My Crystal Ball

Consulting, to varying degrees, involves seeing into the future and advising clients how to best navigate that future. As a consultant and holding myself to a little bit of accountability: were my projections of the future of insurance distribution correct from about 10 years ago?

In particular, a decade ago, I opined about which of 10 new insurance Insurtech distributors were likely to succeed. I advised my clients regarding why they should pay special attention to certain ones, and I advised why I thought specific ones would be more appealing to insureds than what traditional agencies offered. In other words, why did the new distributors have more sex appeal than the boring regular agency?

I was deadly accurate with the entities that were, I’ll put it nicely, not likely legitimate. Those have all failed, but I am surprised how long they lasted.

The one I thought of most highly transitioned from mostly being an insurance distributor to becoming a unique hybrid of a highly rated (by A.M. Best) carrier, captive agency, and independent agency. It has become something of an everything, which I did not predict. This firm has now written, at the carrier level alone, premiums exceeding $200 million. Their agency level writings are not public, but I expect the number is materially higher.

I still recommend to my clients that they use that entity's website as a model for building meaningful content, with maybe a caution regarding overpromising, especially from an E&O perspective. Online distributors might be getting a break from courts relative to E&O standards of care, where perhaps they can say things and get away with it versus a physical, local agency saying the same things. Hopefully, courts level the playing field sooner rather than later.

My crystal ball failed when I did not anticipate the top 10 brokers buying the other new entities. If my research is correct, all the rest were acquired. I find this interesting because, for the most part, these Insurtechs were focused on personal lines and small commercial, while the large brokers are seemingly more interested in large accounts.

I don’t have access to these brokers’ minds as to why they acquired these entities. My best guess is they saw gold in the opportunity to acquire small accounts for less than new business acquisition costs. At some point, they know they must quit growing only by acquisition. (My analysis of the publicly traded brokers’ growth suggests strongly that over the last ten years, if acquisitions and rate increases are addressed, these brokers have not grown, and some might be smaller.)

The catch is how to develop the small account niche, given their structure is focused on larger accounts and to a lesser extent, retaining but not gaining small accounts? Their structure is cost prohibitive to do it organically, thus they focus on acquisitions where they don’t have to account for most of the cost of their acquisitions, given current accounting rules. Who does not like free growth!? If technology can generate volume at low cost, this is the ticket. So they bought the platforms. I wish I had access to their data to know if this strategy is working.

This causes me to wonder what was enticing about the platforms, which must generate a cost savings of at least 50% for this model to work.

The premise must be to take advantage of what this market likely believes or wants to believe, and that is: all insurance is a commodity. Rather than work against the momentum, accelerate the momentum that already exists. In other words, accelerate the belief that all insurance is the same and all insurance companies are the same.

The focus, then, must be the platform. It is the be-all and end-all. Nothing else matters, not the carrier, not the forms, nothing. To some extent, this thought process may be a partial explanation of some of these entities’ propensities, in general, to not pay attention to insurance regulations because they believe they are the only part of the insurance chain that matters.

In particular, they focus on price transparency and what appears to be great customer service. In reading BBB reviews of these entities’ services, reality seems to be considerably different than what customers were anticipating, which is to be expected in this model. The customers’ expectations that all insurance is the same except for price and that the distributor is the be-all and end-all are completely fantastical expectations with no grounding in reality.

However, what is scary is how, with the correct data, algorithms are designed to get these customers in the door at a much lower acquisition cost than usual. Small and medium-sized agencies and many carriers do not understand how the larger players are so fixated on this critical metric. In the old days, the rule of thumb was that an agency needed to keep a client at least four years, more likely seven years, before it made a profit because the new business acquisition cost was so high. This requires a retention ratio of at least 90%. But if an agency can cut that to maybe three years, retention can drop significantly, as can customer satisfaction. In essence, new financial rules exist.

Several quality books have been written on how firms can help consumers think they’re getting a deal that is not likely to meet their expectations. My favorite title of these books is “Phishing for Phools” by two of my favorite authors, Shiller and Akerlof. Another fascinating algorithm combined with advertising is how one carrier creates brilliant price transparency that causes the bad risks to choose other carriers. What is so enviable from a marketing perspective to me is how this model makes the carrier look like the shining knight, when in reality it is about taking the cream at higher profit margins. I recently completed a project looking back, by line of business, to identify the results of this model. The outcome is crystal clear – it works! And the other carriers do not understand their blood is slowly being drained. They are willingly taking on the crappy accounts.

In this manner, the Law of Large Numbers is dead. I did not foresee that happening so soon. It is now relatively easy to identify good and bad accounts, price accordingly, and not need to rely on the randomness of the Law of Large Numbers. The industry would be well served to acknowledge this law is in the trash heap.

And in my final assessment of my predictions, my prediction that distributors needed to become true professionals working with clients who appreciate custom service has become far more important, which means upping your capabilities. Being a run-of-the-mill agent with continued high new business acquisition costs while taking orders cannot continue financially for another ten years.

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None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.