The Competitive Advantage: The Lost Value Proposition of Independent Agencies

My brother recently asked for advice regarding his personal insurance. I recommended he contact an independent agent I know who represents three carriers who I know provide a good form, reasonable price, and good claims service that fit his needs well. Two events during his purchasing process were virtual light bulb moments relative to the lost value proposition of independent agents. In other words, independent agents have unique competitive advantages, but they often are ignored.

The first light bulb moment was when he told me he had never heard of any of the three companies. Two are in the top 20 carriers, by net written premium. These are large, important carriers. Then he told me none of his friends had ever heard of these companies either.

My first thought was, “What a sad situation that three great insurance companies have so little name recognition.” My brother and his friends are the perfect personal lines clients, especially for quality independent agents.

Then I remembered the origin and reason independent agents exist. When insurance distribution was originally created, a choice was given to agents. One could be a captive agent whereby the insurance company would invest heavily in advertising, creating name recognition and driving prospects to their captive agents. The agents in return would be paid less commission, would be limited in what lines of insurance they could sell, would be limited to one company’s forms and rates, and would be limited in their ability to build full value (relatively) in their agencies.

However, they could in some cases sit by their telegraph machine, and eventually by a telephone or by their front door for prospects to appear.

Independent agents on the other hand would represent companies who created little to no consumer name recognition.

In return, commission rates might be higher, the agent could build full value in their agency and sell it more openly upon retirement. They would represent many carriers and provide more options to clients. However, independent agents had to get out and sell or maybe create their own marketing, but mostly get out and sell because one local agent was rarely ever going to market effectively against an entire captive carrier.

As with all things in life, a trade-off existed and still exists. If an agency is going to depend on carriers to market and advertise and then not go out and sell, then the company does not need to pay the same commissions and may not be able to afford to pay as much commission.

Companies have a tradeoff, too. Their agents can get out and sell on their own, or the company can assist through marketing, but to pay for that marketing, they have to cut commissions. A right or wrong answer truly does not exist. However, thinking a trade-off does not exist is simply naïve.

The selling and marketing emphasis for independent agencies is the agent’s responsibility. This is not to say that better company name recognition should not occur; it probably should, but it cannot be the burden of the carrier if agents want to keep their full commissions.

Moreover, my brother’s surprise that such good insurance companies exist that he’d never heard of is really an indictment of independent agencies failing to communicate that insurance is not always about the company. He had no idea agents could offer any additional value beyond offering him quotes from companies he did not know existed. If that is all agents can offer, no future exists for independent agents.

If all independent agents can advertise and market in the new media version of old yellow page advertising is, “ABC insurance agency can quote many companies – call for a free quote today!” then a quality future does not exist either. In fact, given that about five to seven carriers spend approximately $6 billion annually on advertising not involving independent agencies, I do not believe heavy advertising and marketing expenditures, at least using normal advertising/marketing methods makes any sense whatsoever.

Independent agents’ true competitive advantage, from day one, is building one trusting sale at a time.

Sales and marketing are not the same thing.

Sales is about proactively building one relationship at a time. It is proactive. It is about asking for the person’s money. Not everyone can ask someone to hand over their money. Those people may be better suited for a captive environment. By the way, not one independent agent had ever contacted my brother or any of his friends.

He is an ideal middle-market personal lines consumer in a non-cat state, and he even wants to buy extra coverage. Independent agents are giving away their advantage.

I also recently discovered my sister’s auto policy listed her daughter as a driver. If her daughter was 16, this would not be an issue, but her daughter does not live with her. She has her own home, with a husband and child. My sister has no insurable interest in her daughter’s vehicle.

When I asked where her son-in-law was insured, she advised he was insured on his parent’s policy. This married couple did not have their own auto policy! My sister is unfortunately written through a captive who should have his license revoked. An independent agent has never contacted her either. Making that sale would be easy.

One final story: My sister-in-law asked me if she should buy auto insurance from a well-known direct writer. I advised she’d be better off if she went with a local independent agent who could be an advocate in the event of a claim. She had no idea an agent could be an advocate. I find that most independent agents do not know this either. They think they’re prohibited from being an advocate.

Being an advocate is different from interfering. It is different from interpreting coverage in a manner that creates issues with the carrier or creates an E&O exposure. Knowing insurance companies like I do, I cannot imagine buying insurance without having someone that could advocate effectively on my behalf.

The independent agent, when he/she does his/her job well is perfectly situated to be the best solution for middle-class America. Middle-class Americans want, per survey after survey for the last quarter century:

1. Carrier choice and pricing transparency. This means offering three quotes with at least a brief outline of why pricing differences exist relative to quality of coverages, amount of coverage, and/or differences in claim service.

2. Advocacy. This means going to bat for clients, even if it is behind the scenes, when a claim goes awry.

3. Help preventing losses before they occur. This means loss control at least on a simple basis.

4. The right coverages even if they do not know what that exactly means. Them not knowing is an opportunity to be a hero, to exhibit professionalism, and to prove you are better than every other competitor.

Independent agents were created, from day one, to build one trusting relationship at a time through professionalism and sales. To give this away by asking for companies to build name recognition or to waste it by not strongly differentiating what you do versus what captives and direct writers do is your choice. What will your choice be?