The Evolution of Insurance Agencies
To paraphrase Mark Twain — reports of the demise of insurance agencies have been greatly exaggerated.
The local agency has been the backbone of the industry and the target of outside forces that have been trying to eliminate or usurp the work role handled by the agency and staff.
Sure, the insurance distribution model is not optimized, but overall, there is no better approach based on the existing industry structure.
These outside forces are leading to the pruning of ineffective processes and improvements to effective methods. The local agency is still standing and evolving to stay relevant and competitive.
There are several major trends that are impacting the insurance industry.
These include agency consolidation, ease of starting a new business, the age gap, and insurtech and artificial intelligence. The first three trends will re-shape the existing industry and the agency business model and gently morph it into a revised structure. However, proponents believe that insurtech and artificial intelligence are disruptors that could totally change the way business is done.
Big brokers have been buying smaller agencies for some time. Some require the agency to adopt a uniform business model, whereas other buyers let the agencies run semi-independently. Either way, more and more agencies have professional management, access to sophisticated tools and services, and connections to a national presence. This trend tracks with consumer expectations to have access to an organization that has broad support but a personalized approach.
Agency consolidation does create formidable competition for small independent agencies. Those still running their own agency need to focus on personal relationships and create ways to service accounts that make them competitive against larger firms. Unfortunately, the small local agency is less competitive with the larger and sophisticated accounts, which boxes them into working with smaller commercial accounts and personal lines.
Today, the ability to start an agency is as easy as it has ever been due to various options that did not exist 50 years ago. An entrepreneur today can start a new agency and access a wide variety of markets through aggregators, networks/clusters, or similar venues.
Access to good standard markets makes the firm viable right away. In the past, a new agency would have to broker business through another agency until they could get enough volume to have their own contract.
Aside from market access, some of these networks, clusters and franchises offer various types of support and different levels of involvement. They can create the benefits of a large national broker while allowing for independent ownership and control over the agency. Some of these organizations offer back-office support, such as accounting, customer service staff, and agency automation systems. Some networks provide risk management services and other tools that allow the smaller agencies to compete on a higher level.
Also important is that clusters, networks, aggregators and franchises are becoming an incubator for new agencies. In some cases, this could be one producer that has all the back-office support outsourced so he/she can focus on sales.
The third trend is an issue faced by all businesses — it is a demographic population gap. Baby boomers have and continue to retire. The first boomers turned 65 in 2011; 10,000 boomers turn 65 every day. The youngest boomers are now about 60.
Millennials are now all in the workforce with Generation Z just entering. The issue is that there is a growing population gap because the generation in between boomers and millennials — generation X — is smaller than both the baby boomers and millennials groups. So, people in their 60s will be replaced by people in their 20s and 30s, because there are fewer people in their late 40s and 50s.
This age gap means an experience gap. The 25-year-plus seasoned producer or manager will be replaced by a person with less than 10 years of experience. The skills and efficiencies built by experience will be lost, while the younger generation comes up to speed.
Finally, there is insurtech, which is the 800-pound gorilla of these trends. Insurtech is the umbrella term now used to cover the usage of technology in the insurance industry.
This trend is a wild card because all the possibilities are truly unknown at this point. However, it looks like it will have a huge impact in the future.
For example, the wide use of self-driving cars is approaching. These cars are expected to be much safer due to technology, and the liability related to driving is expected to be reduced. Also, because the “driver” is really a passenger with no control, the liability would shift from the car owner to the car manufacturer. If so, the liability portion of personal lines auto policies will be a thing of the past.
This shifting of liability will repeat with other equipment and devices that we use in our daily lives, because those devices will have some sort of technology built in that can monitor performance, how it is used, resolve problems, evaluate surroundings, etc.
For insurance agencies, most likely the next 10 years will be a gentle evolution into a new form. This will be a result of the first three trends as the primary drivers. The number of medium-sized agencies will decrease and larger firms will control much more business. However, the next generation will see the creation of very small and nimble agencies. Basically, it will be salespeople who outsource the service and back-office work. In the long run, the role and even the existence of insurance agencies are very difficult to predict due to the role of technology.