Carrier Disintermediation of Agencies

A multitude of forces are causing many carriers to think of ways to disintermediate agencies. Healthcare reform is one. Some benefits carriers have cut commissions to 0 percent and agents are still writing with them. This fact must have caught the attention of at least a handful of P/C carriers. They have to be studying whether they can find a way to cause agents to sell policies for free, too.

Affordable Care Act (ACA) advertising is causing another branding change. One of their tag lines that is getting much press and attention is, “When insurance companies compete, you get a better deal.” How does this work? By creating an electronic exchange.

A study first published approximately 15 years ago, way before the internet had any effect on the selling of insurance policies, proved that consumers wanted and valued the opportunity to buy insurance through agents that represented multiple carriers. When surveyed if independent agencies could do this, less than 50 percent of the independent agents’ own customers knew they could! Now a generation of consumers is being taught that the only way to choose between carriers is through an electronic exchange. I have news for independent agencies. Insurance companies do not need agencies to run an electronic exchange.

Independent agencies had a great advantage they blew by not adequately branding and advertising a key competitive advantage. Simply giving everyone a choice of carriers/quotes would have distributed the message more effectively. Many carriers understand this today and are taking advantage of the void created. Pricing flexibility is one takeoff of this. Showing other companies quotes when using a single company’s website is another example. These companies are not stupid. They understand the consumer very well and if the agents are not going to fill this need, the smart companies will take over.

Another fact driving carriers to disintermediate agencies is the profit compressions some carriers (not all by any means) are experiencing. The sufferers are examining every tenth of a percent because the “hard” market is not turning out to be that hard. In fact, by most definitions, the market is not even hard as a whole, just average. The result is the suffering companies are considering alternatives to paying 12 percent to 16 percent commission rates.

For other carriers, their thoughts of disintermediation are driven by fear. They truly fear losing control of their books. They fear agents can get to all market segments, which is true. They fear too much agency business will be controlled by brokers and aggregators and banks. For others, they truly fear agents are too easily swayed by other companies promising low rates and great benefits. The difference in rates in specific geographies and lines between some carriers, especially some newer carriers and time tested carriers, is significant today. The older carriers’ fears are reasonable.

Carrier Investments

Regardless of the driver, companies want much greater control of their books. They have invested too much money to see their investment wasted and control lost. So their goals and fears should be taken quite seriously. To most agents, the carriers’ substantial investment is invisible so where exactly have they invested money?

Developing an agency force. This is a large and primary investment.

Service centers. Companies have not created service centers as charities. Have you ever tried to move a large book from a service center when the service center, not the agency, is truly doing the work? If you have, you know most agencies will not have the staff to move the business easily. This control gives the carrier several advantages. Retention should increase. The ability to make rate increases stick should improve too. In fact, some companies may discover it worthwhile to raise rates even higher than normal because with more persistence, they may achieve more revenue with less account loss.

Buying agencies.A number of insurance companies are buying agencies quietly to control their books. In some cases the purchase is an outright purchase of all or part of the agency. In other cases, they find a friendly agency to do the purchases for them with their money.

Direct writing facilities. If I am not mistaken, every large national carrier except maybe one has some kind of direct writing facility today. Some are small and some are huge.

Whether these efforts work for companies in the long run is immaterial to agents today. Agents must protect themselves today rather than waste more good opportunities.

First, make sure your brand and your advertising shouts that you are the exchange. You are the marketplace. Explain what that means to consumers.

Second, then follow your brand. I meet agencies all the time who advertise multiple markets but only give quotes/proposals for one company. Others do not proactively work renewals. The fact you represent multiple companies is a moot point if you do not use them. Keep in mind, this does not mean blocking the market or quoting every company. That is the opposite end of bad management. Every study and every experienced person knows that only two or three markets are appropriate for any given risk. Just work with those markets.

Third, do something a computer cannot do. A computer can provide a quote faster and more accurately than a person. A person is completely unnecessary today for quotes of most personal lines and many commercial accounts. A computer does not have vacation days, bad days, crying days, or interoffice politics and it does not need raises. Anything a computer can do will be moved to computers as fast as the companies can move these duties. However, computers do not listen and educate and understand the nuances of clients’ needs. Understanding clients’ needs on a personal level is a crucial advantage unique to agencies. Build on your unique abilities rather than trying to compete with computers for fast quotes. That is a losing battle.

Squeezing Agents

Carriers might consider whether it is worth the expense and control savings by squeezing agents’ commissions. I am not sure this is the best solution or even a good solution. When a company grabs for control of a book of business it is because they do not have enough to offer the consumer. They are trying to chain the customer to them rather than offering the quality that generates customer and agency loyalty.

Ultimately customers are going to leave an unspectacular carrier anyway so buying customers is, at best, a temporary solution. I do not see many companies using this strategy that understand this point. There are approximately 1,000 P/C carriers doing business in the U.S. With 999 competitors, trying to chain customers to a carrier rather than providing great products, service, and rate is a losing strategy.

If the companies are trying to squeeze out the middle man, the agent, to save money, they might review the results of airlines and travel agents. The airlines squeezed out travel agents to save money, but what replaced them? Behemoth GDS (global distribution systems). These are the computerized ticketing/reservation systems you know by cute names. It is one thing for a huge airline to negotiate with Ma & Pa travel agent. It is totally different negotiating with a billion-dollar company that controls one of these systems.

I work with agents and brokers of all sizes. The travel agent comparison is valid. Companies have much more flexibility and control over small agents than they have and will have with a few huge brokers/aggregators.

For carriers that want a true legacy of success, squeezing out the middle man is not the solution. Innovations that more accurately price the product and address the clients’ needs are the keys. Insurance is obviously based on the law of large numbers, which inherently means policyholders with losses are subsidized by those without losses in any given year. What really happens is that the best accounts continually subsidize the worst.

Pricing correctly and being the first to do so causes the best risks to migrate and yet their rates still do not have to be set at the bottom. The rates only have to decrease enough for them to move. Typically this is 10 percent. The carrier that moves first gains market share for the best drivers while still making more money. Simultaneously, the competition suffers adverse selection. At its best execution, it is conceivable a smart company could eliminate competition this way — without buying anyone or cutting commissions.

Connecting with quality agents reduces cost rather than increasing expenses. Contingencies, regardless of how companies budget contingencies, are always cheaper than commissions.

Product innovation is an option too. People think poorly of insurance, but why not give them something positive before a loss for their premium dollars?

Carrier disintermediation then is not just about companies disintermediating agencies, but they themselves being eliminated. The industry is changing quickly. Grasping for straws by sticking to the old ways is not a good option unless you plan to retire soon. On the other hand, the opportunities are the best ever for those proactive people willing to actually give the consumer what they have been saying they want for decades.