Distribution Consolidation and Agency Networks
Updated: Aug 25, 2020
Given the voluminous agency consolidation (sales to larger distributors) and aggregation (combining volumes in networks or clustering), can carriers who historically focused on single agencies continue to do so? Can those carriers, almost exclusively regional or niched in nature, remain true to their core values and still survive?
Given the same factors, what are state agent associations going to do? How many agents need to attend XYZ convention from the 25 remaining distribution entities?
Carriers and associations have business plans that are largely based on large numbers of distributors each doing an immaterial amount of business. This results in a large spread of risk, which is good risk management. A carrier that has close relationships with its agents and has managed those relationships more successfully on a symbiotic basis than the carrier's peers, certainly has based their distribution strategy and agency relationship culture on wide dispersion of some combination of agents having low concentrations and abilities to concentrate power, market share, underwriting risk, and so forth. However, consolidation changes the equation.
Between consolidation and aggregation, market concentration, power, market share, and potentially underwriting risk (offset possibly by new mapping software) changes the equation. With so much concentration and certainly more to come, can these carriers maintain their past strategy of focusing on single agencies? Spreading risk while branding their strategy as being agency focused is really genius. I am not suggesting they are being disingenuous either, though it might sound that way. They have had tremendous success for a long, long time with this strategy.
With 44,000 agents the strategy worked. Then when the numbers declined to 38,000 agents, and now, maybe optimistically, 36,000 agencies, a little wobble occurs. At 30,000 agents does the model break completely, or is the number 20,000 or 15,000? I heard an estimate that 85% of all independent agents will be purchased or become members of networks within ten years. That equates to around 100-200 distributors (maybe 300 but not 35,000) with thousands of franchises or members operating, maybe, under different names, but having carrier contracts with only those 100-200 entities. There are now around 900 P&C carriers. It is easy to envision there being more carriers than agencies/brokers.
Therefore, the historic distribution strategy must change as the remaining distributors become much, much larger, and at least in theory, more sophisticated and professionally managed. Those distributors will use size to their advantage, and in many cases are already doing so. Unfortunately, some do not possess any other powers. The ones that know how to use their size and sophistication well will be the winners and carriers unprepared to deal with these entities will lose.
Those entities will have the resources to move books, to create their own insurance companies, and flip tables to disintermediate common carriers. They can build all kinds of captives for their best accounts and give adverse selection to carriers. Considerable evidence already exists that this is happening in some sectors as captive results appear to be far better than carrier overall results.
These large distributors are different from what traditional carriers have experienced in another way too. They are run by people who are charged with achieving success or losing their jobs. The old-fashioned agencies had no such mandate. The owners could set their own rules. Quite a few don’t really want to make the effort to grow or cut costs. They are purely lifestyle agencies, not professional businesses. This is a bane to many carriers. They are so tired of their agents aggressively waiting for the phone to ring, but are they ready to deal with agencies run by executives who must make things happen? Is it a case of being careful of what one wishes? With resources and mandates to succeed, these executives are and will be more aggressive working with carriers and, if necessary, disintermediating them. Left unchecked, carriers will not only lose their spread of distribution risk, but possibly have adverse loss ratios, expense ratios, and growth.
Carriers must therefore effect a strategy to offset these deleterious drivers, which means looking out for themselves instead of their agency relationships. This is one reason so many carriers have invested hundreds of millions of dollars in new start-up independent agencies as silent partners. In and of itself, this is evidence of changing the culture from the old-fashioned agency centric models. Other carriers have already built the rating/quoting software with which to go direct to the public. All they need to do is flip the switch.
I am curious what will eventually transpire. I imagine some will hang on too long to the old model, too loyal to those agencies aggressively waiting for the phone to ring. Some will find a two-part strategy. The first part will be for regular agents and the other will be for all other insurance distributors. Some will probably abandon the old-fashioned relationships entirely. Some may already have done so and are just going through the motions at this point.
One suggestion I’d like to make, going back to the very old-fashioned days, is if carriers would help agencies start from scratch, many of their headaches would go away. The idea of not appointing an agent because they don't yet have a book while also wanting strong organic growth is almost oxymoronic. Very few insureds, percentage wise, change agents or carriers in any given year. Those who do change, change far more often. Whatever the resulting average is, becomes meaningless because the 80/20 rule prevails. 20% of customers constitute 80% of the changes. This means getting the higher quality part of the 80% that rarely changes agents is really hard. All normal, non-monomaniacal humans reach a point where they make enough and don’t care to work any harder. Once an agent or producer reaches that point, the extra work required to get clients to move is just not worth it. The solution then is appointing new, very hungry agents like companies used to do a long time ago.
Agents who think carriers' actions today are simply driven by greed and power may be partially correct, but carriers are fighting for their own lives and success in this fast-changing industry. Carriers must make decisions that materially effect their culture and therefore, their approach and relationship to their agencies. The old days of somewhat collegial relationships driving the agency/carrier partnership are about dead. We are entering a phase of professional relationships but not partnerships. Agents who understand this distinction will be far ahead in building their own better future.
NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.