Insurance Distribution Trends And The Effects Of Change

It's remarkable that the insurance industry has experienced only evolutionary - not revolutionary - change in its structure, processes, systems, and culture over the past 50 years. This is due partly to the regulatory nature of the industry and partly to exclusive and/or vertical agency agreements between insurance providers and agents. In this regard, the insurance industry is similar to banking and many other investor-owned utilities that are price regulated by the states and obligated to serve society.

This situation is about to change because several external and internal factors are putting increasing pressure on the industry at a faster pace. The drivers of change include financial pressures, consolidation, advances in technology, regulation, and rising consumer expectations and empowerment. Interestingly, these are the same forces that are already impacting other industries in profound ways.

Financial pressures in the personal computer industry caused by declining margins, rapid product obsolescence, and growth of the consumer market created havoc among franchised distribution companies such as ComputerLand and Entre. This resulted in the formation of a two-tier distribution system (distributors and dealers) as a means of addressing both financial constraints and market demand. Now companies such as Dell and Gateway are trying to shift the distribution system further by selling directly to end users.

The rapid growth of the Internet is clearly responsible for the unprecedented market cap of Charles Schwab in contrast to the largest securities brokerage firm, Merrill Lynch. Electronic trading, available 24 hours a day, seven days a week, is restructuring commission fee arrangements and transforming brokers from order takers into financial advisors and knowledge workers.

Rapid deregulation of the airline industry in the late 1970s and early 1980s permanently reshaped the relationship between airlines and travel agents. Today travel agents are more focused on the end-user (corporate and consumer), and are becoming fee-based service providers. Furthermore, many are consolidating and becoming super-retailers to counterbalance the power of bigger airlines and global alliances.

The exclusive franchise system that has served the automobile industry for generations is giving way to the popularity of auto superstores such as CarMax and AutoNation, a consequence of channel consolidation and rising consumer expectations. This recent transformation is propelling auto makers such as Ford and General Motors to buy out their independent dealers and form separate equity-owned distribution companies, similar to what Coca-Cola did with its independent bottlers through the creation of Coca-Cola Enterprises in the mid-1980s.

This research study attempts to uncover the changes that have occurred in other industries confronted by the same drivers of change. We chose travel agencies, personal-computer dealers, securities brokerages, and automobile dealers for the reasons discussed above. We also interviewed independent insurance agents for their opinions and observations of necessary and desired changes that the independent insurance agency system must engage in the coming years to survive and grow the business.

It's inevitable that insurance agencies will continue to consolidate to become full-service agencies on a national scale. However, small boutique insurance agencies specializing in niche marketing or unique insurance products will also keep growing.

Similarly, independent insurance agents will be disintermediated (eliminated as the middleman) by the Internet, although only for selective product lines, e.g., low-margin commodity products that consumers are willing to purchase without an agent's advice. At the same time, there will be fee-based reintermediation (in which intermediaries are introduced into new relationships or their roles and responsibilities are expanded). And insurance agents will emerge as infomediaries.

Finally, both insurance companies and independent agents will learn to cooperate and collaborate with each other to serve end users more effectively and efficiently. At the same time, it's likely that some insurance companies will acquire or invest in their distribution partners in the same way pharmaceutical companies dealt with their distributors (Merck buying Medco and Baxter acquiring Hospital Supply Corp.).

Not all the observations, conclusions, and recommendations found in this report will be applicable to all independent insurance agents. Each one will have to analyze their own context and drivers of change and attempt to use lessons learned from other industries and other independent insurance agent companies to determine their own path.

MAJOR TRENDS OUTSIDE THE INSURANCE INDUSTRY

Embrace of technology. Regardless of the industry, suppliers and distributors alike are embracing the Internet and other advances in technology to propel their businesses to new levels. Those who adopted the Internet early on seem to love the new playing field, while latecomers are scrambling to catch up.

Channel shifting. Financial pressures and consumer expectations are driving suppliers to distribute their lower-margin products through the most economical channels, sometimes bypassing intermediaries or reducing their commissions in pursuit of profitability. But this is only one side of the story.

New roles in sales and service. A growing number of suppliers is viewing the product sale as the acquisition cost for securing long-term customer relationships. Increasingly, their intention is to find ways to free their distributors from the low-profit transaction and allow them to concentrate on higher-profit, value-added service and support.

Consumers paying for service. As the roles of the supplier and distributor change, so do the distributor's compensation models and sources of revenue. Value-conscious consumers are clearly willing to pay for services rendered, but the greatest challenge to distributors in moving to a fee-for-service model is establishing price.

Successful sales strategies. Growth opportunities will always exist for boutique-sized businesses as they provide specialized services to compete with the largest-volume players. Whether through volume or specialization, success is reserved for those with vision, courage, and an instinctive orientation toward consumer needs.

Integration of supplier-distributor efforts. Suppliers recognize that the distributor ultimately controls the relationship with the customer. To assure that distributors can and will sell their products, suppliers are increasing their efforts to integrate marketing and communications with their distributors to ensure that a consistent message reaches the consumer.

New efforts in cross-selling. The Internet as a medium has made cross-selling more advantageous than ever before to suppliers and distributors. The synergy of products and services offered is providing a tremendous convenience for consumers in their quest for one-stop shopping.

Changing relationships between suppliers and distributors. In just the last few years, relationships between suppliers and distributors have undergone dramatic changes, forcing a reevaluation of commitment and responsibility to one another. While no single course of action has emerged as the standard, the suppliers and distributors who value their existing partnerships are working more closely together and as a result creating stronger, more unified relationships with their customers.

Here are some important questions for the independent insurance agency system:

• Are we responding to consumers' changing needs and desires?
• Is what we're providing today materially better than what we provided five or 10 years ago?
• Have we embraced the available technology?
• Do we understand what business we're in (i.e., selling insurance to buyers or helping them manage risk)?
• Are we prepared for the new competitors on the horizon (if not in our face) who will embrace technology, operate efficiently, and respond to the needs of the consumer?
• Are we improving the quality and efficiency of our working relationships with our business partners?
• Are we asking for and expecting more from ourselves and our business partners?
• Are we actively and aggressively finding ways to eliminate inefficiencies, duplication, and waste?
• Do we know where we can best strategically position ourselves for the future?

Unfortunately, for many within our industry, the honest answer to several of these questions is "no." For them, the future is bleak. Fortunately, many agencies and carriers are aware of the changes, see this as a time of tremendous opportunity, and are actively doing something about it.

We hope that this study will educate, stimulate, and motivate our industry to action. For some, it's a wake-up call. For others, it'll provide direction and ideas on what to do. For still others, it'll confirm what they already know and provide some additional perspectives that may allow them to further develop and make positive future efforts.

The following steps will help to ensure the future of the independent insurance agency system:

• Stay attuned to change.
• Assume an optimistic attitude and perspective.
• Focus on serving the customer better.
• Match customers, products and services, and distribution channels.
• Pursue strategic affiliations and alliances.
• Develop and implement a technology strategy.
• Elevate relationships between agencies and carriers.

In most of life's endeavors, the attitudes and perspectives of the individuals involved will be the most crucial factors in determining the level of success achieved. This is as true in the world of business as it is in sports. When conventional ways of doing business are challenged and the level of performance must be improved or materially adapted, positive attitude and perspective become imperative.

TEN REASONS TO BE OPTIMISTIC ABOUT THE FUTURE

1. In the current economy, the one who controls the customer is king. Insurance agencies have direct contact and good relationships (or their potential) with their customers.
2. Most insurance isn't a commodity product. Buyers of nearly all lines of business require technical and professional assistance to understand and to purchase the most suitable product. This complexity makes insurance difficult to sell on the Internet.
3. Even insurance that could be considered a commodity product can be confusing, considering the volume of options and alternatives available and the significant implications of purchasing the right coverage and limits with a financially stable insurance company. As a result, advice and professional assistance are needed.
4. Technology can empower small independent agents by giving them and their customers access to products, services, and information that historically has been only available to larger organizations.
5. Although compensation for selling insurance may go down, compensation for servicing and providing professional advice is going up.
6. Many insurance companies that historically have distributing their products through captive agency systems are beginning to utilize the independent distribution system.
7. Attractive opportunities exist for agencies to create alliances with other firms and so gain better access to prospects, capital, technology, and other resources.
8. Existing challenges and opportunities are great. The reality is that many agencies won't respond proactively, which presents tremendous opportunity for those that do choose to take action.
9. Many of the factors that are critical to the long-term success of an insurance agency are within the agency's control.
10. There's abundant room for improvement in almost every aspect of our business.

The central focus of this study is the distribution system, particularly the relationship between suppliers and distributors. As we've seen in other industries, changes are occurring in the relationships between these parties, including the roles and responsibilities assumed by each, the nature and quality of the end product being delivered to the customer, and the overall success being achieved by each party.

The recent threat of disintermediation has haunted distributors in many industries. Many have questioned whether insurance agents will soon find themselves cut out of the insurance delivery system. The research in this study suggests that widespread disintermediation won't occur. For every example of intermediaries being squeezed out of the picture, there are comparable examples of reintermediation. If an intermediary is adding value to the transaction, its position is secure.

We see both good and bad in many agency-company relationships. On the positive side, carriers and agents/brokers have provided valuable services and quality products to a large segment of the economy. At the same time, significant opportunities exist to improve the quality of these products and services. Additionally, there's enormous room for improvement in the efficiency and quality of the relationships between insurers and agents/brokers.

For insurance carriers, agents, and brokers to enhance their relationships, a number of things will have to occur:

• Each will need to focus on improving the quality of their own performance and partnering with those who hold themselves to similar standards.
• Decisions need to be made with the recognition that each is dependent on the other and that helping the other succeed will enhance individual success.
• The level, depth, and substance of communications need to be improved.
• Investments need to be made on both sides in proactive and visionary strategic planning.
• Mutual commitments must be honored. The hallmark of the performance-based relationship is accountability.
• Concerted efforts need to be made to eliminate existing duplication of effort, inefficiencies, and unacceptable error ratios.
• Automation and technology need to be mutually embraced by all parties to allow for quantum improvements in productivity and to increase the quality of service provided to customers.
• Agents need to recognize that they are sales and service providers, and insurers need to provide the necessary tools, resources, and support to enable agents to effectively distribute their products and services.
• Compensation needs to be performance based. As roles and responsibilities shift, compensation needs to appropriately reflect the additional responsibilities assumed by each party.