The Impact of Commercial Lines Raters on Independent Agencies

For many years independent agencies waited anxiously for a practical multi-company rating system in commercial lines.

Now, several easy-to-use products are available to agencies with quoting capability among a growing number of standard market commercial carriers. Companies like Tarmika are poised to bring independent agencies the promise of convenience, lower cost and broader choices for their clients.

As these products promise to revolutionize agency operations in ways similar to those that occurred with personal lines comparative raters, it’s helpful to look at both this promise and the pitfalls. Let’s begin by looking at what personal lines comparative rating systems (from companies like EZLynx) did in the independent agency system.

Lessons from Personal Lines

A top reason for consumers to choose an independent agent rather than a captive is their ability to offer choice in both carrier and coverage. Yet, independents were always faced with low-cost policies like homeowners and auto insurance, which do not pay large commissions and take considerable time when quoting multiple options. Then came rating systems, which reduced from hours to minutes the time needed to give consumers the choices they wanted. These systems reduced agency costs dramatically, increased competitiveness and helped agency operations by standardizing coverages and making employee training simpler.

Standardization had a downside, though: a renewed and increased focus on price. When the product became standardized, the number one issue in consumer decision-making became cost. This forced agents to focus further on speed and standardization and, in some cases, robbed them of their historical in-depth knowledge of their clients. Today, many agencies no longer ask clients and prospects detailed questions beyond those required by the application. This, in turn, diminished relationships, and agencies began to lose the distinctiveness of the advice they offered.

All of this led to an increasing commoditization of personal insurance. When a product or service becomes commoditized it means that the only relevant distinction among competing providers is price.

This also had some negative impact for insurance companies.

For decades, independent agency carriers invested in differentiating themselves on product, claims service and other factors. But as agents increasingly focused on price, the speed to issue and technological seamlessness grew to be of paramount concern.

In turn, carriers realized that winning often meant being nothing more than the cheapest product. And so they began to focus on data analysis (flow, hit rate, etc.) to manage their relationships with their agents. They were also enabled, and to some degree, forced, to broaden their agency appointments because they could no longer rely on the depth of real relationships with a select few agents to produce the sales they needed in a commoditized marketplace.

This broadening of appointment criteria had another impact. It made it easier to create a new independent agency which, in turn, increased competition among small agencies and made it more difficult for some to attract prospective customers.

To succeed, agencies now needed to become effective marketers, as well as sales organizations. The agencies that became excellent marketers with assembly line like processes for both selling personal insurance and servicing it were able to achieve strong and sustained growth in personal lines. They also gained an advantage over traditional agencies that remained focused on developing one relationship at a time using only salespeople.

Enter Commercial Lines Raters

As this commoditization has taken place, many in the industry have looked to small business as their growth and profitability salvation. But now comes the commercial lines multi-company rater with the same promises to speed operations and lower agency costs. If it does, then will it not also increase the rate of commoditization among commercial lines products and sales processes?

I believe it will, which raises the question of how agents should respond: Should they exit the small commercial segment or change their business practices?

I think most will choose to change business practices, and the most obvious move is to treat small commercial in the same way as personal insurance. This means a focus on marketing, spreadsheeting of products and carriers, a de-emphasis on the use of producers to make sales, and an increased rate of product standardization, as well as an increased emphasis on price as the primary decision point for the purchaser.

As rating systems grow in small commercial, commoditization is likely to happen. Yet, there also will be benefits to some agencies. Cost and speed are two we have already mentioned, but another opportunity exists for agencies to focus on building business marketing systems. Agencies should build sales systems for small commercial that mirror personal insurance, allowing them to sell policies with lower-cost employees. It will also allow them to focus on marketing more broadly and further expand geographic markets beyond their traditional limited areas.

I also think the widespread adoption of commercial lines rating systems may favor larger agencies that have more sophisticated marketing operations and can maximize the benefits of systems with size and scale. This will be an increasing challenge for small agencies that write much of small business premiums today. If these small agencies do not adapt by lowering their cost structures, they may find the size of their books is eroded by the aggressive marketing of both larger agencies and direct sellers.

Answers for Small Agencies

What is the answer for small agencies? An obvious one is not to stand in the way of history. Be among the early adopters and masters of these new rating systems. Here is how to do it:

• Adapt your business practices to these systems, which means boosting your investment in marketing to broaden your sales funnel.
• Increase your target market area to further increase the number of prospects entering your sales funnel.
• Develop even deeper industry niches to increase the quality of leads entering your system.
• Double down on the training of internal salespeople and customer sales agents for rapid, efficient closing of prospects.
• Modify your compensation model to afford increased marketing efforts and maintain profitability.

By taking these steps early, you have an opportunity to get a jump on the market and establish your agency as a strong new business engine in the marketplace.

Comparative rating systems fundamentally changed the way personal insurance is marketed and sold. They will be the genesis of similar changes in the small commercial market. For those independent agencies that continue to market and sell products one at a time, on a customized basis, using high-cost methods, the result will likely be loss of market share, profitability and growth. But those that take the time to understand market changes and adapt rapidly will ensure their relevance and success.