There is a lot of news in the health insurance and property casualty insurance world these days about customers wanting to buy direct, and how this could unravel the agency model. In a McKinsey & Co. report “Agents of the Future: The Evolution of Property & Casualty Insurance Distribution, they noted signs that the economics of the traditional agent model are beginning to unravel. And in the report they identified the key issues facing agents/brokers selling personal lines insurance today as increasing product commoditization, a rise of multichannel distribution and a desire among customers to buy directly from the carrier—and an increasing willingness of the carrier to accommodate them.
Personal Lines More Profitable for the Independent Agent Channel
Yet many companies today, like The Hartford and Hanover Insurance, direct a lot of energy toward supporting its exclusively independent agent distribution system, rather than concentrating on selling personal lines directly. This gives the company a keen sense of how independent agents are approaching personal lines, says Dick Lavey, executive vice president, president of personal lines and chief marketing officer for The Hanover.
“The whole independent agent channel is thinking more about personal lines than before,” Lavey says, pointing out that on average, commercial lines tend to have a 20% EBITA (earnings before income, taxes and amortization) margin. For personal lines, it is closer to 30% because personal lines is what he calls a “sticky” business. All of the direct-sales efforts in the world won’t change the fact that if the average personal Auto or Homeowners policyholder’s bill looks pretty much the same as it did last year, meaning most policyholders have little incentive to switch carriers. In many cases, it’s just not worth the hassle.
Personal lines trifecta the key to obtaining and retaining policyholders
The trick, Lavey says, is to chase what he calls “the golden egg”—the combination of Auto, Homeowners and other personal lines within the same client. The public isn’t thrilled about actually buying insurance, however, price alone won’t win the day, so value-added services must be considered—such as phone apps that let you take video inventory of your house and store it on the cloud to speed claims, or services that send recall notifications or make and model news based on your vehicle identification number.
“We’re trying to create services the customer wants, to bring Homeowners and Auto together. That makes them feel attached both to the carrier and the independent agent who provided it all.”
Innovations that add value to customers to help retain them are one thing. But there are customer service related innovations and other innovations- both on the insurance and car-makers part, that may not be adding ROI- yet.
Other Innovation Impacting Premium (or Not)
As cars become smarter and more tech savvy, so do the cost of repairs. Things like smart windshields and collision detection, two safety measures that automakers are introducing to help prevent collisions, mean that when there is a loss, it will be more severe. A minor fender-bender could become a $6,000 event just to fix a camera. And items such as these are too new to tell if they reduce the frequency of accidents. Blair also notes that the falling price of gasoline isn’t likely to help either. As gas gets cheaper, people drive more. Those carriers who only sell personal Auto may see a lot more miles driven, and correspondingly, more accidents, as noted by Gavin Blair, chief product officer for personal lines at The Hanover.
Then there are innovations like Progressive’s Snapshot, which drivers voluntarily plug into their cars to transmit back to their insurers driving data, such as average speed, braking tendencies and sharpness of turn, which can be used to price risk more effectively. And in areas such as commercial trucking, the “sentinel effect” of knowing somebody is studying how you drive can impose safer driving habits. But it hasn’t caught on in the personal space. The telematic devices themselves cost about $90 each and the cost of data transmission is another $50 to $60 a year, in addition to the cost of shipping the devices out to customers. All this, for Auto policies that on average cost around $1,000 a year. The ROI just isn’t quite there yet. Many people just don’t like plugging Big Brother into their cars. Ironically, they are more likely to permit the same transmission of data from their smartphones or wearable tech, so until insurers get policyholders to install telematic apps (which Blair believes could do a lot of good with the teen market), the promise of telematics might not yet be fully realized.
New Dawn for Independents
Brian Cohen, an operating partner at Altamont Capital Partners in Palo Alto, Calif., brushes off the notion that personal Auto—which accounts for some 70% of the total personal lines market, is on an inevitable march toward direct sales and total commoditization. “People point to the U.K. as an example of what should happen here,” Cohen says, referring to how the personal Auto market in the U.K. has gone almost entirely direct, mostly sold through the Internet. But, he adds, that’s only because carriers there can change prices at a moment’s notice as they don’t have to file with America’s 50 different Departments of Insurance, and as such they can race to the bottom on price.
Agency-based carriers still dominate the personal lines market, Cohen says, and when it comes to using the Internet to drive sales, it’s the agents who use it best, employing Constant Contact, Google ads or other digital marketing tools to get their names in front of their local micro-markets where they can sell most effectively. Using real-time raters to produce instant quotes for curious online shoppers—quotes that also direct them to their local agent—further maintain the agent’s relevance in a digital world.
Captive versus Multi-Line Agents: An Interesting Observation
The other thing to look at is that all of the pressure in personal lines is really on the captive agents. In a world where consumers expect multiple buying choices for everything, getting a single quote from a single insurer just won’t cut it. They expect multiple quotes that the captive agent just can’t provide. And they need a professional to advise them on what the trade-offs are when choosing one carrier over another. Progressive was the only smart direct-carrier that really capitalized on this trend, providing other competitor quotes. But they don’t provide the insight agents can. The information is solely price-based.
And then there is the rise of the agent aggregator, a kind of field-marketing organization that represents several hundred independent agents under a single umbrella. These companies are very good at seeding Google searches on insurance products with links that lead back to them. Aggregators are luring established, successful agents away from captive insurers with the promise of upside sales potential that comes with their marketing savvy and access to multiple carriers, while offering them the same kind of support they might have enjoyed within a captive system.
“Aggregators aren’t enlarging the pie, they’re just shifting the most productive agents from the captive to the independent channel. This is new. For several decades, you saw the number of independent agents dropping and captives rising. Now, that is starting to switch.”
Key to Personal Lines Growth: Niche Markets and Acquisition
Personal lines remains an incredibly competitive market, especially with rock-bottom interest rates giving insurers no choice but to make their money on underwriting profit. many carriers are writing unprofitable business just to maintain their market share in the face of internecine pricing from competitors. This is especially true where carriers are doing whatever they can to lock in both a customer’s personal Auto and Homeowners business. But the challenge remains for personal lines writers to grow profitably, and the key there, Cohen says, is to target niches. That too, isn’t easy, because most carriers are already using big data and analytics to identify potentially profitable markets—such as motorcycles, recreational vehicles and light watercraft. For most, the answer to profitable growth might just come down to acquisition.
Small, nimble players could be more successful in the post financial crisis era
And it’s not like big carriers can trade on their brand recognition. “‘Like a good neighbor’ doesn’t resonate like it did 20 years ago,” thanks to public distrust of big institutions—especially insurance carriers—following the post-2009 financial crisis. This enables smaller, nimble carriers to penetrate markets in ways they never could before—and it gives an independent agent willing to do some homework on those carriers targeting niche markets a competitive advantage over their peers.
“The big headlines are that if you’re in personal lines, you’re in a dying area of the insurance industry. In fact, you are not. If you are an independent agent focusing on personal lines, there are incredible opportunities today that weren’t available 10 or 20 years ago, says Cohen. You have to look at your market and your business in a different way than you might have in the past. If you do that, this is the new dawn of the independent agent. If I was entering the industry and thinking about where I would want to be on the distribution side, I would want to be an independent agent.”
As adapted from a Property Casualty360 article published on February 11, 2015.