Brian Sullivan: The Industry is Changing — Really

Even though we’ve heard it many times before, the insurance agency business is on the cusp of huge changes, driven in part by technology, a host of new and better insurance products, and increased stability on the part of insurers due to regulatory scrutiny.

For insurers right now, things are “as good as it gets,” with auto and homeowners premium volume at new highs, said insurance analyst Brian Sullivan, addressing agents at the annual Professional Independent Insurance Agents of Illinois’ annual convention in Springfield. For example, in Illinois, homeowners loss ratios are 40 cents on the dollar, and many commercial lines are doing just as well, Sullivan pointed out.

The downside for agents is that these markets have become stale, Sullivan said. Companies like Allstate and Progressive understand that they can’t grow by continually implementing rate cuts, so everything now is in stasis.

The unexpected benefit to all of this is a new stability in the insurance market that hasn’t been evident before. Smarter insurers with fewer chances of cheating for agents means there may be rate cuts, but there is less of a chance of the crazy rate wars that characterized soft market cycles of the past. With the new transparency imposed by the Spitzer lawsuits, “insurance executives can’t lie to each other anymore about maintaining discipline (in pricing),” he said.

This “sea change” in the marketplace means independent agencies have a golden opportunity to grow their businesses by expanding into more lines of business, Sullivan said. The demise of the insurance buyer dealing with an agent in favor of online sales has been highly exaggerated by marketing and demographic experts, he said. While “young buyers” may very well be best served today by the GEICOs because their needs are simple, this will change as their own insurance needs change and grow more complicated–through the purchase of vehicles, homes and the addition of children and wealth, Sullivan said.

For years, industry pundits have warned that no profits can be made from personal lines sales. While this may be true in a monoline situation, the smart agent will sell personal lines as an adjunct to other services, including commercial lines and annuity products.

Sullivan examined four lines of insurance: giant commercial accounts, large commercial accounts, midsize and small commercial accounts, and personal lines. Although the giant commercial accounts are the sexiest, it’s expensive business to get and insurers make almost no money on it, he noted.

Large commercial business should be the “market of your dreams,” because it’s a perfect fit with midsized independent agencies. These relationship-driven, “hand-crafted accounts” are the “Holy Grail for independent agents.”

Midsize and small commercial accounts are where the most money is made and can typically be handled on a boilerplate basis. This market, which many agencies take for granted, is changing and will soon take on the characteristics of personal lines, with more questions for insurers regarding underwriting and pricing.

Leading the cutting edge for change are companies like Progressive, which sells products both direct and through agents. Although many agents hate the company because of this, the formula has proven to be very successful. Progressive has a better product, smoother backoffice functions, and can provide more profit, even at 10 percent commissions.

In spite of everything, insurance buyers will still and always buy on value, not price, Sullivan said. They appreciate brand, and complex relationships still need an agent’s personal touch. Monoline relationships will never be as profitable because “insurance is not a commodity.” Sullivan accused insurers and agents of not talking enough about the product to their potential and current client. Using giant retailer Sears as an example, he pointed out that stores provide spec sheets on products like dishwashers so consumers can compare brands and models. Insurers should provide similar information to prevent consumers from buying on price alone.

And agencies also have to sell themselves, he stressed. Too often, once an agency lands an account, the client is handed off to the customer service representative and the agent never speaks with them again. In order to effectively cross-sell a variety of products, agents must establish solid relationships with clients, or risk losing them to direct writers.

One exception to the rule today is catastrophes, especially in the wake of Hurricane Katrina. “Hurricanes and earthquakes are simply not insurable” because they are currently so unpredictable with today’s technology, so cats are one area of insurance that should be handled through a federal government solution.