Survival of the Brightest

Original Article as featured on Property Casualty 360

By: Susan Toussaintco-founder of The WorkComp Advisory Group


Relationships between independent insurance agencies and insurance companies are changing and new dynamics accelerate the pace of change. Tighter margins, data analytics, a new generation of entrepreneurs and a focus on consultative sales are all trends that challenge the status quo.

The big concern for most agencies is how insurance companies will view the role of the independent agency in the distribution chain of insurance products and services in the future. Will web-based, direct-to-employer sales replace agencies?

“Back in the ‘70s and ‘80s, carriers relied on independent agents to be their eyes and ears and to present an employer’s risk factors,” said Michael S. Arnold, AAI, vice president of sales and marketing for Summit Consulting, a Liberty Mutual workers’ compensation insurance provider, which manages carriers in 11 southeastern states. “Now, we’re using data analytics to select and price risk, and it will be interesting to see how companies balance technology against the input from the independent agent.”

However, most agents do not even try to provide the risk assessments insurance companies need, according to Frank Pennachio, co-founder of The WorkComp Advisory Group, a consulting firm providing business development and retention services to independent insurance agencies. Most agencies have operations focused on copying policies, transferring data to applications, submitting applications to insurance companies, negotiating prices with the insurers, and then spread-sheeting competitive bids to present to the client, he said.

Related: Read the article “The Analytics Advantage” by David Conolly, Jennifer Dotts, and Christofer Raimondo.

While most agents prefer to engage with clients in a consultative manner by analyzing the company’s risks and matching them to the best insurance company, some say their clients won’t let them. Employers easily are confused by insurance options and often fail to understand their own risks, so they default to price-oriented purchases.

“We can blame ourselves for this,” said Dean D’Camera, whose Annapolis, Md.-based D’Camera Group writes commercial property-casualty lines throughout the Mid-Atlantic states. “Independent agents have trained business owners to buy their insurance and risk management using a flawed model I call ‘copy, quote and pray.’”

Agencies and insurance companies complain about being commoditized. Brandt D. Beal, ARM, president and CEO of The Gibraltar Group in Texas, said that the transactional approach creates hostility toward agencies. “Insurance carriers are trying to return stability and profitability to a prolonged soft market and are now, more than ever, looking for agency partners who can lead complex and valuable conversations with their clients,” he said. “But it seems as if insurance agents and carriers are still focused on, and talking about, nothing but insurance premiums.”

While many insurance companies want to change the transactional model, Pennachio said no carrier is willing to be the first to disrupt the distribution chain. “It’s like race car drivers at the Daytona 500. Cars fall in line behind the leader, pulled along by its draft, and don’t want to be the first to pull out of the pack for fear of ending up at the back of the line.”

This could change in the near future. Buyers are more sophisticated and demand more from business partners. If they spend money on insurance, they need to know what the value is. “Agencies and carriers are going to have to get better at articulating their value propositions,” Pennachio said.

Insurers Are Watching

Carriers monitor agencies and pay attention to how agents commoditize them for the value they deliver. Beal said carriers embrace a more consultative approach, especially as the market hardens.

Most carriers measure the agency’s “quoted to written” stats, according to Duke Mills, president of WorkComp Solutions, which sells workers’ compensation insurance to mid- and large-sized employers in Florida. “If your agency only delivers 10 or 20 percent of what the carrier quotes for you, the carrier knows you’re just using them. ‘Quoted to written’ is becoming another factor in commission strategies and underwriter flexibility,” he said.

Related: Read the article “Four Key Steps for Carriers to Digitally Empower Their Agents” by Erik Sandquist.
Insurance companies are going along with the bid-and-quote game, Mills said, but they know which agents are spread-sheeting and which deliver good-fit clients. “When they know you’re just using them, they’re slower to get you the quotes and when you need a favor, you’re not going to get it.”
Arnold believes carriers, especially the national and super-regional ones, are segmenting their agent customer base. “This segmentation ties back to how much authority an agency is granted to bind a quote and plays into other decisions, such as profit-sharing agreements or giving an agency geographic exclusivity,” he said.

What Carriers Want

Insurance companies want agents to bring them “right-fit” clients, who need and will benefit from the resources and services the insurer provides. For example, Summit has loss-control consultants who proactively help insured businesses assess exposures and hazards and manage risk through safety training and improvements to working conditions.

“We help employers rewrite safety programs, put together best practices for hiring and even help find the best prices on safety equipment,” Arnold said. “And we appreciate agents who communicate this value and bring us clients that need us.”

Agents have an opportunity to distinguish themselves by being consultants instead of transactional sales reps. Of course, agents must understand the technical aspects of risk management, experience modifications, hiring practices, injury management and other workers’ compensation cost-control strategies to succeed.

“This should all come out in a thorough risk analysis,” Mills said. “Are there a lot of claims with opioids? Does the client need access to an Employment Retirement Income Security Act attorney? No insurance company is great at everything. You have to get the employer to work with you to prioritize its risks and identify services, than strategically match the client to the right insurer. It’s got nothing to do with spread-sheeting premiums. At the end of the day, the cheapest quote may not be the cheapest price.”

Gibraltar Group has its own loss-prevention and human resources teams and just added a cyber liability expert. The company brings its in-house expertise along with experts from the carrier to help the employer manage risk. The D’Camera Group offers a variety of proprietary programs, not all insurance related, to address clients’ needs, cement its relationship with the employer and to distinguish it to carriers. Both agencies promote their strengths and expertise to insurance carriers as well as clients and prospects.

Agents have to be able to sell the agency’s story and the client’s story to the insurer. They must clearly identify the employer’s high priority risks and communicate to the carrier how the agency and insurance company can deliver the right services to address those risks.

Gibraltar Group recently demonstrated this by persuading an insurance company to write a client that it had declined to write for 3 years straight. When the other broker complained, the carrier explained that Gibraltar Group took a different approach and was able to communicate a very different story.

Related: Read the article “Matchmakers” by Mark E. Ruquet.

Consultative agencies do not fling proposals at several insurance companies at once. D’Camera said his insurers know not to expect a huge flow of submissions. “We’re more apt to pick up the phone, discuss the employer’s hot-buttons, the services required, why it makes sense for the insurance company, and about where the premium should be,” he said. “We spend a lot of time building credibility and preparing unique submissions with video, underwriting applications and intangibles that others aren’t likely to submit. An underwriter who is quoting 100 at a time is going to grab mine.”

Beal believes insurance agencies need to treat insurance companies as if they were prospects or clients. “Someone needs to tell the client’s and the agency’s stories to the carriers, and we have a professional dedicated to doing just that,” he said. “To create an effective partnership, we must communicate our client’s risk profile, including their strengths, weaknesses and needs to insurance carriers. Often our hardest sale is in placing the client with the carrier we know will best serve their needs.”

Will the Independent Agency Model Survive?

Insurance companies continue to work with independent agencies, even the transactional firms, but they are analyzing agency behaviors and eventually they’ll do something with that data. Insurance companies already have the technology to cut agents out of the distribution chain and conduct direct-to-employer sales easily and efficiently. Web-based sales of personal lines fueled by ubiquitous television and radio ads (think Progressive’s Flo and Geico’s gecko) demonstrate this.

Business line carriers without in-house web sales capabilities may take a cue from the Allstate/Esurance merger and acquire companies that have it. In fact, Hiscox USA, while still selling through brokers, already sells direct to small business customers with general liability and professional lines. Others are considering the model.

“Insurance companies are under significant pressure to cut expenses and grow top-line revenue. Can they afford the luxury of the independent insurance agency system as a primary distribution channel in the future?” Pennachio said. “The disintermediation of the agency has long been grist for the mill.”

Small group health agents are in a panic over the impact of insurance exchanges and medical loss cost ratio government regulations. Will they be cut out of the distribution chain? Is there still room for them to provide value?

Agencies in business markets tend to feel immune from these disruptive economic and regulatory forces and are quick to point out that clients are ill equipped to understand or address workers’ compensation risks without professional guidance.

“That’s true,” Pennachio said. “But precious few agents are providing any guidance. Some employers are better off going to the web.”

Summit’s Arnold isn’t sure how it will all play out. He thinks some of these prospects, especially younger entrepreneurs, will go to the web first, but ultimately purchase work comp insurance through a broker. “Business owners might have to answer 700 questions to assess their risks, and that would surely tax their tolerance,” he said. “I believe there will always be a place for a consultative agent.”

Beal acknowledged the potential of direct-to-employer sales. “Insurance companies could significantly cut their expenses by changing the distribution arm,” he said. “If I were to start an insurance company, I would set up a Geico-style platform for commercial lines and let small businesses purchase their insurance direct with advice from an online risk assessment. Sadly, many people would learn more about risk this way than they would from an agent. If an agent is acting solely as a middle man, technology will eventually put them out of business.”

Pennachio advised agencies to stop spread-sheeting premiums and force-fitting clients with carriers to meet a bonus quota. “Carriers want to align themselves with agencies that fit their model. If the agents cannot see and articulate the carriers’ value, they may find carriers unwilling to work with them,” he said.

Pennachio said that the spread-sheet agencies will link with the “low-touch, low-price option carriers that will try to get the volume and hope they can outrun any risk,” he said. “Carriers with broader, deeper value propositions—the Nordstroms of insurance companies—will align more with the consultative and carrier-reliant agent to solve or mitigate employer’s problems. One thing is certain, things are changing and agencies need to drive the changes in their insurance company relationships, not wait for changes to be thrust upon them.”

“In this industry, if agents don’t change quickly, there will be a lot of people standing without a chair to sit in when the music stops,” Beal said.


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