Are independent insurance agents on the verge of extinction? On the MisFortune 500 list of endangered occupations? You might think so after reading some of the press. For a different perspective, Kevin Stipe offers his observations of current and past trends and market conditions to prove that we’re not necessarily going the way of the dinosaur and the door-to-door encyclopedia salesman.
It was just a few short years ago that people derisively referred to independent insurance agents as the 'buggy-whip' makers of the late 20th century. Critics of the industry suggested it was only a matter of time before customers bypassed independent agents altogether, preferring instead to deal directly with insurance companies, or with a faceless Internet intermediary.
What a difference a couple of years and an unpredictable economy can make! Today, much of the bravado is melting away like an ice-cream cone on a hot sidewalk. But the lingering memory of the doom-and-gloom talk remains fresh enough to keep most agents from becoming smug. In fact, many remain deeply concerned about the future. They wonder, is independent distribution of insurance going to survive through another generation?
That’s the $64,000 question that agencies are evaluating in order to decide whether to sell to a third party or remain independent. If you find yourself pondering your own agency’s future, here are some points to consider.
- The independent agent’s value proposition was tested, and it passed. It wasn’t long ago that local bookstores (i.e. Barnes & Noble) appeared headed for serious trouble. The dot-coms (i.e. Amazon.com) were going to use price, selection, and ease-of-doing-business to poach the local bookstores’ customers. From a transactional efficiency standpoint, Amazon looked like the clear winner.
We’ve since come to find, however, that much of a local bookstore’s value proposition to customers goes beyond simply selling books. Barnes & Noble, for example, has worked hard to create an 'experience' with perceived value for its customers. Walk into a Barnes & Noble bookstore and you’ll find overstuffed chairs to lounge in while you peruse your favorite magazine and sip a cup of coffee from the in-house cafe. You might find yourself going back simply for the enjoyment.
Although few agency principals see a day when customers will hang out in their agencies for the sake of the 'experience,' we now know better than ever (thanks in part to the Internet) that people prefer to use agents — they’re able to cut through the bewildering maze of insurance policies and options in ways that computers simply cannot. The 'consulting' component of an agency is where the value has been shifting for years and is where it’ll increasingly reside in the future. Those who position themselves as consultants will prosper. On the other hand, the future looks dismal for those who simply connect buyer to seller, since these agencies will be fighting a losing battle for market share that will naturally migrate to the Internet, 1-800 providers, and other efficiency-driven providers.
- Investors are bullish on insurance broker stocks. When trying to predict the future of an industry a significant piece of evidence is the stock performance of its publicly traded market leaders. After all, speculation is one thing; investment of real cash is quite another.
- Private broker financial results are improving dramatically. Driven by faster revenue growth and steady profit margins, many private agencies are experiencing financial returns not seen since the mid-1980s. Although the fortunes of private brokers could of course turn around, it appears that the greatest current threat to them is the downturn in the overall economy. But even in a significant recession, few businesses will represent a 'safe-harbor' investment. Because private agencies link their stock values to internal cash flow rather than stock market multiples, the impact of a stock market downturn (as opposed to a downturn in the overall economy) is less dramatic.
But the performance bar is rising. With the continued success of public brokers, the aggressive acquisition of key agencies by banks, and the emergence of a new breed of super-regional private brokers, the stakes for remaining in the business as a privately held independent agency are steadily increasing. And the resulting need for reinvestment in the business has never been higher.
So if you’ve been kicking yourself for not dumping those technology stocks when the NASDAQ was trading around 5,000, take heart: You’re a better investor than you think. That 'old economy' insurance agency stock you’ve owned for all those years is really starting to pay off. And the long-term indicators look good, if you have the patience, discipline, and the will necessary to keep building.