At least once per decade, as technology advances there are predictions that the insurance agency model of selling coverage will be dead soon. And like Mark Twain, independent insurance agencies persist in showing that the reports of their deaths have been greatly exaggerated.
There are several causes for optimism about the independent agency model.
Independent agents maintain a healthy share of the property-casualty insurance market. According to A.M. Best, in 2020 they wrote 53.8% of P/C net written premium. That included three quarters of commercial lines premium and more than one-third of the personal lines market, an area of strength for captive (those who sell through exclusive agents) and direct writers (those carriers who sell coverage by phone or over the internet with no agent involvement.) Their share of the personal lines market actually grew slightly between 2017 and 2019 and has held steady since 2015 despite the millions of dollars their captive and direct competitors have poured into advertising.
IAs are holding onto their personal lines customers while their competitors cannibalize each others’ customers. During that time period, direct writers gained 4% of market share while captives lost that amount.
Between 2019 and 2020, Nationwide released its 11,000 captive agents to act as independent agents. Allstate has been distributing its products through IAs for many years now. Farmers began working with IAs in 1999, recognizing that consumers want to buy insurance that way. These and other captive agency carriers have recognized the high overhead cost their agency force accrues. Persistently low interest rates have hampered their ability to grow revenues in the traditional way, forcing them to examine alternatives.
More carriers are expected to follow Nationwide’s lead. “Nationwide was one of the first large carriers to release its captive base, but it won’t be the last as other carriers look for ways to go leaner,” wrote consultant Joel Zwicker in October 2021.
In fact, the three largest captive agency carriers own subsidiaries that sell through independent agencies. Allstate has Encompass, State Farm has Dover Bay Insurance, a surplus lines carrier for homeowners business in coastal areas, and Farmers recently added the MetLife P/C business to Foremost in its stable of IA carriers. This indicates that even the captive agency carriers see value in the IA model.
It is true that direct writers have grown. However, they remain a minority of the overall P/C market. In 2019 they wrote one quarter of private passenger auto premium but only 1% of commercial auto premium. They wrote negligible percentages of other commercial lines premiums.
Agencies Are Growing
MarshBerry reported that revenue at agencies and brokerages grew an average of 9% during the first pandemic year of 2020. Most of that growth (7.5%) was organic versus growth resulting from acquisitions. The firms they surveyed saw an average increase of 23% in earnings before interest, taxes, depreciation and amortization (EBITDA.) These firms anticipated even faster growth in 2021 as the economy recovered.
Online Quoting Platforms Use Agents
The IA distribution model is working well enough that online platforms get quotes from them. For example, InsuranceQuotes.com states that it is “(a)rmed with … a large network of national and local insurance agents …”
IAs Are Changing Their Services and Approach
A recent report from PwC said that “many brokers have made their relationships stickier by providing objective advice around emerging risk management issues” during the pandemic. A McKinsey study concluded that the strong agencies of the future will be based on the core capabilities of defining and reaching target markets; expertise; and operational efficiency and scale.
The PwC report said it best: “Intermediaries aren’t going anywhere.” The IA model will continue to evolve and adapt to changes in technology, such as insurtech innovations, and in conditions, such as the occasional pandemic. Agencies of tomorrow will look differently than those of the 1990s, but they will be there.