I’ve written before about the perils of innovation in insurance. There is a flip side to that as well, which is if one of your competitors innovates, don’t dismiss their breakthrough and let them build up a big lead. You need to match their innovation immediately.

Two recent market developments highlight this challenge. First, Allstate is trying to get agents to outsource more policy servicing so they can lower costs. Second, Schwab has taken retail stock trading commissions to $0. What do these have to do with each other? A lot, actually.

The Past in Personal Lines Distribution

The 80s & 90s

Let’s set the stage, first. Where are we today and how did we get here? When I was a kid in the 80s, I knew all the national auto insurance companies because they all had commercials that emphasized their strength and dependability – State Farm, Allstate, Nationwide, etc.

Ads were primarily to establish brand awareness and credibility. If you saw your neighborhood agent was associated with a reputable brand, that meant it was a sound choice, in the same way that McDonald’s wanted every restaurant around the country to provide the same experience so the customer knew what to expect.

The agent’s job at that time was twofold: first, to prospect for clients in the community and second, to identify good customers. The agent was supposed to know who was a “good neighbor” and thus least likely to have an auto accident (at least that was the theory). Agents could justify 15% commissions (new AND renewal) because of their sales skills and underwriting acumen.

To support that acquisition of local knowledge, the agent needed a storefront in the busy part of town to encourage walk-ins and to spend on local advertising. It was very similar to the real estate agency model – see and be seen. The expense could be justified because there wasn’t a more efficient way to reach customers.

The 2000s

Until the internet broke everything. Progressive and GEICO created direct distribution which upended the existing neighborhood facing distribution model. Main street agencies became expensive albatrosses. Advertising changed from brand building to impulse buying (call NOW! and save).

Market share bled from agencies to direct sellers who could lead the market on price because they didn’t have expensive overhead or commissions to pay. This freed up lots of $ to buy more ads and drive more calls and clicks.

With their brands established, GEICO and Progressive (and USAA) became the new captive “agencies”except they were virtual agencies where phone reps were paid an hourly wage well below that of an agent.

As the internet became more accepted and Americans enjoyed being able to buy stuff from their couch, even long time agency customers began to conduct business over the phone rather than stop in the agency. Even much of the new business could be conducted by phone without the customer actually knowing precisely where the agent’s office was. The main street agency was becoming an anachronism.

Worse, it was now an expensive burden with a constituency that was resistant to change. If a prospective customer was going to shop the major captive brands, the direct ones would usually be cheaper because of their lower cost structure. It was obvious the agent-centric companies needed to change, but just as obvious that they were going to be slow to do so because change is hard.

What Needs to Change

That was a pretty quick review of forty years of history! So where does that leave us? We’re now in a position to discuss how to adapt to the new reality.

Focus on Brand, not Channel

The biggest thing captive insurers fail to understand is that, to the consumer, directs and captives look the same. They both fall under the umbrella of “branded” companies where you are only presented with one option when you ask for a quote.

The only difference is when I call the captive I know the name of the person answering the phone and when I call the direct I don’t. While some people value this, the shift in market share to directs makes clear it is not as valued as it used to be.

Furthermore, the customer doesn’t care that you used to need all these offices in simpler times or, when they call with a billing question, if the CSR who answers is in your office or in Fargo at a call center. They don’t care how much the agent makes compared to the person who answers the 800# at GEICO. Those are your internal issues to solve! Don’t make them a burden for the customer.

Smaller Footprint

There are way too many physical agencies. I have within a ten minute drive of me the following number of agencies I can visit:

Agency TypeIn Town<10 minutes
State FarmCaptive714

This is insane! Why are there seven State Farm agents in town (population <50k)? Fourteen within ten minutes! Why does anyone have more than one left in my town? Or more than three within ten minutes?

Think of all the redundant real estate costs. The redundant marketing costs (most of these agents send me mailers at least once a year). The missed opportunity to better scale policy admin costs. There is a reason Progressive and GEICO (and USAA) are stealing market share! It’s not just lack of commissions. There is a huge overhead expense deficiency.

Note, this doesn’t necessarily mean firing agents. It means changing the way they do business. First, rather than five offices around town, they all need to move to one central location. Second, instead of having two CSRs each, maybe there are three shared CSRs total on site.

The rest of the CSRs can move to the new regional CSR facility and be assigned to all area agents rather than a specific one. I know there will be some pushback around this given how many CSRs are spouses or children of the agent, but GEICO doesn’t guarantee employment to family members of their best call center reps, so it’s time for the old school companies to catch up with the times.

Over time, frankly, these regional call centers would probably evolve to state or even multi-state call centers in cheap locations, but baby steps first.

Agents as Closers

The other big thing agents need to change is how they spend their time. With the call centers taking over a lot of the servicing, the agent can spend more time on new business (or adding new coverages to existing clients). This is similar to the model Goosehead has used in the independent channel where agents only sell and don’t service.

There are two differences though in the captive channel. First, someone like Goosehead can always find a market somewhere for the customer. A captive can’t guarantee that, especially if the driver has a poor risk profile. Second, the captive agent has the backing of a large corporation with a big marketing budget to generate leads. The agent is not going to be more efficient generating leads than HQ can.

So if the agent isn’t servicing and isn’t generating leads and isn’t quasi-underwriting, what exactly do they do with their day??? They close leads.

The new model is advertising generates call volume which then gets routed to a local agent. That agent’s job is to convert the customer through explaining coverage needs, claims capabilities, finding the right price, etc. If the customer wants to see someone face to face, they can offer that as a differentiator vs. the directs. The point is they are now closers only.

Note, this has positive economic benefits to the agent. They can handle a lot more volume than before with fewer responsibilities. What would likely happen next is instead of five former individual agents in that new office, two of them would choose to sell their books and there would be three servicing the same amount of business.

Reduce Commissions

Now, I’m going to make the agents really mad. I’ve told them their family can’t work with them anymore and now I’m cutting their pay? Yep, but stick with me. It doesn’t really make sense that I reduce agent’s workload dramatically so they can sell more and let them keep all of the upside of that improved productivity that I created for them by my brilliant changes to the model!

Also, if I am having agents spend most of their time on converting leads, then why am I still paying them for renewals? I’m pretty sure GEICO reps don’t get paid a renewal stream. So, I’m going to cut new business to 10% and renewal to 5%. If I’ve doubled the size of your book and cut most of your expenses, you are still net ahead. And, as we will discuss in a bit, if the incumbents don’t do this proactively, it will probably be done to them later.

The New Landscape

So what the future looks like is less overhead and less overlap with agents who serve you how you want to be served. If you want to come and shake hands before signing your policy, you can still do that. If you’d rather do most of it online and have a brief phone call with the agent at the end, you can do that too.

We’ve eliminated a ton of expense, both acquisition cost and G&A. Those lower costs can then be put into lowering prices and increased marketing spend. This will slow, if not stop, the loss of market share to the directs and increase the size of agent’s books.

The only real casualties are those who are resistant to change, either because they like collecting their annuity on their renewals or because they’ve guaranteed full family employment and don’t want to disrupt that. Unfortunately, the market can no longer support that model.

To its credit, Allstate has belatedly started to realize this. They are slowly moving to a service center model. This takes CSRs out of the agency and replaces them with a centralized location which has lower costs and where processes can be more consistent.

However, it is only required for new agencies. Existing agencies are not interested in adopting because a) see the family concerns and b) they take a 2% commission cut. Of course, there are reduced expenses that offset this 2%, but that’s not how the agents see it (this “editorial” was pretty transparently aided by an agent or their agent association).

The problem is Allstate is moving too slow. They have ceded ground to the directs for far too long by delaying painful steps like this. Even now, by making this voluntary, it just creates a straw man for agents to be mad about without actually moving the ball downfield. If you’re going to upset the agents regardless, you might as well justify the anger by doing something meaningful.

What Comes Next

And now to tie in the free stock commissions tease. Why does this matter? Because it shows how quickly commissions can get cut once the momentum shifts. Within a week of Schwab’s move, every other competitor had gone to free stock trading. What stops a disruptor from starting a commission war in auto insurance?

One can argue we already had the commission war. It’s called Progressive, GEICO, and USAA charge 0%. That said, the incumbents chose to react to that by ceding share rather than match the cuts.

The changes I’ve suggested could potentially allow agents to tolerate cuts to 10 new/5 renewal, but if someone came along with a lower cost structure and cheap venture funding that let them ignore profits for a long time, one could see how that might go to 10 & 0.

If the incumbents still have bloated cost structures, they will not be able to match that as the agents wouldn’t be able to cover their overhead and would start defecting. Then, you have a downward spiral.

However, if you start making proactive decisions now, you might be able to create an environment that will lead to sustained change until G&A costs are more in line with the directs. Then, if the world evolved towards 0% on renewal, it wouldn’t be a shock to the system.

Ultimately, the only difference between direct and captives should be one has a local presence while the other doesn’t. The policy administration and claims reporting should be identical, meaning done remotely by specialists rather than locally by friends and family. The lead generation should be exactly the same, driven by the headquarters marketing department.

The one novel capability a captive would offer is the ability to sit down with someone locally if you require it. Given changing consumer needs, that requires a lot fewer local agents than the majors have today.

I know people in the business will say this is all easier said than done. I agree with that completely. It’s easy for me to preach from the cheap seats. However, I’ve been preaching this same sermon for about ten years now. I think that is more than enough time that something should have been accomplished by now.

Allstate is moving the right direction. Hopefully, they will have the fortitude to stick with it and then push even harder. You don’t want to be Ameritrade watching your stock sink 25% in a day because you weren’t prepared for the future.

3 thoughts on “The Future of Personal Lines Distribution”

  1. Not all auto ins carriers view the same “customer facing” structure as you mention in this article. Even though Geico and Progressive Direct have lower cost distribution models currently, the client still wants to have the ability to speak to an individual vs doing it online. Geico, for the most part, is making auto ins into a commodity. The general insuring population doesn’t always know how their coverage will respond in time of need, much less how much insurance they should carry to be fully protect themselves.
    Change does need and will happen, but the captive and heavy “indy” agent carriers are changing, but not as fast as you have alluded. Being a 30 yr agent in this industry, the way to communicate with your clients and attract new clients continues to change at a rapid pace from year to year. The US consumer base continues to check out carriers and rates online, but still will contact a carrier rep, whether captive or not, before purchasing a policy.
    Going forward, insurance agents and real estate agents need to brand themselves more to the client before branding themselves with a carrier. Agents need to take more control of the data, something that the “big” carriers are keeping to themselves,.at least for now. This is happening as we speak.

    1. Thanks for the comments, Joe. I agree most people don’t know what coverage they’re buying and the big directs specifically steer you to bare bones coverage and don’t disclose that sufficiently. There is definitely a role for a consultant, whether that be a traditional agent, a more sophisticated rep at the directs, or even something like an evolved AI capability where a bot will ask you the right questions online about your coverage needs rather than default you to mins to show the lowest quote. When I talk about the agents role evolving to close leads rather than generate them, this is what I envision. The agent’s main function should be to make sure customers are truly addressing their coverage needs and buying the appropriate policy. This decommoditizes the product and should generate customer loyalty.

      I’ll add I’m in the midst of a shopping exercise that I will write about in the next week or two. So far the findings have been very interesting regarding the disparity in processes across companies. Stay tuned!

  2. Ian / Joe

    A very shortsighted solution to a much more complex challenge.
    First let’s get a basic fiscal understanding on how the finance of insurance plays out. Expense is one small part of what is referred to as the combined loss ratio. This is what is paid out combining claims paid and operating expenses . Each provider models and prices based on their experience of frequency and severity in markets. The key point here is that all carriers drive towards their target of combined ratio. No where did you state in what you believed was Allstate’s brilliance that their corporate strategy was to run at one of the industry’s lowest combined ratios. Yes corporate greed or the spin of shareholder value has been the greatest trigger at Allstate’s loss in market share
    Let’s write an article about the non renewal process of homeowners through out the country in the last 15 years drove limitless opportunity to Geico and Progressive since many of these customers had bundled their home and auto together. The first captive carrier in California to place almost exclusively all new homeowners policy holders to non Allstate paper since 2008. Recently State Farm limited their exposures in brush areas and Allstate opened up some limited zip codes in CA to cherry pick homeowners underwriting profit
    The point here is consumers value has been disrespected by many within this industry. Geico and Progressive received much of the fallout because they made themselves very visible and easy to access. After feeling being betrayed from the local captive consumers were just looking for an outlet. Yes your point that there are now contributory factors of the ease of using the internet in our daily consumption that has triggered the consumer confidence
    Your analogy of zero cost trades is such a fallacy
    What % of consumers are active in the market ??
    What % of consumers acquire car insurance ??
    The point is in today’s world you have a greater ethical responsibly when you voice your individual perspective to be 100 % accurate and share both cause and effect.

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