Description
Local agents have long been an integral part of the property and casualty (P&C) insurance landscape, and continue to serve an important role as advisors and intermediaries.
Financial Services Practice
Agents of the Future:
The Evolution of Property and
Casualty Insurance Distribution
Agents of the Future:
The Evolution of Property and
Casualty Insurance Distribution
Introduction
The End of An Era for the Local Insurance Agent
Implications for Agency Principals
Implications and Questions for Carrier Leadership
1
5
13
19
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
Introduction
Local agents have long been an integral part of
the property and casualty (P&C) insurance
landscape, and continue to serve an important
role as advisors and intermediaries. However,
there has been a gradual shift in the value that
carriers and customers (both retail and small
business) place on many activities traditionally
performed by local agents, which is increasingly
calling into question what role they will play in
the future.
Where agents once served as the front line in
risk selection and pricing, advances in predictive
models are making this role obsolete. The agent
was once the face of the insurance brand; now,
customers increasingly use multiple channels to
connect with their carrier. Perhaps most disrup-
tive to the traditional agent value model, auto in-
surance – which accounts for 70 percent of per-
sonal lines premiums – is fast becoming
commoditized.
1
2
Surprisingly, these trends have not yet led to significant change in the
local insurance agent landscape. There are signs now, however, that
the economics of the traditional agent model are beginning to unravel.
Carriers are interacting more directly with customers, at lower cost
and often with more consistent service levels. The once clear division
of labor between carrier and agent is diminishing, but agent commis-
sion structures remain largely unchanged. Many carriers are now re-
considering how they allocate their distribution budgets and asking
themselves what role agents should play in the system.
These new economic realities have the potential to alter the distribu-
tion landscape in personal lines and
small commercial insurance. Within five
to ten years:
• Most personal lines and small
commercial customers will interact
with their agents and carriers
across the full range of channels:
in-person, through mobile devices,
and by phone, Internet and video
conference.
• Carriers will continue to use tech-
nology to increase their direct inter-
action 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.
• Carrier agent management models in both the independent (IA) and
exclusive (EA) channels 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 opera-
tional efficiency.
Local agents are not in danger of extinction, but the role they play will
continue to evolve. Those that can adapt to a new set of circum-
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
There are signs that the
economics of the traditional
agent model are beginning to
unravel. Carriers are interacting
more directly with customers, at
lower cost and often with more
consistent service levels. Many
carriers are asking themselves
what role agents should play in
the system.
3
stances will thrive. For their part, carriers must think now about what
these changes will mean for their business and begin developing robust
strategies to respond.
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
Over the last decade, market forces and technological advances have com-
plicated this arrangement. The clean division of activities between agent and
carrier no longer serves carriers the way it once did. For a number of reasons
(e.g., greater consistency, lower transaction costs, better capturing and lever-
aging of data), P&C insurers are taking on many of the activities that were
once the responsibility of agents.
A diminished role in risk selection and pricing
Agents once acted as the first line of risk selection and underwriting, provid-
ing the “gut feel” insights that come from living in the market and knowing
(often personally) the local customers. Carriers relied on agents’ judgment to
improve their profitability.
The End of an Era for the
Local Insurance Agent
Historically, most insurance carriers distributed their prod-
ucts through local insurance agents. Roughly a decade
ago 80 percent of personal auto policies were placed with
an agent (the percentage was closer to 100 for home-
owners and small commercial policies). These were sim-
pler times for insurance carriers. They competed on the
strength of their actuarial pricing models, their ability to
return a quote quickly and handle claims, and the quality
of their agency force. Management discussions about
distribution centered on growing the agency force, mak-
ing it easier for them to do business, and designing in-
centives to reward their entrepreneurial zeal.
5
6
Today, carriers rely far less on the intuition of their agents. The increasing so-
phistication and accuracy of predictive models, and the rise in straight-
through underwriting, are diminishing the agent’s role in risk selection in both
personal and small commercial lines. As a sign of how much has changed,
many carriers now actively restrict the ability of even their own field staff to de-
viate from modeled prices, and are questioning whether the agent plays any
role at all in managing profitability – especially in personal lines auto.
The rise of multichannel
Where once consumers expected to shop for insurance with their agent, and
to submit claims and get answers to their questions in the same way, today
they increasingly expect to interact with their insurance provider on their own
schedules, at all times and through multiple channels (e.g., phone, online
self-service, click-to-chat). Furthermore, customers expect a consistent, sat-
isfying experience at every interaction. As a result, the walls between tradi-
tional distribution channels are crumbling. This is most obvious in personal
auto, where recent McKinsey efforts to map the customer decision journey
reveal the extent to which shoppers jump from one channel to another as
they move from information gathering to purchase and beyond (Exhibit 1).
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
Top 3 most
common
journeys
Top 5 multichannel shopping journeys
1
Percent of shoppers
28% Direct
Direct
Agent
Mix of agent and direct
Direct
Direct
Direct
Agent
Mix of agent and direct
Agent
Direct
Gather Quote Purchase
Agent
Agent
Agent
Agent
16%
13%
8%
7%
1
Account for 72% of all shoppers
Source: 2012 McKinsey Auto Insurance Customer Insights Research
Exhibit 1
Auto insurance customers are using more channels in their
shopping journey
7
In light of this increasing channel “agnosticism,” carriers are making heavy
technology investments to reduce friction for customers and data as they
move between channels. They are opening central contact centers to handle
questions and conduct transactions for policy changes, billing, claims and all
other interactions. Soon, carriers will be able to replicate the feel of an
agent’s office – with more consistency and with greater ability to test new ap-
proaches (e.g., segment-based service-to-sales scripts, “next product to
buy” or “likelihood to switch” analytics). As more customer interactions filter
through these central contact centers, the opportunities for agents to interact
with the customer and add value will decrease.
The ascendance of the carrier brand
Not too long ago, the average insurance consumer would respond to the
question, “Who is your insurance policy with?” by naming her local agent.
Today, after 10 to 20 years during which carriers have invested billions of
advertising dollars building and strengthening their brands (Exhibit 2), cus-
tomers are far more likely to answer the same question with the name of
the carrier instead. It is very hard for agents to compete with this spend-
ing, even in their own local markets.
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
2011
5.9
10 09 08 07 06
5.1
4.2
4.3
4.1
05 04 03
3.4
3.0
2.4
1.9
2002
1.7
USAA 92
American Family
AIG
Liberty Mutual
125
Travelers 166
167
Nationwide 277
332
Progressive 536
Farmers 718
Allstate 745
State Farm 813
GEICO
12
16
5
18
41
19
20
17
18
15
19 1,000
Marketing spend for P&C carriers
$ billions
Marketing spend, 2011
$ millions
CAGR,
2002-11
Percent
Source: A.M. Best
Exhibit 2
U.S. P&C marketing spend continues to increase
8
Commoditization in personal auto
Insurance may never be a pure commodity like copper or wheat, but per-
sonal auto is edging closer to this territory. Consider the following:
• Consumers have easy multichannel access to auto insurance products
from many carriers, and no longer need an agent to navigate carriers or
explain terms. Independent agents themselves are using comparative
raters to generate enormous numbers of commodity-like price quotes to
present to the customer.
• The flood of price-centric marketing for auto insurance has conditioned
many consumers to focus on price as their primary buying factor.
• Customer claims satisfaction is at historically high levels, leaving less
ground for differentiation between insurers.
The agency channel has lost 7 percentage points of share in auto insurance
to direct carriers since 2003 (Exhibit 3). And while more than half of auto in-
surance purchases still occur through a local agent, in most cases the
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
Independent
agent
Exclusive
agent
Direct
2011
29
2007
31
2003
32
44
46 48
27
23
20
38
2011
2007
38
2003
39
56 57 57
6 5 4
2011
77
2007
81
2003
77
23
19
23
Personal auto Homeowners Small commercial
Premium by channel
Percent
Source: A.M. Best: IIABA market share reports
Exhibit 3
Local agents continue to touch the majority of business across
personal auto, homeowners and small commercial
9
agent is simply executing a transaction. (For a perspective on homeowners
and small commercial lines, see sidebar.)
The hard truth is that most agents have neither the scale nor the operational
efficiency to profitably sell a commodity (or even a near-commodity). Com-
mission revenues and profit margins have been on a long-term decline as
yield rates on new business remain low, average premium per policy has
been relatively flat, and costs are rising due to increased operating expenses.
Many agents report that auto acquisition has the thinnest margins of any line
and can even be unprofitable (Exhibit 4, next page). With auto insurance ac-
counting for 30 to 60 percent of a typical agent’s book, the numbers paint a
difficult picture for future profitability.
Commission rates under pressure
The traditional agency model provided a straightforward, low fixed-cost distri-
bution system for carriers; they spent little on acquisition until a policy was
sold and commissions paid. Growth was often as simple as appointing new
agents in new markets. But carriers today operate in a more complex distri-
bution landscape, and their investments must be balanced across a number
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
Homeowners and small commercial: A bright spot for agents
Will homeowners and small commercial lines follow auto down the path
to commoditization? Some direct carriers are already quoting these
lines on the Internet, and there is an increasing amount of mass-market
advertising focused on commercial auto. Small commercial aggregators
and comparative-rater technology are making selling on price much
easier. These efforts, however, have only seen limited success, and
many carriers continue to resist them.
These lines are inherently more complex than auto, and the insured as-
sets are larger; so consumers still find the counsel of a local agent valu-
able. In addition, there are no widely adopted technologies that
supplement underwriting for homeowners and small business insurance
(e.g., ability to view homes remotely via satellite imagery), and there is
no robust data set (e.g., risk data available by cross street) to enable
full automation of the underwriting process, so agents still play a role in
risk selection and pricing.
10
of areas (e.g., direct channels, heavy advertising, and the creation of contact
centers). This shift is putting pressure on their ability to maintain the level of
commissions they pay to agents. Inevitably, carriers will need to consider re-
warding agents more directly for those efforts that uniquely add value (such
as retention and cross-selling).
* * *
What is the future of the local agent, given the convergence of headwinds?
How can they continue to add value and remain relevant? Some lessons can
be learned from examining the evolution of travel agents over the last 15
years (see sidebar next page).
Travel agents faced similar dis-intermediating forces. Many disappeared, to
be sure; but those that survived did so by reinventing their business models
in multiple ways. They shifted towards more complex travel and specializa-
tion. They focused on operational efficiency and technology. In the next
chapter, we look at how insurance agents can adapt a similar approach in
their efforts to remain relevant.
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
Life Specialty
/other
Homeowners Auto Commercial
35% 35% 5% 10%
Book mix
(by policies in force)
15%
Relative pro?t margin by product line for a typical large agent
Percent
Source: Agent interviews
Exhibit 4
Auto insurance usually has the thinnest margins for agents
11 Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
Travel agents: Still afloat
A little more than 10 years ago, the vast majority of airline tickets were
booked through traditional travel agencies. With the advent of the Inter-
net as a channel for shopping and price comparison, travel agents’
share of sales plummeted (Exhibit 5); by 2010, online travel agents and
airline Web sites had cut agents’ share in half. The travel agent model
seemed dead in the water. Surprisingly, despite a large decline in total
numbers, travel agents have not disappeared; in fact, those that remain
are on the whole larger and more successful (Exhibit 6).
Of?ine
1
Online travel agency
Airline Web site
2005 2013F
50
13
37
2010
50
16
34
66
12
22
1999
100 100 100 100
95
2
3
U.S. airline leisure and unmanaged business sales by channel
Percent
1
Includes traditional travel agencies (the majority), airline call centers and airport sales.
Source: PhoCusWright; US Online Travel Overview reports
Exhibit 5
Airline bookings through traditional travel agents declined
precipitously with the advent of Internet booking tools
2011
14,000
2000
38,800
1995
47,000
2011 2000 1995
73.0 82.1 83.5
1.6
5.8
2.2
Number of traditional
travel agencies
1
Total air sales
$ billion
Air sales per location
$ million
1
Airline Reporting Corporation (ARC) accredited agencies – those that are able to issue air tickets.
Source: PhoCusWright; ARC; ASTA.org
Exhibit 6
The number of traditional travel agents dropped, but those that
remain are larger and more successful
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
Three core capabilities
Three core capabilities will serve as the foundation for agents as they seek to
thrive in today’s increasingly competitive environment:
1. Defining and reaching a target market
A limited and generic view of potential customers can no longer sustain the
agent business model. Successful agents will move beyond the local market
paradigm, in which their customer base is strictly geographically defined (for
example, by the five-mile radius centered on their office). Agents will need to
take a broader view of their market and have a clearer articulation of their tar-
get customer segments (and associated product offerings). To reach those
target segments in the digital era, traditional local marketing tactics will no
longer be sufficient. Agents will need to increase their digital presence, be-
come more flexible in how they communicate with their clients (e.g., video
chat, Twitter, Facebook), and find new and more effective ways to get in front
of potential customers (e.g., through affinity group relationships).
2. Expertise
With easy access to so much free information, customers are increasingly
unwilling to pay for generalist advice. The broader retail market has also cre-
Implications for Agency Principals
To survive in a changing environment, insurance agents
will need to develop new strengths and capabilities, and a
value proposition that is compelling for both carriers and
consumers. There is no single model that will guarantee
success in the market, but we expect that several will
emerge over time to replace the current operating models.
And while the likelihood is that the number of agents will
decline, those that remain stand to become stronger.
13
14
ated an appetite and expectation for more tailored, personalized products. This
translates into a demand for more tailored and deep expertise from their insur-
ance advisors. They will turn to agents for advice on holistic insurance pack-
ages for their personal needs, or for industry-tailored advice on small
commercial policies.
3. Operational efficiency and scale
Given the economic realities of rising operating expenses and flat commissions,
agents will need to do more with less. Technology will be a source of increased
operational efficiency, but increased scale will also be required. Scale can be
achieved in two ways – agents can grow bigger themselves (organically or
through acquisition), or “virtually,” by banding together with other small agen-
cies or by outsourcing certain functions to carriers or other third-party
providers.
Agents may also need to search for new revenue sources, extending beyond
P&C products to areas such as life insurance, financial services, group bene-
fits, health insurance, notary services and tax advice.
Many agents are not currently positioned to succeed in a world where scale and
operational efficiency, sophisticated marketing tactics and deep product expert-
ise are critical. However, several new agency models are already finding success.
Agent models of the future
Some winning models will look slightly different from today’s; others will com-
pletely redefine what it means to be an agent (Exhibit 7):
• Traditional commercial lines agents. Large and professionally run, these
agencies will have industry-focused producers who target larger accounts
at the top-end of small commercial ($20,000 to $100,000 in annual premi-
ums) or middle market ($100,000 and up). They will have formalized, at-
scale teams for small commercial accounts that leverage automation to
drive down costs.
• Large multiline agents. These agencies will have a well-balanced product mix
that comprises personal lines, commercial lines and life insurance; product-
focused producers; a high degree of cross-sell at the point-of-sale as well as
into existing books; and a consolidated, at-scale back office.
• Agents with leveraged or lower-cost models. In areas where local pres-
ence is valued but local market economics cannot support a traditional
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
15
agency model (for example, rural areas with low asset density), a lower-
cost model could evolve that shares characteristics with existing aggre-
gator, cluster or managing general agent models. Agents adopting this
model could take a variety of approaches to drive down operational
costs while maximizing access to mass market customers (e.g., hub-
and-spoke models, co-locating a small agency storefront in a popular
retail outlet).
• “Teams” of specialized agents. In this model, agencies formally partner to
provide holistic, multiline solutions, each bringing unique product expert-
ise and their own network of clients and prospects. At a minimum, they
would provide each other with leads, but could also combine into formal
sales teams that share clients, revenue, expenses and support. This
model exists informally in P&C, but is more prevalent in other advisory
services (e.g., wealth management).
• Small, niche, expertise-driven agents. These agents will thrive with well-
articulated value propositions targeted at a small number of customer
segments across those personal and small commercial lines that require
more specific advice, tailored products and a greater degree of service
(e.g., wealthy clients or ethnic groups in personal lines; select industry
classes in small commercial). The cost structure will be low, with a virtual
or limited physical footprint, and they will maintain few carrier relation-
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
N
e
w
n
e
s
s
o
f
m
o
d
e
l
Small, virtual agencies
(no physical of?ce)
Small, niche,
expertise-driven agents
Large multiline
agents
Traditional commercial
lines agents
Leveraged or
lower-cost agencies
Teams of
specialized agents
Source: McKinsey Insurance Practice
Exhibit 7
Future agent models
16
ships, focusing on brands that resonate with their target segments. One
such agent today is an online small business insurance specialist focused
on select industry classes. The agent has a high degree of specific expert-
ise and provides technology-driven support (e.g., ability to assist small
businesses in real time with online applications).
• Small, virtual agents. Virtual agents will spend the bulk of their time on sales,
as opposed to service. They will have very low overhead, adopt new tech-
nologies and focus on remote interactions through phone, e-mail, video-
chats and other emerging channels. In one current example, an agency
providing personal lines insurance exclusively to high-net-worth individuals
has no physical location, and all employees work remotely.
For their part, carriers will need to determine the optimal portfolio of agent models
required to serve their target customers and migrate to this portfolio over time.
The shrinking of the agent force
One implication of the changes described in this paper seems clear: only a
subset of current agents will transition successfully. Since 1995, the overall
number of agents competing to capture a share of the available “commission
pools” has declined by about 10 percent (Exhibit 8). If any of these pools
shrink without offsetting growth in other lines of business, the decline in num-
ber of agents is likely to accelerate.
Several factors make a decline in auto insurance commissions – the largest
pool at about $12 billion annually – likely:
• Total auto gross written premium (GWP) is expected to grow slowly at best
or even stagnate or decline with increased adoption of usage-based insur-
ance, continued price competition, the downward trend in accidents and
the increasing safety of cars.
• Market share of auto GWP of the direct channel (where few if any commis-
sions are paid) continues to grow at the expense of the agency channel.
• Carrier spending on marketing, technology and physical infrastructure to
meet consumer demands for multichannel capabilities will continue to eat
away at the amount available to pay agents as commission.
From the agent side as well, auto insurance is becoming less profitable due to
rising operating expenses, decreased efficiency of new customer acquisition
(driven by increased consumer shopping and resulting low yield rates), and in-
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
17
creased investments in technology (e.g., lead management tools,
rating/quoting tools with self-populating fields).
It is difficult to make predictions about how the absolute size of the local
agent force will change. High trailing commissions and earnings from “sticky”
customer segments could allow many agents to survive for years without
making any changes (assuming no aggressive actions by carriers). Much will
depend on which of the emergent models gains momentum. As a thought
experiment, consider that if the average agency size increased by 50 per-
cent, the decline in total number of agencies could reach 20 to 30 percent,
fueled by consolidation and the rise of new “agency direct” models. (Com-
pare this to our earlier example of travel agencies, which declined by 70 per-
cent in a decade. Travel agencies, however, did not have the benefit of large
renewal books to dampen the decline.)
The local agent channel is undergoing tremendous change, and not all
agents will survive the transition. Those that do, however, will likely be well-
adapted to thrive in the new distribution environment. For carriers, watching
these developments should not be a spectator sport. They should begin po-
sitioning themselves now for success.
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
Travel
P&C
-10%
2011
2000 1995
100,000 95,000
90,000
47,000
39,000
14,000
Source: : A.M. Best; 10K reports; IIABA survey; PhoCusWright; ARC; ASTA.org
Exhibit 8
The overall number of P&C insurance agents declined 10% between
1995 and 2011
19
Implications and Questions for
Carrier Leadership
The evolution of the agency channel is both a
challenge and an opportunity for property and
casualty carriers, who will need to develop new
capabilities and new mindsets to thrive in a
changing distribution landscape. The following
questions for carrier leadership are a starting point
for debate as carriers in both exclusive and
independent channels consider their distribution
and sales strategies for the new era.
1. Which of our current and target policyholder segments value agents?
A more sophisticated and granular approach to customer segmenta-
tion will be required for all but the very largest carriers
1
in the new dis-
tribution landscape. As part of this approach, both EA- and IA-focused
insurers must develop a deeper understanding of which segments still
find value in their interactions with agents, what keeps them loyal to
the channel, and how their preferences are changing. Insights from
this research should inform decisions regarding the carrier’s portfolio
of agents.
2. How do agencies add value for our target segments today? What unique
services can they offer now and in future? Where do they need to excel?
For agents and carriers alike, the burning question is whether agents can
carve out a new value proposition that makes sense in the new multi-
channel property and casualty market. What can they do more efficiently
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
1
See “Beyond Price: The Rise of Customer-Centric Marketing in Insurance,” McKinsey & Company, January 2013.
20
or more effectively than carriers? How will they reach the target customer
segments compared to other channels or sales approaches? How will the
various channels coordinate in a way that is additive to agents (rather than
diminishing their role)?
3. Are our current agents positioned to succeed in this new environment?
Which agent segments should we support and help grow? Does the over-
all agent network need to change? How do we understand more deeply
an agent’s business (e.g., succession plans, growth targets) and plans for
the future? How do we assess their capabilities to change? Do our current
agents give us access to the right
customer segments and industries?
How do we fill the gaps where exist-
ing agents are unable to adapt?
4. How should we work with our agents
to support them as they evolve? What
tools, systems, capabilities and orga-
nizational changes are needed to en-
sure success? What change
management techniques can we use
to help agents make transitions while
maintaining a healthy organization?
How do we maintain our current flow
of new business while our agents migrate to a new business model? If we
are building or expanding our agency force, how do we foster a perform-
ance culture that drives agents to produce throughout their tenure? Im-
portantly, how can we foster and support distribution innovation? Insurers
should not be bystanders in the evolution of the agent channel. They
should encourage innovation and be as flexible as possible in giving fledg-
ling ideas room and time to develop.
5. How can we reward agents for the value-added services they provide and
remain competitive on price? Carriers cannot afford to continue paying
agents for activities they are performing themselves. They will need to take
a hard look at commissions and the many cross-subsidies that exist
among products (e.g., home and auto) and activities (e.g., new business
and retention).
6. How should we monitor and stay abreast of the challenge (or opportu-
nity) of direct distribution and price-driven sales in homeowners and
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
How can insurers foster and
support distribution innovation?
They should not be bystanders in
the evolution of the agent
channel. They should encourage
innovation and be as flexible as
possible in giving fledgling ideas
room and time to develop.
21
small commercial? What role can we play in slowing the commoditiza-
tion of the sales process for homeowners and small commercial insur-
ance? What changes can we make to our marketing messages and our
products, underwriting and sales capabilities?
* * *
Fundamental changes in how customers shop for and purchase insurance –
and in the very nature of how they view the insurance product – are already
altering the distribution landscape in personal and small commercial lines.
And the pressure on the current economics of the agent model will soon
force carriers to rethink how they distribute their products. To win, insurers
must develop a thoughtful perspective on which agent models will emerge
from this period of transition, and a clear strategic plan for harnessing these
new models.
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
Contact
For more information about this report,
please contact:
Devin McGranahan
Director
(412) 804-2745
[email protected]
Ginny Gaeta
Practice Manager, Insurance
(617) 753-2262
[email protected]
Financial Services Practice
June 2013
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Copyright © McKinsey & Company
www.mckinsey.com/clientservice/financial_services
doc_545542512.pdf
Local agents have long been an integral part of the property and casualty (P&C) insurance landscape, and continue to serve an important role as advisors and intermediaries.
Financial Services Practice
Agents of the Future:
The Evolution of Property and
Casualty Insurance Distribution
Agents of the Future:
The Evolution of Property and
Casualty Insurance Distribution
Introduction
The End of An Era for the Local Insurance Agent
Implications for Agency Principals
Implications and Questions for Carrier Leadership
1
5
13
19
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
Introduction
Local agents have long been an integral part of
the property and casualty (P&C) insurance
landscape, and continue to serve an important
role as advisors and intermediaries. However,
there has been a gradual shift in the value that
carriers and customers (both retail and small
business) place on many activities traditionally
performed by local agents, which is increasingly
calling into question what role they will play in
the future.
Where agents once served as the front line in
risk selection and pricing, advances in predictive
models are making this role obsolete. The agent
was once the face of the insurance brand; now,
customers increasingly use multiple channels to
connect with their carrier. Perhaps most disrup-
tive to the traditional agent value model, auto in-
surance – which accounts for 70 percent of per-
sonal lines premiums – is fast becoming
commoditized.
1
2
Surprisingly, these trends have not yet led to significant change in the
local insurance agent landscape. There are signs now, however, that
the economics of the traditional agent model are beginning to unravel.
Carriers are interacting more directly with customers, at lower cost
and often with more consistent service levels. The once clear division
of labor between carrier and agent is diminishing, but agent commis-
sion structures remain largely unchanged. Many carriers are now re-
considering how they allocate their distribution budgets and asking
themselves what role agents should play in the system.
These new economic realities have the potential to alter the distribu-
tion landscape in personal lines and
small commercial insurance. Within five
to ten years:
• Most personal lines and small
commercial customers will interact
with their agents and carriers
across the full range of channels:
in-person, through mobile devices,
and by phone, Internet and video
conference.
• Carriers will continue to use tech-
nology to increase their direct inter-
action 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.
• Carrier agent management models in both the independent (IA) and
exclusive (EA) channels 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 opera-
tional efficiency.
Local agents are not in danger of extinction, but the role they play will
continue to evolve. Those that can adapt to a new set of circum-
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
There are signs that the
economics of the traditional
agent model are beginning to
unravel. Carriers are interacting
more directly with customers, at
lower cost and often with more
consistent service levels. Many
carriers are asking themselves
what role agents should play in
the system.
3
stances will thrive. For their part, carriers must think now about what
these changes will mean for their business and begin developing robust
strategies to respond.
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
Over the last decade, market forces and technological advances have com-
plicated this arrangement. The clean division of activities between agent and
carrier no longer serves carriers the way it once did. For a number of reasons
(e.g., greater consistency, lower transaction costs, better capturing and lever-
aging of data), P&C insurers are taking on many of the activities that were
once the responsibility of agents.
A diminished role in risk selection and pricing
Agents once acted as the first line of risk selection and underwriting, provid-
ing the “gut feel” insights that come from living in the market and knowing
(often personally) the local customers. Carriers relied on agents’ judgment to
improve their profitability.
The End of an Era for the
Local Insurance Agent
Historically, most insurance carriers distributed their prod-
ucts through local insurance agents. Roughly a decade
ago 80 percent of personal auto policies were placed with
an agent (the percentage was closer to 100 for home-
owners and small commercial policies). These were sim-
pler times for insurance carriers. They competed on the
strength of their actuarial pricing models, their ability to
return a quote quickly and handle claims, and the quality
of their agency force. Management discussions about
distribution centered on growing the agency force, mak-
ing it easier for them to do business, and designing in-
centives to reward their entrepreneurial zeal.
5
6
Today, carriers rely far less on the intuition of their agents. The increasing so-
phistication and accuracy of predictive models, and the rise in straight-
through underwriting, are diminishing the agent’s role in risk selection in both
personal and small commercial lines. As a sign of how much has changed,
many carriers now actively restrict the ability of even their own field staff to de-
viate from modeled prices, and are questioning whether the agent plays any
role at all in managing profitability – especially in personal lines auto.
The rise of multichannel
Where once consumers expected to shop for insurance with their agent, and
to submit claims and get answers to their questions in the same way, today
they increasingly expect to interact with their insurance provider on their own
schedules, at all times and through multiple channels (e.g., phone, online
self-service, click-to-chat). Furthermore, customers expect a consistent, sat-
isfying experience at every interaction. As a result, the walls between tradi-
tional distribution channels are crumbling. This is most obvious in personal
auto, where recent McKinsey efforts to map the customer decision journey
reveal the extent to which shoppers jump from one channel to another as
they move from information gathering to purchase and beyond (Exhibit 1).
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
Top 3 most
common
journeys
Top 5 multichannel shopping journeys
1
Percent of shoppers
28% Direct
Direct
Agent
Mix of agent and direct
Direct
Direct
Direct
Agent
Mix of agent and direct
Agent
Direct
Gather Quote Purchase
Agent
Agent
Agent
Agent
16%
13%
8%
7%
1
Account for 72% of all shoppers
Source: 2012 McKinsey Auto Insurance Customer Insights Research
Exhibit 1
Auto insurance customers are using more channels in their
shopping journey
7
In light of this increasing channel “agnosticism,” carriers are making heavy
technology investments to reduce friction for customers and data as they
move between channels. They are opening central contact centers to handle
questions and conduct transactions for policy changes, billing, claims and all
other interactions. Soon, carriers will be able to replicate the feel of an
agent’s office – with more consistency and with greater ability to test new ap-
proaches (e.g., segment-based service-to-sales scripts, “next product to
buy” or “likelihood to switch” analytics). As more customer interactions filter
through these central contact centers, the opportunities for agents to interact
with the customer and add value will decrease.
The ascendance of the carrier brand
Not too long ago, the average insurance consumer would respond to the
question, “Who is your insurance policy with?” by naming her local agent.
Today, after 10 to 20 years during which carriers have invested billions of
advertising dollars building and strengthening their brands (Exhibit 2), cus-
tomers are far more likely to answer the same question with the name of
the carrier instead. It is very hard for agents to compete with this spend-
ing, even in their own local markets.
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
2011
5.9
10 09 08 07 06
5.1
4.2
4.3
4.1
05 04 03
3.4
3.0
2.4
1.9
2002
1.7
USAA 92
American Family
AIG
Liberty Mutual
125
Travelers 166
167
Nationwide 277
332
Progressive 536
Farmers 718
Allstate 745
State Farm 813
GEICO
12
16
5
18
41
19
20
17
18
15
19 1,000
Marketing spend for P&C carriers
$ billions
Marketing spend, 2011
$ millions
CAGR,
2002-11
Percent
Source: A.M. Best
Exhibit 2
U.S. P&C marketing spend continues to increase
8
Commoditization in personal auto
Insurance may never be a pure commodity like copper or wheat, but per-
sonal auto is edging closer to this territory. Consider the following:
• Consumers have easy multichannel access to auto insurance products
from many carriers, and no longer need an agent to navigate carriers or
explain terms. Independent agents themselves are using comparative
raters to generate enormous numbers of commodity-like price quotes to
present to the customer.
• The flood of price-centric marketing for auto insurance has conditioned
many consumers to focus on price as their primary buying factor.
• Customer claims satisfaction is at historically high levels, leaving less
ground for differentiation between insurers.
The agency channel has lost 7 percentage points of share in auto insurance
to direct carriers since 2003 (Exhibit 3). And while more than half of auto in-
surance purchases still occur through a local agent, in most cases the
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
Independent
agent
Exclusive
agent
Direct
2011
29
2007
31
2003
32
44
46 48
27
23
20
38
2011
2007
38
2003
39
56 57 57
6 5 4
2011
77
2007
81
2003
77
23
19
23
Personal auto Homeowners Small commercial
Premium by channel
Percent
Source: A.M. Best: IIABA market share reports
Exhibit 3
Local agents continue to touch the majority of business across
personal auto, homeowners and small commercial
9
agent is simply executing a transaction. (For a perspective on homeowners
and small commercial lines, see sidebar.)
The hard truth is that most agents have neither the scale nor the operational
efficiency to profitably sell a commodity (or even a near-commodity). Com-
mission revenues and profit margins have been on a long-term decline as
yield rates on new business remain low, average premium per policy has
been relatively flat, and costs are rising due to increased operating expenses.
Many agents report that auto acquisition has the thinnest margins of any line
and can even be unprofitable (Exhibit 4, next page). With auto insurance ac-
counting for 30 to 60 percent of a typical agent’s book, the numbers paint a
difficult picture for future profitability.
Commission rates under pressure
The traditional agency model provided a straightforward, low fixed-cost distri-
bution system for carriers; they spent little on acquisition until a policy was
sold and commissions paid. Growth was often as simple as appointing new
agents in new markets. But carriers today operate in a more complex distri-
bution landscape, and their investments must be balanced across a number
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
Homeowners and small commercial: A bright spot for agents
Will homeowners and small commercial lines follow auto down the path
to commoditization? Some direct carriers are already quoting these
lines on the Internet, and there is an increasing amount of mass-market
advertising focused on commercial auto. Small commercial aggregators
and comparative-rater technology are making selling on price much
easier. These efforts, however, have only seen limited success, and
many carriers continue to resist them.
These lines are inherently more complex than auto, and the insured as-
sets are larger; so consumers still find the counsel of a local agent valu-
able. In addition, there are no widely adopted technologies that
supplement underwriting for homeowners and small business insurance
(e.g., ability to view homes remotely via satellite imagery), and there is
no robust data set (e.g., risk data available by cross street) to enable
full automation of the underwriting process, so agents still play a role in
risk selection and pricing.
10
of areas (e.g., direct channels, heavy advertising, and the creation of contact
centers). This shift is putting pressure on their ability to maintain the level of
commissions they pay to agents. Inevitably, carriers will need to consider re-
warding agents more directly for those efforts that uniquely add value (such
as retention and cross-selling).
* * *
What is the future of the local agent, given the convergence of headwinds?
How can they continue to add value and remain relevant? Some lessons can
be learned from examining the evolution of travel agents over the last 15
years (see sidebar next page).
Travel agents faced similar dis-intermediating forces. Many disappeared, to
be sure; but those that survived did so by reinventing their business models
in multiple ways. They shifted towards more complex travel and specializa-
tion. They focused on operational efficiency and technology. In the next
chapter, we look at how insurance agents can adapt a similar approach in
their efforts to remain relevant.
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
Life Specialty
/other
Homeowners Auto Commercial
35% 35% 5% 10%
Book mix
(by policies in force)
15%
Relative pro?t margin by product line for a typical large agent
Percent
Source: Agent interviews
Exhibit 4
Auto insurance usually has the thinnest margins for agents
11 Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
Travel agents: Still afloat
A little more than 10 years ago, the vast majority of airline tickets were
booked through traditional travel agencies. With the advent of the Inter-
net as a channel for shopping and price comparison, travel agents’
share of sales plummeted (Exhibit 5); by 2010, online travel agents and
airline Web sites had cut agents’ share in half. The travel agent model
seemed dead in the water. Surprisingly, despite a large decline in total
numbers, travel agents have not disappeared; in fact, those that remain
are on the whole larger and more successful (Exhibit 6).
Of?ine
1
Online travel agency
Airline Web site
2005 2013F
50
13
37
2010
50
16
34
66
12
22
1999
100 100 100 100
95
2
3
U.S. airline leisure and unmanaged business sales by channel
Percent
1
Includes traditional travel agencies (the majority), airline call centers and airport sales.
Source: PhoCusWright; US Online Travel Overview reports
Exhibit 5
Airline bookings through traditional travel agents declined
precipitously with the advent of Internet booking tools
2011
14,000
2000
38,800
1995
47,000
2011 2000 1995
73.0 82.1 83.5
1.6
5.8
2.2
Number of traditional
travel agencies
1
Total air sales
$ billion
Air sales per location
$ million
1
Airline Reporting Corporation (ARC) accredited agencies – those that are able to issue air tickets.
Source: PhoCusWright; ARC; ASTA.org
Exhibit 6
The number of traditional travel agents dropped, but those that
remain are larger and more successful
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
Three core capabilities
Three core capabilities will serve as the foundation for agents as they seek to
thrive in today’s increasingly competitive environment:
1. Defining and reaching a target market
A limited and generic view of potential customers can no longer sustain the
agent business model. Successful agents will move beyond the local market
paradigm, in which their customer base is strictly geographically defined (for
example, by the five-mile radius centered on their office). Agents will need to
take a broader view of their market and have a clearer articulation of their tar-
get customer segments (and associated product offerings). To reach those
target segments in the digital era, traditional local marketing tactics will no
longer be sufficient. Agents will need to increase their digital presence, be-
come more flexible in how they communicate with their clients (e.g., video
chat, Twitter, Facebook), and find new and more effective ways to get in front
of potential customers (e.g., through affinity group relationships).
2. Expertise
With easy access to so much free information, customers are increasingly
unwilling to pay for generalist advice. The broader retail market has also cre-
Implications for Agency Principals
To survive in a changing environment, insurance agents
will need to develop new strengths and capabilities, and a
value proposition that is compelling for both carriers and
consumers. There is no single model that will guarantee
success in the market, but we expect that several will
emerge over time to replace the current operating models.
And while the likelihood is that the number of agents will
decline, those that remain stand to become stronger.
13
14
ated an appetite and expectation for more tailored, personalized products. This
translates into a demand for more tailored and deep expertise from their insur-
ance advisors. They will turn to agents for advice on holistic insurance pack-
ages for their personal needs, or for industry-tailored advice on small
commercial policies.
3. Operational efficiency and scale
Given the economic realities of rising operating expenses and flat commissions,
agents will need to do more with less. Technology will be a source of increased
operational efficiency, but increased scale will also be required. Scale can be
achieved in two ways – agents can grow bigger themselves (organically or
through acquisition), or “virtually,” by banding together with other small agen-
cies or by outsourcing certain functions to carriers or other third-party
providers.
Agents may also need to search for new revenue sources, extending beyond
P&C products to areas such as life insurance, financial services, group bene-
fits, health insurance, notary services and tax advice.
Many agents are not currently positioned to succeed in a world where scale and
operational efficiency, sophisticated marketing tactics and deep product expert-
ise are critical. However, several new agency models are already finding success.
Agent models of the future
Some winning models will look slightly different from today’s; others will com-
pletely redefine what it means to be an agent (Exhibit 7):
• Traditional commercial lines agents. Large and professionally run, these
agencies will have industry-focused producers who target larger accounts
at the top-end of small commercial ($20,000 to $100,000 in annual premi-
ums) or middle market ($100,000 and up). They will have formalized, at-
scale teams for small commercial accounts that leverage automation to
drive down costs.
• Large multiline agents. These agencies will have a well-balanced product mix
that comprises personal lines, commercial lines and life insurance; product-
focused producers; a high degree of cross-sell at the point-of-sale as well as
into existing books; and a consolidated, at-scale back office.
• Agents with leveraged or lower-cost models. In areas where local pres-
ence is valued but local market economics cannot support a traditional
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
15
agency model (for example, rural areas with low asset density), a lower-
cost model could evolve that shares characteristics with existing aggre-
gator, cluster or managing general agent models. Agents adopting this
model could take a variety of approaches to drive down operational
costs while maximizing access to mass market customers (e.g., hub-
and-spoke models, co-locating a small agency storefront in a popular
retail outlet).
• “Teams” of specialized agents. In this model, agencies formally partner to
provide holistic, multiline solutions, each bringing unique product expert-
ise and their own network of clients and prospects. At a minimum, they
would provide each other with leads, but could also combine into formal
sales teams that share clients, revenue, expenses and support. This
model exists informally in P&C, but is more prevalent in other advisory
services (e.g., wealth management).
• Small, niche, expertise-driven agents. These agents will thrive with well-
articulated value propositions targeted at a small number of customer
segments across those personal and small commercial lines that require
more specific advice, tailored products and a greater degree of service
(e.g., wealthy clients or ethnic groups in personal lines; select industry
classes in small commercial). The cost structure will be low, with a virtual
or limited physical footprint, and they will maintain few carrier relation-
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
N
e
w
n
e
s
s
o
f
m
o
d
e
l
Small, virtual agencies
(no physical of?ce)
Small, niche,
expertise-driven agents
Large multiline
agents
Traditional commercial
lines agents
Leveraged or
lower-cost agencies
Teams of
specialized agents
Source: McKinsey Insurance Practice
Exhibit 7
Future agent models
16
ships, focusing on brands that resonate with their target segments. One
such agent today is an online small business insurance specialist focused
on select industry classes. The agent has a high degree of specific expert-
ise and provides technology-driven support (e.g., ability to assist small
businesses in real time with online applications).
• Small, virtual agents. Virtual agents will spend the bulk of their time on sales,
as opposed to service. They will have very low overhead, adopt new tech-
nologies and focus on remote interactions through phone, e-mail, video-
chats and other emerging channels. In one current example, an agency
providing personal lines insurance exclusively to high-net-worth individuals
has no physical location, and all employees work remotely.
For their part, carriers will need to determine the optimal portfolio of agent models
required to serve their target customers and migrate to this portfolio over time.
The shrinking of the agent force
One implication of the changes described in this paper seems clear: only a
subset of current agents will transition successfully. Since 1995, the overall
number of agents competing to capture a share of the available “commission
pools” has declined by about 10 percent (Exhibit 8). If any of these pools
shrink without offsetting growth in other lines of business, the decline in num-
ber of agents is likely to accelerate.
Several factors make a decline in auto insurance commissions – the largest
pool at about $12 billion annually – likely:
• Total auto gross written premium (GWP) is expected to grow slowly at best
or even stagnate or decline with increased adoption of usage-based insur-
ance, continued price competition, the downward trend in accidents and
the increasing safety of cars.
• Market share of auto GWP of the direct channel (where few if any commis-
sions are paid) continues to grow at the expense of the agency channel.
• Carrier spending on marketing, technology and physical infrastructure to
meet consumer demands for multichannel capabilities will continue to eat
away at the amount available to pay agents as commission.
From the agent side as well, auto insurance is becoming less profitable due to
rising operating expenses, decreased efficiency of new customer acquisition
(driven by increased consumer shopping and resulting low yield rates), and in-
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
17
creased investments in technology (e.g., lead management tools,
rating/quoting tools with self-populating fields).
It is difficult to make predictions about how the absolute size of the local
agent force will change. High trailing commissions and earnings from “sticky”
customer segments could allow many agents to survive for years without
making any changes (assuming no aggressive actions by carriers). Much will
depend on which of the emergent models gains momentum. As a thought
experiment, consider that if the average agency size increased by 50 per-
cent, the decline in total number of agencies could reach 20 to 30 percent,
fueled by consolidation and the rise of new “agency direct” models. (Com-
pare this to our earlier example of travel agencies, which declined by 70 per-
cent in a decade. Travel agencies, however, did not have the benefit of large
renewal books to dampen the decline.)
The local agent channel is undergoing tremendous change, and not all
agents will survive the transition. Those that do, however, will likely be well-
adapted to thrive in the new distribution environment. For carriers, watching
these developments should not be a spectator sport. They should begin po-
sitioning themselves now for success.
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
Travel
P&C
-10%
2011
2000 1995
100,000 95,000
90,000
47,000
39,000
14,000
Source: : A.M. Best; 10K reports; IIABA survey; PhoCusWright; ARC; ASTA.org
Exhibit 8
The overall number of P&C insurance agents declined 10% between
1995 and 2011
19
Implications and Questions for
Carrier Leadership
The evolution of the agency channel is both a
challenge and an opportunity for property and
casualty carriers, who will need to develop new
capabilities and new mindsets to thrive in a
changing distribution landscape. The following
questions for carrier leadership are a starting point
for debate as carriers in both exclusive and
independent channels consider their distribution
and sales strategies for the new era.
1. Which of our current and target policyholder segments value agents?
A more sophisticated and granular approach to customer segmenta-
tion will be required for all but the very largest carriers
1
in the new dis-
tribution landscape. As part of this approach, both EA- and IA-focused
insurers must develop a deeper understanding of which segments still
find value in their interactions with agents, what keeps them loyal to
the channel, and how their preferences are changing. Insights from
this research should inform decisions regarding the carrier’s portfolio
of agents.
2. How do agencies add value for our target segments today? What unique
services can they offer now and in future? Where do they need to excel?
For agents and carriers alike, the burning question is whether agents can
carve out a new value proposition that makes sense in the new multi-
channel property and casualty market. What can they do more efficiently
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
1
See “Beyond Price: The Rise of Customer-Centric Marketing in Insurance,” McKinsey & Company, January 2013.
20
or more effectively than carriers? How will they reach the target customer
segments compared to other channels or sales approaches? How will the
various channels coordinate in a way that is additive to agents (rather than
diminishing their role)?
3. Are our current agents positioned to succeed in this new environment?
Which agent segments should we support and help grow? Does the over-
all agent network need to change? How do we understand more deeply
an agent’s business (e.g., succession plans, growth targets) and plans for
the future? How do we assess their capabilities to change? Do our current
agents give us access to the right
customer segments and industries?
How do we fill the gaps where exist-
ing agents are unable to adapt?
4. How should we work with our agents
to support them as they evolve? What
tools, systems, capabilities and orga-
nizational changes are needed to en-
sure success? What change
management techniques can we use
to help agents make transitions while
maintaining a healthy organization?
How do we maintain our current flow
of new business while our agents migrate to a new business model? If we
are building or expanding our agency force, how do we foster a perform-
ance culture that drives agents to produce throughout their tenure? Im-
portantly, how can we foster and support distribution innovation? Insurers
should not be bystanders in the evolution of the agent channel. They
should encourage innovation and be as flexible as possible in giving fledg-
ling ideas room and time to develop.
5. How can we reward agents for the value-added services they provide and
remain competitive on price? Carriers cannot afford to continue paying
agents for activities they are performing themselves. They will need to take
a hard look at commissions and the many cross-subsidies that exist
among products (e.g., home and auto) and activities (e.g., new business
and retention).
6. How should we monitor and stay abreast of the challenge (or opportu-
nity) of direct distribution and price-driven sales in homeowners and
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
How can insurers foster and
support distribution innovation?
They should not be bystanders in
the evolution of the agent
channel. They should encourage
innovation and be as flexible as
possible in giving fledgling ideas
room and time to develop.
21
small commercial? What role can we play in slowing the commoditiza-
tion of the sales process for homeowners and small commercial insur-
ance? What changes can we make to our marketing messages and our
products, underwriting and sales capabilities?
* * *
Fundamental changes in how customers shop for and purchase insurance –
and in the very nature of how they view the insurance product – are already
altering the distribution landscape in personal and small commercial lines.
And the pressure on the current economics of the agent model will soon
force carriers to rethink how they distribute their products. To win, insurers
must develop a thoughtful perspective on which agent models will emerge
from this period of transition, and a clear strategic plan for harnessing these
new models.
Agents of the Future: The Evolution of Property and Casualty Insurance Distribution
Contact
For more information about this report,
please contact:
Devin McGranahan
Director
(412) 804-2745
[email protected]
Ginny Gaeta
Practice Manager, Insurance
(617) 753-2262
[email protected]
Financial Services Practice
June 2013
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