Two recent reports by analysts for the Japanese investment bank Nomura and the U.S. consulting firm McKinsey & Company have created quite a buzz in the insurance industry. Both reports had negative things to say about the future of independent insurance agents, especially with respect to the sale of personal automobile insurance. Both reports conclude that the average consumer now views such insurance as a commodity. For the analysts at Nomura, this meant that the direct writers, such as Geico, and the captive agents, such as State Farm, now have the upper hand in selling that type of insurance because they can, in the case of direct writers, spend money they would otherwise be paying agents on advertising and lowering premiums, and in the case of captive agents, lower premiums by bundling products under the same brand name. According to the Nomura report, independent agents are in danger of becoming obsolete with respect to the sale of automobile insurance. (Click here for more on this report.) (Click here to read about a product developed by Travelers Insurance to combat this trend.)
The Nomura report draws on the research done by the consultants at McKinsey & Company for its report, “Agents of the Future: The Evolution of Property and Casualty Insurance Distribution.” In that report, the consultants point out the problems for independent agents created by the increasing use of technology by insurance companies to predict risk and communicate directly with potential customers, both of which have reduced the role traditionally played by independent agents in the insurance marketplace. They conclude that this reduced role will inevitably lead to a change in the commission structure for independent agents making it harder for them to survive.
Many commentators have cited this report as signaling the beginning of the end for independent insurance agents. However, that is not what its authors think. Instead, they state that “Local agents are not in danger of extinction, but the role they play will continue to evolve. Those that can adapt to a new set of circumstances will thrive.” The authors think that homeowners and small commercial insurance products will still be largely sold through independent agents due to the fact that they present more complex risks than personal automobiles for which the insured will want the advice and assistance of an insurance agent.
The report goes on to outline what changes an independent agent will have to make to survive and thrive in the future. While there is no single business model that will guarantee success, the authors point to three “core capabilities” that they think all agents who want to survive and thrive will have to develop. They are: (1) defining and reaching a target market, (2) obtaining greater expertise about the insurance needs of their target market, and (3) increasing operational efficiency and scale. The report also discusses six business models that the authors think are likely to evolve and be successful in the future. They range from traditional commercial lines agencies that target large accounts in specific industries to small virtual agents who devote most of their time to sales using technology to communicate with their customers and potential customers.
The report concludes with a series of questions that the authors think insurance companies should be asking themselves about their agents. These questions range from how do agents add value for their target markets to how can agents be rewarded for the service they provide while allowing the company’s products to remain price competitive. The agents who can provide positive answers to these questions and who can successfully develop the core capabilities described above will be more likely to survive and thrive in the future. (Click here to read the full report.) (Click here to read one independent agent’s thoughts on what the report means for her and other such agents.)