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  • Writer's pictureChris Burand

Insurance Carriers: Are you hostage to a top distributor?

Updated: Jan 27, 2021

Is your insurance company held hostage to distributors that cause problems or fail to perform but represent too much of your premiums? Do you have distributors that are “Too Big to Fail”? In other words, are you in a situation similar to a bank that has a large loan that has gone bad? The bank cannot afford to call in the loan and they can’t afford to ignore the loan.

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More and more distributors (I prefer “distributors” to “agents" or "brokers" because the word “distributors” encompasses electronic distribution, networks, franchisors, clusters, brokers, and individual agencies) are far larger than hundreds of carriers. A number of distributors now have $100 million and more premium with individual carriers. By my estimate, 45-50 distributors now control over 50% of P&C, U.S. based premiums. As a carrier, walking away from a nonperforming $100 million book is a whole lot harder than walking away from $500,000 books.

One reason for the growth of networks, consolidators, franchises, etc., is that distributors small and large know carriers will not cancel a $50 million to $1 billion book, regardless of performance. This fact creates a pernicious situation. More and more poor performers combine to get paid more and by doing so basically eliminate the possibility of losing their contracts. In other words, they know they escape accountability. What happens when a bunch of poor performers combine to become bullet proof relative to their carriers? Does their performance improve? Hardly.

Carriers have to put more pressure, or at least depend more, on smaller but much better performing distributors to subsidize the larger poor performers. This gross inequity of good distributors subsidizing their worse competitors does not go unnoticed by the better performers. The better performers are not happy subsidizing their poor performing competitors. What I am writing is not a secret even if many insurance company people think it is. Almost every distributor knows what is happening.

It is not only intuitive to suggest that when one combines poor performing distributors that use size to their advantage rather than actually improving performance, their performance may actually deteriorate. Some public data suggests this happens consistently. Anecdotally, the private information confirms these conclusions. (I need to say that my comments do not apply to every large distributor. A few are achieving excellent results, but they are exceptions.)

Carriers are using different strategies and some carriers don’t seem to have any strategies. One interesting strategy is investing in new, usually virtual, distributors. To the amazement of many, these are often independent distributors representing many carriers, not just the insurance carrier(s) that is/are investing in them. Carriers are funding these start-up distributors with millions of dollars of investment equity. It is interesting these same carriers will not give a new brick and mortar distributor a contract, but they’ll invest millions in virtual distributors. I believe the thought process is this:

  • The distributor can’t demand higher compensation if the carrier owns them.

  • The distributor absolutely must grow. They have no choice. They cannot sit and clip renewal coupons.

  • These distributors represent the future anyway, at least relative to that part of the market. If this is the future of working with this market segment and holding onto the dying books of consolidators is not the future, then this is a good strategy.

  • With adequate success, these virtual and partially controlled distributors will be large enough to offset the power of distributors not performing, and will give carriers the ability to tell those large and underperforming distributors to “Go pound sand.” The carriers hope to have eliminated their “Too Big to Fail” situation.

We will all have to wait and see if that strategy works. Even if it works though, I wonder if the strategy will take too long.

The better, and even some of the not “better” distributors, especially the handful of large high-quality distributors are frankly tired of subsidizing wasting asset competitors. These entities believe in meritocratic capitalism rather than size-based capitalism. A few high performing carriers’ leadership teams also believe more in meritocratic capitalism and have addressed the subsidy issue well – but only a few. Whether good performance enables carriers to forego subsidies and extra payments for marginal results or having leadership that refuses “Too Big to Fail” distributors (in other words, having a good leader with a spine has effects beyond paying extra to large but poor distributors) is more important is speculative. The correlation exists though whether it is good results or high-quality leadership that is the causation is camouflaged.

On the other hand, some of the carriers lagging are also carriers that may be caught up in the “Too Big to Fail” situations. The results are already poor, their options are limited or unimaginative, so they line up to pay more.

“Too Big to Fail” scenarios really suck. I feel for these carriers even if their problems are of their own making. Imagine having 5% of your book, or actually more commonly 15%-25% of your book, with a few (less than ten) distributors who do not, and likely cannot, grow and whose loss ratios are average and who have poor hit ratios driving up the carrier’s cost, and yet the carrier has to pay them extra money. There is no way in a low growth environment that a carrier can walk away from that volume of premiums unless forced. Simultaneously, if the carrier’s expense ratio is elevated, the carrier is highly likely to be at a material disadvantage from a profit, and therefore a pricing perspective. In this situation, the distributor and the carrier may enter into a slow downward spiral while the carriers and distributors that have a low cost, lower priced platform will have outsized success. Industry evidence already exists showing this is what is happening.

The distributors are highly unlikely to forego the extra compensation until the last minute so they’re not going to voluntarily cut the carrier’s expense load. This leaves the carrier to make hard decisions or create new distributors and/or distribution channels. The distributor’s model is to ride out extra compensation for as long as it lasts and figure out what to do when that goes away, while the carrier is stuck watching their premiums slowly decline.

Today is a great day for carriers with strong leadership to make tough decisions to eliminate “Too Big to Fail” threats proactively. It is a great day for distributors to know which carriers have the models for success versus slow deteriorations. It is a great day for doing business with carriers that don’t take from good distributors to subsidize poor distributors. In other words, it is a great day for leaders of carriers and distributors willing to strongly take charge of their futures based on quality performance.

In my work with carriers that have strong leaders willing to ask for outside help, creating new compensation models that align distributor and carrier needs is the best solution. The proactive distributors with the best management, love carriers that present these solutions.


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.

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