If you have not yet had the opportunity to review McKinsey & Company’s “Agents of the Future: The Evolution of Property and Casualty Insurance Distribution,” released this past June, I encourage you to do so for two primary reasons. First, it provides some very useful guidance as to how agencies can position themselves for success, reinforcing many of the recommendations that have been emerging from ACT work groups for some time. Second, McKinsey & Company studies are well read within carrier executive suites and this one raises several issues for carrier executives to be thinking about regarding how they should manage and compensate their distribution force in the future.
Below I will overview the trends and predictions for property-casualty agency distribution contained in the report; its recommendations to help agents position themselves for the future; and the key questions it encourages carriers to be thinking about with regard to their agency force.
It is important to note that this report focuses on local agency distribution, including both independent agents and exclusive agents, so it is very possible that some of its predictions might impact one of these groups of agents more than the other. In addition, independent agency carriers must compete for the business of their agents, causing them to take different considerations into account in managing their agency force than exclusive agency carriers might.
McKinsey’s View of Agency Distribution Trends
· “A gradual shift is occurring in the value that carriers and customers (both retail and small business) place on many activities traditionally performed by local agents.”
· “Where agents once served as the front line in risk selection and pricing, advances in predictive models are making this role obsolete” (at least for personal auto insurance). This is not yet the case with homeowners and small commercial, according to McKinsey.
· “The agent was once the face of the insurance brand; now, customers increasingly use multiple channels to connect with their carrier.” The carrier’s brand is becoming predominant because of all of their extensive advertising and the carriers’ building online capabilities for insureds, including central contact centers for client inquiries. (Is this more of a trend for the exclusive agency carriers?)
· “Auto insurance – which accounts for 70 percent of personal lines premiums – is fast becoming commoditized” and most agents “have neither the scale nor operational efficiency to profitably sell a commodity (or even a near-commodity).” (pp. 1 & 9) (I believe agents can successfully counter the emerging perception of auto insurance as a commodity by “going opposite” with their marketing strategy. See ACT article, “The Independent Agents’ Opportunity to Take Back Personal Lines.”)
McKinsey sums up these trends stating that it is “The End of an Era for the Local Insurance Agent” (p. 5) and later in the report states “only a subset of current agents will transition successfully.” (p. 16) However, the report does not distinguish between the impacts of these trends on exclusive agents vs. independent agents and McKinsey does not mention the recent trend of more exclusive agents moving to become independent agents to position themselves to offer their clients a broader array of markets.
McKinsey also observes that its prediction of a smaller local agency population has not yet started to happen: “Surprisingly, these trends have not yet led to significant change in the local insurance agent landscape.” (p. 2) In fact, IIABA’s Agency Universe Study found that the number of independent agencies has actually grown from 37,500 to 38,500 over the two year period 2010-2012, for the first time in several years.
I believe the continuing strength of the agency force results from two factors that McKinsey does not even acknowledge in its report: (1) the continuing importance of personal relationships in insurance (agents have them; most carriers don’t) and (2) the greater trust many consumers have in individuals they personally know and do business with, as compared to large institutions.
McKinsey’s Predictions in 5-10 Years
· “Most personal lines and small commercial customers will interact with their agents and carriers across the full range of channels” (mobile, Internet, video conference, phone, in person, etc.).
· “Carriers will continue to use technology to increase their direct interaction with the primary customer, delivering more consistent service at a lower cost.”
· “Agents will be compensated only for the unique value they deliver to the customer and the carrier.”
· Carriers will “focus resources on those agents that deliver profitable business.”
· “Winning agents will deliver tailored and relevant expertise and excel at multichannel marketing, while increasing their scale and operational efficiency.” (p. 2)
McKinsey’s Recommendations for Agency Principals
McKinsey believes that: “Many agents are not currently positioned to succeed in a world where scale and operational efficiency, sophisticated marketing tactics and deep product expertise are critical.” (p. 14)
To McKinsey’s credit, however, the study does provide agents with several recommendations as to how they can position themselves for success in the future:
· Develop a value proposition that is compelling for both carriers and consumers
· Define and reach target markets, rather than just being a generalist in your local market
· Increase your digital presence
· Be more flexible in how you communicate with your clients (use the tools your clients prefer and be on the social media they use)
· Develop new ways to get in front of your audience, both to develop new prospects and to reach out to your existing clients (i.e., social media, websites, online industry forums, Project CAP).
· Deliver more tailored and deeper expertise, such as bundled insurance packages for personal lines & industry-tailored advice for small commercial risks. Consumers can easily get general insurance information on the Internet. Agents will need to provide more.
· Use technology to be positioned to do more with less (i.e., increase operational efficiency)
· Increase scale, whether through organic growth, mergers, banding together (clusters, sharing backrooms, etc.), outsourcing certain functions
· May need to search for new revenue sources. (See pp. 13-14)
McKinsey also outlines several agency business models that it believes will be successful in the future, including:
· Commercial lines agents with industry focused producers who target larger commercial accounts
· Large multiline agents
· Agents with lower-cost models
· Teams of specialized agents each bringing unique product expertise
· Small, niche, expertise-driven agents targeting customer segments for personal lines and commercial lines that require more specific advice, tailored products and a greater degree of service
· Small, virtual agents who spend the bulk of their time on sales, not service, using technology to enable employees to work remotely. (See pp. 14-15)
McKinsey’s Recommendations for Carrier Executives
The report urges carriers not to be “bystanders in the evolution of the agency channel. They should encourage innovation and be as flexible as possible in giving fledgling ideas room and time to develop.” (p. 20)
McKinsey urges carriers to:
· Evaluate which of their policyholder segments value agents and how do agents add value to these segments. What unique services do agents offer to these particular segments and how can we help our agents offer more value to them?
· Evaluate your current agents. Are they positioned to succeed in this new environment? Which agency segments should we support and help grow?
· How should we work with our agents to support them as they evolve? What “tools, systems, capabilities and organizational changes” are needed to ensure success?
· How should we reward agents for the value-added services they provide, while remaining price competitive?
· How should we monitor and stay abreast of the “challenge (or opportunity) of direct distribution?” (See pp. 19-21)
McKinsey’s report contains a lot to think about as we continue to devise strategies to help agencies and carriers position themselves for the future. This fast changing environment will also impact agent-carrier relationships going forward. The IIABA Special Event taking place on September 27 is directly focused on these issues and how we can take our distribution system to the next level. We look forward to continuing this discussion there with many of you.
Finally, while McKinsey talks about how agencies will change theoretically, we are seeing the independent agencies of the future emerge right before our eyes. For a view as to what some of these agencies look like, take a few minutes to view ACT’s agencies of the future videos, if you have not already done so:
I welcome your thoughts as to where you agree with the points made in the McKinsey report and where you disagree. Send your comments to firstname.lastname@example.org.