Agencies of the Future

A report from McKinsey & Co., titled “Agents of the Future: The Evolution of Property and Casualty Insurance Distribution,” warns that the division of labor between carrier and agent is blurring. “Carriers are interacting more directly with customers, at lower cost and often with more consistent service levels. But agent commission structures remain largely unchanged,” the report says. As a result, many carriers are reconsidering their distribution costs and strategies.

The McKinsey report cites four trends transforming the agent’s role:

• A diminished role in risk selection and pricing due to the increasing sophistication of predictive models and the rise in straight-through underwriting.
• The walls between distribution channels (agent, online, phone, self-service) are crumbling, especially in personal auto. Customers jump from one to another.
• Carriers have invested billions in their brands, and consumers increasingly identify with their carrier rather than their agent.
• Commoditization in personal auto: Auto insurance accounts for 70 percent of personal lines premiums. For many agents, auto can be unprofitable.

Many carriers today balance their investments across a number of areas including direct channels, advertising and the creation of contact centers. “This shift is putting pressure on their ability to maintain the level of commissions they pay to agents. Inevitably, carriers will need to consider rewarding agents more directly for those efforts that uniquely add value, such as retention and cross-selling,” according to McKinsey.

McKinsey identifies core capabilities that agents must develop to succeed in this environment:

• Reaching a target market: Successful agents will move beyond the local market with defined target customer segments and associated products. They will need to increase their digital presence, expand their communications including social media, and find new ways to meet prospects.
• Expertise: The broader retail market has created an appetite for more personalized products. Consumers want advice on holistic insurance packages for their personal needs or industry-tailored advice on small commercial policies.
• Operational efficiency and scale: Technology will be a source of increased operational efficiency, but increased scale, organically or through acquisitions or outsourcing, will also be required. Agents may also need new revenue sources, such as life insurance, group benefits or tax advice.

While “many agents are not currently positioned to succeed in a world where scale and operational efficiency, sophisticated marketing tactics and deep product expertise are critical,” the news isn’t all bad. The report says several agency models are already doing well. These include traditional commercial lines agents; large multi-line agents; agents with leveraged or lower-cost models; teams of specialized agents; small niche, expertise-driven agents; and small virtual agents. They are the agencies of the future.