The McKinsey Report: Minor Kerfuffle...or Major Crisis?

Posted by Michael Jans on 11/11/13 11:30 AM
  • As recently as 2008, Blockbuster CEO Jim Keyes said, “Neither Redbox nor Netflix are even on the radar in terms of competition.”

    Ooops.  That was one bankruptcy ago...as Blockbuster faded to black last week and shuttered the lonely, remaining stores.

    There are a zillion reasons, of course, why it’s dangerous to think that what happened in one industry will happen in another. But we’re really not talking about one industry, are we? Can you think of many industries that have not been disrupted by the introduction of new technologies?

    Journalism? Telecommunications? Photography? Publishing? Travel? Retail? Even...pornography?  Major operators have been crushed. Jobs lost. New players dominating.

    And consumers behaving differently. And that is the ultimate, critical factor. Consumers are devotedly loyal – to their own desires and interests. And when new technologies, new players or new channels service those desires and interests, they vote with their pocketbook.

    And – on occasion – it’s the “old player” behaving in new ways or adding new value that captures the consumers’ hearts. All love stories journey through tension and conflict, and, in our industry’s story, the final chapter is not yet written.

    At the risk of offending some of my dearest friends in the industry – and that hasn’t stopped me before – I’d like to take a quick but sober look at what the so-called “McKinsey Report” is saying to the retail agent.

    What exactly did McKinsey say?

    First of all, they’re saying this:

    “...gradual shift in the value that carriers and consumers....place on...local agents, which is increasingly calling into question what role they will play in the future."

    And, in case we slept through that part of the report, they’re saying this:

    "There are signs now, however, that the economics of the traditional agent model are beginning to unravel."

    But, lest we think they are a lone voice in the wilderness, let’s consider what some other respected sources are saying:

    JD Power: "...emerging trends are dramatically reshaping customer expectations in the personal auto insurance market."

    AM Best: “The internet has dramatically transformed consumer behavior and shifted their interaction with insurance providers, as well as their expectations of quality...”

    Well, gosh ‘n golly, friends, either the most respected industry observers are all passing around the same pitcher of after school Kool-Aid, or, maybe we should pause, take stock – and strategize.

    After the McKinsey report was released, we observed the standard industry response to this kind of news. (Standard, I believe, to any industry. Not just ours.)

    First, fear and panic. My email browser lit up with messages from clients and friends with messages flavored with a mix of anxiety and fear.

    Then, industry strongholds (and legitimate advocates) declaring that the “outsiders” at McKinsey were dead wrong, didn’t understand the industry, were blowing smoke or were irresponsibly issuing opinions without supporting fact.

    I have no friends at McKinsey. No bias for them or against them. But, I think you’d have a hard time finding a serious business executive who thought they were stupid, out of touch, ignorant or rash.

    What do the numbers say?

    In fact, as I read their report, I see their observations based on the very same empirical evidence that is available to all of us who are serious students of our own industry.

    Such as the statistically valid observations that:

    * In 2003, 80% of new auto policies were written by local agents; that figure dropped to 63% in 2010.
    * 67% of auto insurance shoppers shopped online in 2010.
    * 39 million quote requests were submitted over the internet.
    * 72% of those quote requests went to GEICO, Progressive and Esurance.
    * 23% of Gen Y shopped for insurance online; 9% of boomers shopped online.
    * In 2010, 22% more quote requests were bound online than the previous year.
    * In 2007, having a local agent was the #1 driver of customer satisfaction. That ranking has dropped to #4.
    * Insurance customers with the highest satisfaction rating were serviced by local agents who used “emerging technology.” (That, friends, is a glaring silver lining in all the recent research.)
    * Since 2005 – a benchmark year for consumer internet usage – the independent channel witnessed PPA market share erosion from 34% to 31% - almost 10% of its available volume. (During the same period, the direct marketing channel shot from 21% to 28% - an increase of 33% of their respective volume.)

    Doesn’t it mean something that GEICO’s ad budget is one billion dollars...and that they have doubled their market share – from 4.8 to 9.7% - in less than ten years – a feat previously considered impossible in this industry?  

    Their strategic execution has been successful enough – combining massive advertising, a seamless web experience and internal efficiencies (AKA, elimination of the agent channel) – to add $7.5 billion in top line revenue in five years.

    Can’t we expect Warren’s team to stay the course and double down?

    Consider this: that while both agent channels – independent and captive – deliver better underwriting results than the direct marketers, their combined ratios crumble with addition of agent expenses. The independent channel is 2.3% more expensive; the captive channel is 3.2% more expensive.  When you’re trading in the tens of billions of dollars, those percentages demand attention, govern strategy – and make stockholders smile or grimace, depending on which side of the aisle they sit.


    We could beat this dead horse until it cries “uncle,” but, my point is simply to urge the serious student to pay attention. Whether, ultimately, you judge the McKinsey consultants right or wrong, as the sailor reads the ripples in the sea, shouldn’t every player in the agent channel read the signs?

    And those are not concealed. They are not below the surface. They are empirical. They are statistical.

    And they are undeniable.

    Does this signal the “undoing of the agent channel?”

    The short answer is an unequivocal “no.”  I will explain why in a moment.

    But does it signal troubled waters – or worse – for the agent who chooses (strategically or, more likely, complacently) to steer their ship as if it were the 1990’s?  (Or, for that matter, 2004.)

    I suggest that the data provides the answer. Yes.

    Remember the silver lining I spoke of earlier? Both the older boomers and the young Gen Y’s reported the highest customer satisfaction when two criteria were met:

    1. They are serviced by an agent.
    2. Their agent communicates using emerging technology.

    JD Power further reveals, in brightly cheerful numbers, how much that translates into new and retained dollars in every desirable category (retention, cost of acquisition, price elasticity, likelihood to recommend).

    What really happened to the travel agent?



    Again, while I recognize the danger of making cross-industry comparisons, the disruption to our second cousins in the travel industry may provide some insight about what happens when technology spurs changes in consumer behavior – and changes in consumer behavior drive changes in the industry:

    * 70% of travel agents disappeared in 16 years.
    * The survivors write 363% more business.

    The survivors in that industry did two things the others did not. They mastered marketing. And they mastered innovation. In other words, they knew how to get and optimize customers. And they knew how to create value.

    A careful examination of the changes in our consumers’ behavior and the changing expectations of our carriers simplifies the demands on the retail agency executive: get customers and deliver value. Value, that is, that adds to the value chain.  In other words, be good at it. (Passing along the value created by other parties – carriers – no longer qualifies as “value added.”)

    I said “simple.” I did not say “easy.”

    The consumer has spoken. “Delight us and we will reward you.” But – and this is crystal clear from their behavior: “communicate to us with today’s technology.”

    The old guard defenders of the industry – and my heart is with them – risk a great misunderstanding: that agents will be around because they’ve always been around.  

    Nay, they will be around because the consumer wants them to be around... because they are worthy of being around.

    Peter Drucker offered the recipe for us many years ago:   "Business, because of its purpose, has just two functions and only two: marketing and innovation. Marketing and Innovation make money. Everything else is a cost."

    In times of disruption, this can no longer be mere theory, weekend reading or “wish I woulda” thinking.

    It is urgent. It is imperative. It is survival.

    Some have been in the industry long enough to remember when the independent channel boasted 80,000 agencies. The consolidation to 40,000 was rapid, brutal – and probably beneficial to the consumer. Stronger and better agencies emerged.

    To those who say, “we will always be here because we’ve always been here,” I’ll remind them that 40,000 independent entities are not here.

    But the industry remains. And the consumer – once again – appears to be asking us to be worthy of their attention,  their loyalty and their business.

    Some will rise to the challenge. And the industry will be the better for it.

    I’ll be addressing – in specific detail – the various trends and forces that are demanding change on the retail insurance industry in my upcoming “2014 State of the Industry Address” on Thursday, November 14th in a free webinar format.

    More importantly, I will draw a series of predictions and strategic implications for the retail agent, and close with an Action Plan for agents and brokers who want to thrive in the coming year.

    Personal lines or commercial lines. If you are a serious student of the industry (and if you read this far, you qualify), please join me by clicking here to register.

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