The Future of Insurance Agencies
There is a traditional proclamation made following the accession of a new monarch in various countries that simultaneously announces the death of the previous monarch and asserts continuity by saluting the new monarch. “The king is dead; long live the king!” This seemingly contradictory phrase can well apply to the independent insurance agency.
The demise of the independent agent has been predicted for well over 20 years, with the dawn of the internet. Fintech and insurtech like to proclaim that they are disrupting the insurance industry. The reality is that insurance agencies evolve with changes to the marketplace (technology, business environment, society, etc.), and fintech and insurtech are mostly marketing campaigns. There are two camps for evolution – creepers and leapers – meaning slow incremental evolution (creepers) and rapid, significant changes (leapers). As we look to the horizon of the insurance industry, independent agencies will transition from creepers to leapers.
There are several key factors that are driving the need for major changes to the independent insurance agency model. The first and most obvious force is technology. Layered over the impact of technology is societal changes. Next, multi-faceted changes to the business environment will require insurance agencies to adapt or die.
Technology
Artificial intelligence (AI) will be the biggest change catalyst for insurance agencies. Automation, from rate quoting and application processing to risk evaluation and educational resources, has encroached on tasks traditionally performed by agents.
Predictive analytics and chatbots now enable self-service insurance shopping, especially for straightforward products like term life insurance and even personal lines, which are challenging agents’ roles.
When the internet was becoming popular, many thought that direct-to-consumer (DTC) sales would become standard; however, adults at that time were slow to adapt. Young adults today grew up with the internet and expect the ability to get everything directly on the internet. About two-thirds of personal lines sales are now direct-to-consumer sales, whereas only a quarter of the more complicated commercial lines sales are DTC sales. Most likely, as Gen Z ages, these percentages will increase.
More pernicious for insurance agencies than the growth of DTC sales will be changes to the insurance industry that will have a cascading effect downstream. With the advent of self-driving cars and other internet of things (IoT) (physical objects embedded with sensors, software, and other technologies connected to the internet), risk and liability will shift from the consumer to the manufacturer. Personal auto coverage for self-driving cars will have no or limited liability coverage. Smart devices in homes and businesses are providing real-time risk data that essentially creates individual risk assessment (versus pooled risk assessment).
AI and “big data” are changing how insurance companies do business, from distribution to underwriting and claims. The insurance buying process has become significantly quicker and more automated. AI now plays a key role in assessing risk profiles based on individual behavior, allowing for near-instant policy issuance in areas like auto and life insurance.
The use of telematics and IoT devices is streamlining this further. Additionally, blockchain technology facilitates instant financial transactions, simplifies contract processing, and slashes costs for insurers, paving the way for rapid commercial insurance quoting. All this will make it less likely for the consumer to use an insurance agent.
Usage-based insurance (UBI) is becoming increasingly prevalent, with customization according to individual behavior. Insurance models are shifting from traditional purchase and renewal to continuous coverage, dynamically aligning with users’ lifestyles. Micro coverage options for specific needs, like phone battery or flight delay insurance, allow for personalized policy bundles. With the rise of the sharing economy, UBI is adapting, offering pay-per-use models for shared assets like cars and homes. Many of these types of coverage will be offered by the business selling the product or service and not an insurance agent.
The traditional methods of underwriting for most personal and small business insurance products are becoming obsolete.
Automation and artificial intelligence, including predictive models and deep learning, have expedited the underwriting process to mere seconds. This is achieved by integrating these technologies into the insurers’ tech stacks and utilizing internal and extensive external data through APIs and providers. The data, collected from various sources, including carriers, reinsurers, and distributors, proactively offers customers tailored insurance packages, with pricing reflecting their individual risk profiles. There is less and less need for an insurance agent to collect, review, summarize, and submit underwriting data.
Claims management, which is no longer a key role for most insurance agents, is increasingly handled by algorithms, diminishing human involvement.
Insurance Distribution Business Model
For most of the 20th century, the typical insurance agency was a local small business. Generally speaking, during that timeframe, only very large businesses had the need to seek out insurance brokers with specialized skills and services (like AON, Marsh McLennan, etc.).
Consolidation of insurance agencies started picking up steam in the 1990s. The national brokers started acquiring large premier agencies across the country. Regional brokers grew by acquiring small and mid-sized insurance agencies.
Mergers and acquisitions grew exponentially with the turn of the century. Acquisitions were the growth strategy for the national (publicly traded) brokers. Private equity (PE) money realized the insurance industry was lucrative and jumped in with both feet. Now most of the national brokers are or were backed by PE money.
Due to the M&A frenzy of the past 20-plus years, there are few large, privately owned independent insurance agencies. More often than not, the local privately owned insurance agency is a firm with fewer than 10 employees. Consumers are presented with the binary of working with a national broker with deep resources or a local privately owned firm with limited resources. These small, privately owned firms face the pressure of competing against professionally managed competitors with a plethora of products and services that only a large firm can offer.
Despite the growing juggernaut of national brokers, it seems easier to start an insurance agency now compared to 50 years ago.
Obtaining the first carrier appointment was the largest hurdle to starting an agency. Networks, aggregators and franchises have been created to provide market access to the small agency, removing the largest hurdle and immediately making the new agency viable.
Clusters, networks, aggregators and franchises are becoming an incubator for new agencies. Agency franchises and some networks not only provide market access, but some also include back-office support, such as accounting and customer service staff. The branding, agency automation system, procedures, etc., are consistent.
Typically, the new franchisee will pay an initial franchise fee (often $25,000 or more), and then the commissions are paid to the franchisee at a lower rate to offset the support cost. Some may just have a flat monthly fee. These options also have the benefit of operating a small agency while being part of a larger organization.
Societal Changes
The last of the baby boomers is slowly exiting the industry. The issue is a growing population gap since the generation in-between, Generation X is smaller than both the Baby Boomer and Millennial groups. So, people in their 60s will be replaced by people in their 20s because there is a lack of people in their 40s and 50s.
This will shift how agencies operate because young people think differently and have different values. This age gap also means an experience gap. The 20-plus year seasoned producer or manager will be replaced by someone with less than 10 years of experience. The efficiencies built by experience will be lost while the younger generation comes up to speed. On the other hand, the next trend might play well into the Millennials’ lack of experience with the current business model.
Consumers today expect a seamless experience across both digital and physical sales channels, with the ability to quickly get answers to simple inquiries, as well as conduct in-depth research. They want the convenience of purchasing straightforward products like car insurance without complications. Additionally, for more complex insurance products, there’s a desire for real-time interactions with agents through both digital and in-person means.
The pandemic revealed that many routine interactions, such as simple consultations and account maintenance, can occur without in-person contact. Digital platforms often provide a more suitable environment for activities like research.
Nevertheless, there remains a selective preference among customers for in-person engagements with agents for specialized advice and the final steps of service. With a significant reduction in in-person visits to agencies and a decrease in direct customer interactions, insurers are challenged to develop new strategies for lead generation.
The traditional insurance agent, reliant mainly on personal appeal and interpersonal skills, is becoming less common. Their modern counterparts will need to be adept in various new skills and use digital resources. They are expected to engage with customers more often, primarily through digital means, and utilize AI-powered analytics to enhance service efficiency. Agencies that have not already adapted to the consumers’ expectations will not survive.
Conclusion
Independent insurance agencies are not going away. The human touch will remain crucial, especially when dealing with complex insurance products that require nuanced understanding and personal advice. Agencies must adapt to changing consumer behaviors and expectations, changes from new technology, and changes to insurance companies.
Everything is changing, and it is changing rapidly. To remain competitive, agencies must focus on agility, customer-centricity, and tech-savviness while maintaining the core strengths of personalized service and expertise. All this means that the agency of the future will be very different compared to agencies today.
Prepare for rapid changes.