The distribution models of auto insurers
(Direct, captive and independent) and the agent’s role
1) Direct seller GEICO spends $1,000,000,000 a year in nationwide marketing. After years of such outlays for customer acquisition, its’ market share (for autos in CA) doubled from 1.41% to 2.86% from 2005 to 2012. For the same period, another direct seller, 21st Century, shrunk its share from 6.13% to 2.89%. Though they don’t pay agent commissions, they not only must pay sales and customer service employees to do the agents’ work, but also carry such other expenses as office rent, etc.
2) Insurance Journal (in June 2012) reported that GEICO in 2011 spent 6.5% of total premium for ads.
3) The All-State-Farm-ers captive agency model is familiar to all of us. As (quasi) independent contractors, the agents own the agencies but not the customers, fully licensed but are limited to the troika’s products, responsible for office expenses but may be restricted in their geographic preferences.
4) Indirect sellers such as Mercury, Travelers and Safeco selectively appoint independent agents to sell their products, with much lower direct marketing expenditures.
Analysis
Considering an auto book of $2,500,000 in annual premium,
a) At 6.5% of total premium, GEICO spends $162,500 on ads (acquisition cost).
b) In lieu of commissions to an agency for sales and service, it likely needs to hire one sales agent (at $30 K a year) and two CSRs (at $25 K each) with a total payroll around $80,000.
c) In addition, it needs to shell out another $15,000 for office and other fixed expenses.
d) The above total $257,500, slightly north of the equivalent of 10% agent commissions.
e) Without an agency force to connect to the policy holders, its’ customer loyalty and retention ratio are much lower. Sans a large ad campaign to attract new customers, 21st Century from 2005 to 2012 has lost more than half of its market share.
f) Equally costly, if GEICO saves the callers 10% (never mind that 15% in 15 minutes), it has 10% less in premium dollars to pay claims for the same risks. The last time I checked, drivers aren’t going to be 10% to 15% safer simply by switching to GEICO. It’s the reason that in 2012, GEICO had the highest loss ratio among the top 15 auto carriers in the golden state. For good measure, Wawanesa had the highest among the top 20, at 77%, which indeed was an improvement over its’ unsustainable average of 81.64% for the previous 4 years, while all carriers stood at 60.60%.
In light of the above, carriers know better to retain their agency force for better retention and loss ratios. It’s up to us to understand where we are and figure out how best to position our agencies for the benefit of the consumers. Do we round up the households with auto/home and/or other discounts? Offer the most suitable coverage features? And consider their interest first and foremost?
Difference Between Captive and Independent Agents
1) Generally, captive agents are recruited by their carriers. On the other hand, independent agents seek out the carriers for appointments.
2) The captive owns the agency and all commissions but not the customers. The independent owns everything. As such, when a captive quits, the carrier decides who gets the customers, and duly notifies them of the agent change. When an independent quits, she decides who the new agent is. When a captive is fired, the same procedures apply. When an independent is fired, the carrier notifies the customers with nonrenewal notices – the customers can shop around, but mostly likely the agent simply rewrites them to another carrier.
3) Appointment contract dictates that the captive agency can only be owned by one individual, whereas the independent’s ownership can be structured any way the owner(s) see fit.
4) The captive offers one brand at one price. The independent offers various brands at various price points, with various coverage features. For instance, in H/O insurance, there are options for 125%, 150% or guaranteed replacement for dwelling A and blanket combined single limit for coverage A, B, C and D; and programs for vacant properties. Therefore, the captive agent sells to the consumers on behalf of the carrier, while the independent shops on behalf of the consumers and buys from the carriers.
5) When a customer doesn’t renew due to rate increase or U/W, the captive has no choice but to let the customer walk, but the independent has the liberty to shop around other carriers for the customer.
6) The captive may be pressured by management for quotas in life or financial products. The independent isn’t. Nonetheless, the independent stands to lose her carrier appointment(s) for persistently high loss ratios.
7) The captive needs to learn products from only one carrier, but the independent must learn from various carriers. This explains why it’s almost impossible to go independent without any prior insurance experience or partnership with others.
8) For various reasons, it’s almost always that the captive becomes independent and not the other way round.
If the captive agency model is at a disadvantage, why All-State-Farm-ers (the troika)
are still the major players in personal lines?
Travelers - the only insurer among the 30 companies in the Dow Jones Industrial Average - sold its’ first auto policy more than 100 years ago. The troika all started in the 1920s.Though commercial lines have mostly been distributed by independent agents, the troika has been a major force in personal lines due mainly to:
1) Their focus on personal lines. Commercial lines by nature are more complex and therefore require a higher level of expertise in both underwriting and sales. The troika made a wise decision to focus only on personal lines. Over the decades, it brought efficiency and effectiveness to their agency training and product distribution.
2) Their astute management of the agency force. With travels and other rewards, successful agents are celebrated. As humans, we the agents need our egos massaged. And when our efforts are duly recognized, we simply don’t think of jumping the track.
3) Their recruiting of new agents with no insurance experience. Other carriers (which use independents) not only never recruit anyone with no experience, but also require prospective new agents to prove three years of acceptable performance in sales production and underwriting profitability. Enticed with the excitement of owning an agency right out of the gate, and no way of going independent right away, a newbie understandably would go captive.
4) Their ownership of customers and non-compete clause for department agents. When and if the agents become aware of the lost opportunities and contemplate going independent, strong disincentives set in. Per the agency agreement, the agents must leave all customers behind, and can’t solicit them for a year. Though largely non enforceable in California courts, the non-compete clause is a major deterrent for switching to independent.
5) Difficulty for captive agents to develop a bearable exit strategy. For various reasons, other carriers won’t even discuss appointments with captive agents until after they quit. Since such carriers as Mercury and Safeco review candidates’ past performance and set quotas, agents can only count on appointments from such non-standard carriers as Infinity and Access to start with, unless they can find an established agency to partner with.
As most of us are now aware, the status quo is changing fast. This will be the topic next week.
Our market place is changing at a faster pace
A) Since 1998 (the earliest reports available from the DOI), seven of the top 10 auto carriers in CA (including AAA and each of the troika) have lost market share. At one end, 21st Century’s 2012 share of 2.8877% stood at 46% of its share in 1998, and Famers’ (includes Mid-Century) share of 9.217% was 64% of what it was in 1998. At the other end, GEICO gained from 0.7204% to 2.8561% while Mercury was up from 7.3026% to 8.4525%.
B) Ha! The internet! It continues to transform our market place not so much because it enables certain consumers to get quotes more conveniently, but because it helps to disseminate the facts that insurance products are mostly generic and therefore it pays to shop around.
C) For agent training and other standard procedures, the internet also levels the playing field for carriers with independent agents. In the years before e- mails and webinars, these carriers couldn’t interact with their agents as easily without a sizable team of middle managers ala the troika. For them, it’s par for the course for a marketing rep with a shoestring budget to oversee 100 to 150 agents. With today’s technology, they can function just as well (if not better, as too many cooks may spoil the broth) without a layer of middle management. Not burdened with a fat payroll and financial packages for retiring agents, they can afford to offer lower rates and pay higher commissions.
D)To stem the tide of customer attritions, the troika has in recent years put new agent recruiting on steroid and exert heavier pressure on everyone to close more sales, at the expense of morale and underwriting accuracy. These are gathering storms.
As insurance is a complex product and trust is a major factor in purchasing, captive agents will remain relevant for years to come, it’s just that the best days for this agency model are likely over.
Asking for referrals
Be careful of what you wish for. A State Farm agent remarked to me that she has long ago stopped asking customers for referrals. Here’s what she dreads: When a referral prospect calls for a quote, and finds out State Farm’s rate is higher than his renewal, he may disclose it to the person referring him. As a result, she’s more likely to lose a customer than gaining one.
What do you think? Here’s my two cents:
1) Approach the referral with the purpose of coverage review and not price comparison.
2) If price is on your side, it’s your business to lose.
3) If it’s not, confidently stick to coverage features. Offer something better than the current coverage, as though the price is the last thing on your mind.
4) The prospect may perceive your confidence as a sign of strength, coming from your expert knowledge that you indeed offer a better proposal.
5) Winning a prospect with a higher price surely isn’t easy. But it shouldn’t stop your winning the prospect’s trust.
6) If you have the prospect’s trust, you can take a shot at every renewal.
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