Is the insurance industry careening towards implosion...consolidating at such a rapid pace that it'll look and act like the airlines industry? You know, run by a small handful of "big, dumb" companies? And on the distribution side, are we crashing towards a handful of super-mega-agencies that dominate every market in North America?You don't have to be ancient to remember the days when there were 80,000 independent agencies in the US alone. Now, 40,000.
What does the trend toward carrier and broker consolidation mean to the Main Street agent of today?
How must serious insurance marketers respond to a business environment that just won't stand still?
Ernst Young recently published their Global Outlook for Property & Casualty. This is what they said about consolidation.
EY Quote: Under growing pricing pressure and competition from nontraditional sources, in 2015 insurers turned to transformative mergers to achieve these goals. This surge in M&A activity is expected to continue in 2016, as acquirers seek to build scale and access US markets.
In a poignant article on the trends shaping the industry in 2016, The Insurance Journal echoes the sentiment: "M&A became a popular strategy for putting available capital to work and to bolster return on equity in 2015...It's a very safe bet that the M&A trend will continue into 2016 as P&C insurers continue to weigh their options in an evolving market where even its strongest players have had a hard time of making hay.”
Agents don't often feel the impact of consolidation...until they lose a cherished carrier. The recent Chubb-ACE mash-up caused some wailing and gnashing of teeth at a recent meeting of our own Million Dollar Club.
But, consolidation is old hat in this industry.
- In 1995, the top 25 carriers held almost 70% marketshare. In 2012, the top 25 carriers owned almost 84%.
- In the same time period, the top ten carriers jumped from about 59% to almost 70%.
Bigger does not necessarily mean better.
Large carriers will jostle for geographic and product diversity.
But, ultimately, the consumers demand satisfaction, and they show relative disinterest in the size of their insurance carrier. Carriers with strong customer satisfaction scores - NPS, for example - remain strong.
Consolidation remains an important tool in a company's toolbox - carrier or agency - but customer satisfaction ultimately outranks even the most strategic deployment of capital.
Michael Porter, author of the single most downloaded essay in the history of The Harvard Business Review - What Is Strategy? - observed the core problem with “consolidation as strategy: “Driven by performance pressures but lacking strategic vision, company after company has had no better idea than to buy up its rivals. The competitors left standing are often those that outlasted others, not companies with real advantage.”
WHAT THIS MEANS FOR AGENTS & BROKERS.
For decades - perhaps longer - the agent-broker channel had certain inherent strategic advantages “baked into” the industry business model itself.
That's true for many industries.
- CPA's were the default system for tax preparation. Turbotax and other digital providers changed the game.
- Opticians were the default system for getting glasses. Warby Parker and other online providers changed the game.
- Video stores like Blockbuster were the default system for getting video. Netflix and a gang of other online providers changed the game.
And on and on.
Agents and brokers delivered the most efficient way to connect the carrier to the consumer.
In many sectors of the industry, that can hardly be considered to be true anymore.
Hence, agents and brokers must deliver what businesses are often called on to do: create value.
While they should demand excellence and innovation from their carriers, the confluence of consolidation, perceived commoditization and digital communications, come together to put pressure on the channel to prove itself to the consumer.
That is the core responsibility of every business. Agents and brokers cannot act as mere “sales reps” and pass-throughs for carriers.
They must emphasize their traditional strengths of advocacy, education and relationship to make themselves irreplaceable.
And todays' consumer isn't pretending that it's 1990...even if a lot of agents and brokers are.
EY Quote: Consolidation in the insurance broker and independent agent markets has tipped the balance of power towards distribution. In response, insurers in 2016 will look to gain direct customer access by purchasing specialty distribution, and continue the trend of underwriters acquiring managing general agencies with exclusive books of business to increase premiums in less price-sensitive lines. Access to captive distribution should help tilt the scales back towards underwriters.
The typical Main Street agency may be scratching their head at the comment that “balance of power” has tipped toward the distributors.
But, as capital has poured into the distribution sector, it has helped create a bevy of mega-brokers, demanding higher commissions at the negotiating table. (Add a couple of commission points to a billion dollar in premium...it's enough to make a carrier exec wake up at night.)
Just how big are agencies in the US getting?
The chart above contrasts a $5 million revenue agency - that little line on the left - to the ten biggest, as reported by Insurance Journal.
WHAT THIS MEANS FOR AGENTS & BROKERS.
Some re-balancing of power matters to carriers. Expect them to continue investing in alternative distribution models.
As Peter Drucker pointed out, “The purpose of a business is to create and keep a customer.”
Agency leadership must be willing to assume the full weight of that responsibility.
Mere pass-through status in the industry value chain no longer provides sufficient defense against a growing competitive landscape.
Agencies who can earn deep loyalty with their customer base will be rewarded by the customers themselves, but, also, they could very likely be rewarded more generously by carriers.
Long term customers tend to be profitable customers. Successful agents should take that to the negotiating table. (Reliable customer loyalty is worth a lot in agency perpetuation, too.)
Anticipate that agency consolidation will continue as excess capital seeks a profitable home. That means that you’ll be bumping into larger competitors in the marketplace.
However, that said, the mega-agencies have demonstrated few distinctive advantages, other than size.
They should invest in modern technologies to scale their own capabilities. (They can't outpace customer satisfaction simply by getting bigger.) Main Street agencies must do the same.
The insurance industry will continue to show the standard signs of industry maturity. Entities will continue to buy each other up, at both the carrier and agency-broker level.
Carrier consolidation could threaten agents' ability to offer the full breadth and diversity of product offerings. In some cases it could eliminate a marketplace advantage that agencies have over competing agencies.
Additionally, if the industry's mega-agencies move beyond acquisition as their core strategy and invest resources in effective marketing and communication technologies, as well as other forms of innovation, they could eventually be a threat to standard Main Street business.
More serious threats, however, hover from established and incipient alternative and disruptive channels and providers.
One thing stands true about every serious competitor to the independent agency channel they have invested in modern technology, not just to create efficiencies, but to communicate to the marketplace in the manner that people desire.
Once upon a time, serious agents and brokers needed to answer the question: should we invest in agency/broker management systems? Time quickly answered that question, and the answer was "yes."
Facing an army of well-connected, digitally savvy competitors and a marketplace of digitally connected consumers, agents face a similar question about communication technology, and again, the answer is "yes."
Email marketing or marketing automation doesn't interfere with "old fashioned" communication. It complements it.
A serious online communication strategy tells your clients they're worth the effort of a real, ongoing relationship.
If the core strength of this channel is the relationship between the broker and the customer base, it's time for brokerage leadership to prove that those relationships matter.
Add value at the retail level. Communicate that value to your customers.
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