The Future of Insurance Agencies

In various countries, it is a traditional proclamation made after the coronation of a new king that simultaneously announces the death of the previous king and asserts continuity by saluting the new king. “The king is dead; long live the king!” This seemingly contradictory phrase may also apply to the independent insurance agency.

The demise of the independent agent has been predicted for over 20 years, with the advent of the Internet. Fintechs and insurtechs love to announce that they are disrupting the insurance industry. The reality is that insurance agencies evolve with changes in the marketplace (technology, business environment, society, etc.), and fintech and insurtech are mostly marketing campaigns. There are two camps for evolution – creepers and leapers – meaning slow incremental growth (creepers) and rapid, significant change (leapers). As we look to the horizon of the insurance industry, independent agencies will transition from crawlers to leapers.

There are several key factors that are driving the need for major changes to the independent insurance agency model. The first and most obvious force is technology. There are social changes based on the impact of technology. Subsequently, insurance agencies will have to adapt to multifaceted changes in the business environment or perish.

technology

Artificial intelligence (AI) will be the biggest change catalyst for insurance agencies. Automation has encroached on the tasks traditionally performed by agents, from rate quotes and application processing to risk assessments and educational resources.

Predictive analytics and chatbots now enable self-service insurance shopping, especially for straightforward products like term life insurance and even personal lines, challenging the role of agents.

When the Internet was becoming popular, many people thought that direct-to-consumer (DTC) sales would become the standard; However, adults at the time were slow to adapt. Young adults today have grown up with the Internet and expect the ability to get everything directly on the Internet. About two-thirds of personal line sales are now direct-to-consumer sales, while only a quarter of more complex commercial line sales are DTC sales. Most likely, this percentage will increase as Gen Z ages.

More damaging to insurance agencies than the increase in DTC sales will be changes in the insurance industry that will have cascading effects downstream. With the advent of self-driving cars and other Internet of Things (IoT) (physical objects equipped with sensors, software, and other technologies connected to the Internet), risk and liability will shift from the consumer to the manufacturer. Personal auto coverage for self-driving cars will have no or limited liability coverage. Smart devices in homes and businesses are providing real-time risk data that essentially creates individual risk assessments (vs. aggregated risk assessments).

AI and “big data” are changing the way insurance companies do business, from distribution to underwriting and claims. The process of purchasing insurance has become much faster and more automated. AI now plays a vital role in assessing risk profiles based on individual behaviour, allowing instant policy issuance in sectors such as auto and life insurance.

The use of telematics and IoT devices is making it more streamlined. Additionally, blockchain technology facilitates instant financial transactions, simplifies contract processing, and reduces costs for insurers, leading to faster commercial insurance quotes. All this will make the consumer less likely to use an insurance agent.

Usage-based insurance (UBI) with customization according to individual behavior is becoming increasingly prevalent. Insurance models are moving from traditional purchase and renewal to continuous coverage, which is dynamically aligning with the lifestyle of users. Micro coverage options for specific needs, such as phone battery or flight delay insurance, allow personalized policy bundles. As the sharing economy grows, UBI is introducing a pay-per-use model for shared assets like cars and homes. Many of these types of coverages will be offered by the business selling the product or service, not by an insurance agent.

Traditional methods of underwriting are becoming obsolete for most personal and small business insurance products.

Automation and artificial intelligence, including predictive models and deep learning, have accelerated the underwriting process by mere seconds. This is achieved by integrating these technologies into insurers' technology stack and using internal and extensive external data through APIs and providers. Data collected from a variety of sources, including carriers, reinsurers and distributors, proactively offers customers insurance packages with pricing reflecting their individual risk profiles. There is less and less need for the insurance agent to collect, review, summarize and submit underwriting data.

Claims management, no longer a key role for most insurance agents, is increasingly being handled by algorithms, reducing human involvement.

Insurance Distribution Business Model

For most of the 20th century, the typical insurance agency was a local small business. Generally speaking, during that time frame, only very large businesses needed to seek out insurance brokers with specialized skills and services (such as Aon, Marsh McLennan, etc.).

Consolidation of insurance agencies began to accelerate in the 1990s. National brokers began acquiring large prime agencies across the country. Regional brokers grew by acquiring small and medium-sized insurance agencies.

Mergers and acquisitions increased rapidly as the century turned out. Acquisitions were a growth strategy for national (publicly traded) brokers. Private equity (PE) money realized that the insurance industry was lucrative and jumped in with both feet. Most national brokers are now or were backed by PE money.

Due to the M&A frenzy of the last 20-plus years, there are few large, privately owned independent insurance agencies. Often, the local privately owned insurance agency is a firm with fewer than 10 employees. Consumers are presented with the binary of working with a national broker with deep resources or a local privately owned firm with limited resources. These small, privately owned companies face pressure to compete against professionally managed competitors with a plethora of products and services that only a larger company can offer.

Despite the growing influx of national brokers, it appears to be easier to start an insurance agency now than it was 50 years ago.

Getting the first carrier appointment was the biggest hurdle in starting an agency. Networks, aggregators and franchises have been created to provide small agency access to the market, removing the biggest hurdles and making the new agency immediately viable.

Clusters, networks, aggregators and franchises are becoming incubators for new agencies. Agency franchises and some networks not only provide access to the market, but some also include back-office support, such as accounting and customer service staff. Branding, agency automation systems, processes, etc. are consistent.

Typically, new franchisees will pay an initial franchise fee (often $25,000 or more), and then a reduced rate of commission is paid to the franchisee to offset support costs. Some may have a fixed monthly fee. These options also have the advantage of operating a small agency while being part of a larger organization.

social change

The last of the Baby Boomers are slowly exiting the industry. The issue is that there is a growing population gap since the middle generation, Generation X, is younger than both the Baby Boomer and Millennial groups. Therefore, 60 year old people will be replaced by 20 year old people because there is a shortage of 40 and 50 year old people.

This will change the way agencies work because young people think differently and have different values. This age difference also means a difference in experience. A producer or manager with more than 20 years of experience will be replaced by someone with less than 10 years of experience. The skills built up through experience will be lost as the younger generation comes into motion. On the other hand, the next trend may be influenced by Millennials' lack of experience with existing business models.

Consumers today expect a seamless experience across both digital and physical sales channels, with the ability to get instant answers to simple inquiries as well as perform in-depth research. They want the convenience of purchasing a straightforward product like car insurance without any complications. Additionally, for more complex insurance products, there is a desire for real-time interactions with agents through both digital and in-person mediums.

The pandemic showed that many routine interactions, such as simple consultations and account maintenance, can take place without personal contact. Digital platforms often provide a more suitable environment for activities such as research.

Nevertheless, there remains a selective preference among customers for specialized advice and personal engagement with agents for the final step of service. With a significant reduction in in-person visits to agencies and a reduction in direct customer interactions, insurers have been challenged to develop new strategies for lead generation.

The traditional insurance agent, who relies primarily on personal appeal and interpersonal skills, is becoming less common. Their modern counterparts will need to master various new skills and utilize digital resources. They are expected to engage with customers more frequently, primarily through digital means, and use AI-powered analytics to increase service efficiency. Agencies that have not already adapted to consumer expectations will not be able to survive.

conclusion

Independent insurance agencies are not going away. The human touch will remain important, especially when dealing with complex insurance products that require nuanced understanding and personalized advice. Agencies must adapt to changing consumer behavior and expectations, changes driven by new technology, and changes in insurance companies.

Everything is changing, and it's changing fast. To remain competitive, agencies must focus on agility, client-centricity and tech-savvy while maintaining core strengths of personal service and expertise. This means that the agency of the future will be very different than the agencies of today.

Prepare for rapid change.

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trend agencies