'Brokers to Decline as Direct Sales Gain,' read the headline of the lead story in the Agent/Broker section of a recent issue of National Underwriter. Well, how could I not read that? After all, these are my customers they're talking about, and I shoot my mouth off frequently in the opposite direction. The story cited a research report, 'Property & Casualty - Mapping the Future,' prepared by The Economist Intelligence Unit in conjunction with PricewaterhouseCoopers (PwC). The Economist is a superior publication, and PwC's standing speaks for itself.
However, I had two general problems with this story. First, I found that the report was weak. If I'd turned it in as a graduate-school paper, I'm sure it would've been kicked back with comments such as 'Topical, Mr. Burke, but lacking rigor and full of unsupported generalities.' You'd love one of the report's major findings: Agents and brokers must 'transform themselves' from being 'mere intermediaries' to advisers and providers of services.
The report was based on a questionnaire sent to insurance company executives. The researchers, who inquired about lots of things other than agents and brokers, probably weren't aware that there might be no other group of industry people less in tune with the agency world, actual front-line sales, field underwriting, and service than senior executives at insurance companies. I'm not being a smart aleck. I think that's an accurate assessment and one that The Economist and PwC might not expect.
Let's get to the second and more important problem - the issue the report raised. The bold prediction of the report, ballyhooed in National Underwriter, was that the independent agent's and broker's market share and influence will decline significantly over the next several years. Not only do I not see that, I see the opposite. In the distribution side of the Property/Casualty and Benefits business over the last few years, every important innovation I've seen firsthand or heard of secondhand has been created by an agent or broker or has at least had major agent or broker involvement, such as:
- Working directly with reinsurers on signature products and programs
- Developing captive programs for the benefit of customers, associations, and agency collectives
- Working with financial institutions to carry out the responses to Internet-driven inquiries
- Developing Internet-resident databases for Group Health accounts
- Getting involved with virtual insurance companies
- Forming powerful and well-capitalized collectives
- Managing self-insured trusts
Does this spate of creativity I observe in the agency/broker ranks mean that all existing agencies will prosper? Of course not. The thinning of the herd continues. But the learners and the energetic and optimistic are building a whole new foundation for agent and broker distribution, and they're expanding market share. While they're at it, they're greatly increasing their agencies' value.
The Economist/PwC report treat the notion that insurance buyers want one-stop shopping as a given. Let's talk about what customers really want. I'm not talking here about the kid who needs a minimum-limits Auto policy for a month to get his car registered. I'm talking about almost everyone else:
- They want their insurance arranged properly. That goes for the risk manager at a big company, a middle-income family with a kid away at college, and the owner of a vacation cottage in a windstorm area.
- They want to feel that they're paying a reasonably competitive price.
- They want good service when they need it. As individuals, heads of households, and business managers, customers want professional service and the sense that the person at the other end of the line (or across the desk) is listening and actually intends to help. And, as part of that service, they want timeliness and accuracy.
That's it. Now, if we can get these three things and do it in one stop, I suppose that's nice, too. But I can't ever remember an insurance buyer, business or personal, lamenting, 'My insurance is so inconvenient.' Their complaints are usually that a claim wasn't covered, that the insurance cost too much, or that they got the runaround from inept or snotty 'service' people.
The problem with insurance isn't that it takes too much time. The problem is that it's an expensive necessity. The question is, who's going to help you with your insurance so you can get what you want arranged properly, at a competitive cost, and with good service when you need it?
Millions of American households and many small businesses already get their insurance without a local broker. This has been true for a long time. A few buy their insurance directly from the carrier without an agent. The rest buy it over the phone, by mail, over the Internet, or from an agent who's an employee of an insurance company. From everything I see, these sources will continue to prosper and give local agents and brokers lots of competition.
But The Economist/PwC report and National Underwriter claim something different. They're predicting a sea change in market share. Would someone please tell me what forces out there - economic, demographic, social, or political - are going to cause this big shift? Who would be the beneficiaries of this major swing away from agents and brokers? Let's look at who this report claims will be soaking up all this market share that's pouring from agents and brokers in a torrent:
- Insurance companies that decide to go direct. They lack sales and customer service staff. Insurance company employees have lots of skills; they just don't sell.
- A Wichita-based employee of an investment company that prospects customers who are checking their 401(k) balances. Maybe, but only if that investment company employee refers the customer to an agency.
- Banks. Do you really believe that bank supervisors struggling to maintain trained staff in banking are now going to train their employees in coverage, pricing, risk management, self-insurance, and deductibles? Their only realistic move is to buy an agency or refer to one. And referral to an agency, however that agency is owned, is not an example of customers going direct.
- A well-trained employee of a direct-response insurance carrier. Amica, USAA, and GEICO are major players in the Personal Lines market. And, as I indicated above, they'll continue to prosper. They have very entertaining advertising and promotions behind them. But if they were going to wipe out the agency system, they would've done it years ago, when their advantages were much greater than they are today.
The only place I can see such a structural shift happening is in small-business Commercial lines. In this so-called select business market, agencies throughout the country are making deals with insurance companies to systematically turn over their small accounts and, in effect, teach them the agency business, at least from the service and account-rounding side.
This is an example of customers going direct, but an especially subtle one because all sorts of efforts are made to disguise the carrier's involvement. The carrier employee in or upstate
New York
answers, 'Jones Agency. May I help you?' The carrier acknowledges that the agency owns the business. While this is an example of what was predicted in The Economist/PwC report, in the overall scheme of things it's not very big. I regard it as sort of the exception that proves the rule.
The Economist/PwC report and National Underwriter story missed the real part of the agency business that's in decline: The role played by many traditional carriers (headed by many of the very people, presumably, to whom the researchers sent the questionnaire) who've been in denial about what's really happening or who are unable to shift their entrenched cultures in response. This was a novel and provocative observation a few years ago, but it has now become obvious.
People who don't know the insurance business very well look at the Property/Casualty marketplace and conclude that agents and brokers are in decline. It reminds me of a child watching a beach erode and concluding that there's no more sand, unaware that it's just moved elsewhere and formed a new beach.
I don't mean to imply that insurance agencies and brokerages are rising in unison and marching in some victory parade. Many agencies are in retreat, and there are big changes afoot, along with some failures, heartbreak, and lots of consolidation. Firms that are focused on the customer, willing to learn continuously, and building capital to invest in people and systems can ignore our clucking friends. The sky is not falling.