Few topics strike closer to the heart of the agent and broker than pricing and commissions. Ernst Young’s EY 2016 P&C Global Outlook speak directly to these topics. And the retail sector won’t like much of what they have to say.Just like agents and brokers, carriers face considerable challenges in a disruptive business environment. Their strategic response to those challenges may have significant impact on agents & brokers, and, ultimately, could have substantial and damaging consequences to the industry channel as a whole.
EY’s report places “pricing” as the number two issue, after “technology,” rating its importance as a 9 on their 1-10 scale.
We’ll examine EY’s findings in three areas, and explore the impact of the major trends and forces reported in their Outlook and how they affect the retail agent and broker.
EY Quote: “Greater competition and pricing transparency will hold down fees in both personal and commercial sectors. Insurers will need to reconsider pricing models as pay-as-you-go gathers appeal and analytics provide deeper customer insights. Come to grips with pricing transparency.”
EY cites three major pressures on pricing in the P&C industry:
- Pricing transparency, made possible with modern digital technology.
- Pressure from emerging competitors: “Digital technology is eroding the advantages of scale enjoyed by established insurers and empowering smaller players to compete for market share through more flexible pricing models and new distribution channels.”
- Low to moderate catastrophic incidents. “Continuation of moderate activity keeps downward pressure on pricing. Only a very large and unexpected event (or events) has the potential to be market-changing.
Further, the excellent MarketScout Barometer is reporting initial signals of downward pressure after four years of a modest hardening of the market.
WHAT THIS MEANS FOR AGENTS
Richard Kerr, CEO of MarketScout, in a recent interview with me reported, “We may never see market swings like we used to. Predictive modeling and growing analytic sophistication, he argues, may provide new market stability, giving underwriters the ability to price accurately, major and unforeseen trends and forces notwithstanding.
Even modest downward pressures have a financial impact on a retail agency.
Price, as part of the overall value proposition never disappears, of course. But, considerable research on consumer behavior and consumer preference supports the notion that a significant demographic highly values the advisory role of the agent, as well as the benefits of appropriate and tailored coverage, and that price takes a backseat in their insurance purchasing decisions.
Historically, the independent channel is more expensive. Ideally, the channel should learn to live with that. It’s more expensive for a reason.
Agents and brokers may not like to hear this - initially - the the fundamental reason for the additional expense is the agent and broker component itself.
But, as Deloitte research has shown in industry after industry, being more expensive is not bad. It’s good.
That is, when it’s understood. Expense caused by redundancy and waste is bad. Expense caused by value creation is good. It leads to greater profitability and, ultimately, market domination.
To thrive in 2016, agents and brokers must:
- Make price increasingly irrelevant. Selling on price runs counter to the strategic forces that support the independent channel. Likewise, it feeds directly into the strengths of competing forces.
- Agents can’t simply “sell on value.” They must create value. They can no longer merely rely on the inherent value from their carriers. They must suffer the blood, sweat and tears that entrepreneurs commonly face. Study their individual marketplace. Examine the internal assets of their own firm. And package those assets in a unique “value package” that represents the most attractive offering possible. (It's the rare firm, when asked what makes them different or great, that can provide more than platitudes like, "We have a great team," or "Great service." Soft and fuzzy answers won't cut it anymore in the marketplace.)
- Both commercial and personal lines agencies must speak directly to the “peace of mind” values of the marketplace by providing a helpful and ongoing stream of information that helps the consumer, ultimately, prevent the filing of claims by, wherever possible, preventing the causes of claims.
- Exploit the inherent strength of the channel by engaging in the depth of relationship that is highly valued by the most profitable consumer demographic. They must invest in the modern communication technologies that accelerate and facilitate loyal customer relationships. Digital marketing and modern day digital communications as a tool in insurance marketing is no longer an option.
EY Comment: Explore new technologies and start-up models. Competition is heating up as an array of new Fintech companies offer services that were once the exclusive domain of traditional insurers. To cope, insurers will need to adopt, acquire or even fund new technologies and experimental models that may even compete with their existing businesses.
WHAT THIS MEANS FOR AGENTS.
Many of those new “FinTech” companies are actually competing directly with the retail agent, with product provided by existing independent carriers. And, of course, these “experimental models” encouraged by EY may very well compete with the agent model.
A growing theme in major carrier strategy seems to range from “we need other options to compete” to “ we don’t have sufficient confidence in the agent-broker channel.”
Independent carriers have been openly supporting competitive models, and, in some cases, initiating their own.
Agents and brokers have been slow to change. Even carriers, rarely heralded as beacons of innovation in modern industry have been quicker than the general agency force to adopt the digital technologies and engagement expected by the contemporary consumer. (Big, fat carriers faster to change than small, nimble agencies? Absolutely.)
To thrive in 2016, agents and brokers must:Put simply, agents have to prove their worth. If they prove their worth to the marketplace - earning business, and, most importantly, earning depth of relationship, carriers will notice. It may be anticipated that carriers will explore more alternatives, and, in so doing, may reduce excess and unprofitable appointments. Weak agencies are replaceable or disposable by carriers. Strong ones are not.
EY Quote: Rethink compensation plans for distributors. Private equity-financed broker consolidation, ongoing for nearly a decade, will continue to shift bargaining power in favor of distributors. Agent and broker control of profitable businesses has allowed some large distributors to negotiate greater compensation. This power shift is happening at a time when rate softening has become the norm. As a result, insurers in 2016 should consider changing the industry’s level-commission compensation standards in favor of greater up-front payments that reward access to new profitable customers.
Ouch. The “big nationals” and other consolidators, in control of billions of premium, have taken the power seat at the negotiating table, leveraging extra points of commission. This hasn’t trickled down to the rest of the masses. On the contrary, it stretches carrier commission budgets to their limit.
EY’s recommendations to carriers have been sound. A major shift in the commission model, however, could have major negative consequences, not just for the broker community, but for the carriers and this channel as a whole.
The inherent and unique strength of this channel has been its capacity to engage in depth of relationship with the markets that are immediate to its distributors.
That depth enables longer client retention, more referrals and more policies per customer.
A compensation shift that refocuses attention away from relationship toward acquisition could be damaging to all three parties: carrier, broker and, ultimately, the consumer, who will find themselves with less attentive advice and weaker protection.
Because the strength of the broker channel has been loyalty, not acquisition - as pointed out by Bain’s research, this recommendation could undermine one of the few distinguishing competitive strengths the channel has.
WHAT THIS MEANS FOR AGENTS.
To thrive in 2016, agents and brokers must:
This is a stark reminder that the agent-broker model depends on elements over which it has little or no control, such as setting price and setting commissions. Agents and brokers must do what all businesses have to do in turbulent times: commit to growth and create a sufficient buffer for disruption.
The retail segment has a history of operating like “lifestyle” businesses, relying on inherent channel strengths and stability to sustain modest growth.
As that stability is challenged, agency leadership must commit to re-casting its culture into “marketing culture,” in the Drucker tradition of “marketing as getting and keeping customers.”
Agency leadership must plan a comprehensive, full spectrum approach to deeper customer relationships, examining and establishing strategies to acquire, deepen and lengthen customer relationships. (This tool, The Growth Analyzer, will help forecast revenue plans in the three areas of enhanced conversion, optimization and retention.)
A core element of marketing, in todays’ economy, requires the investment in digital marketing and appropriate marketing automation. The most sophisiticated email marketing technologies will deliver meaningful and time-sensitive communications to an agency's customer base in the unobtrusive manner that the modern consumer demands.
Summary. Insurance pricing rests on the numerous hard-to-predict variables that exist “in the wild” but, clearly, some forces are acting to maintain a soft pricing market, which may be evident in the last two months of general price reductions.
Price transparency, digital disrupters, excess global capital, all put downward pressure on actuarial models. EY recommends that carriers consider a weighted front-end commission model, which could have dire consequences on a model that relies strategically on long term relationships.
In 2016, agents and brokers must commit to growth through marketing, and, they must invest in high leverage digital marketing technologies that permit value-rich and engaging communications with their customer base.
Next installment: Customer Expectations
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