THE PAST
From 1800 to 1950 the evolution occurred from marine and fire insurance to more complex and comprehensive insurance policies covering liability as well as property and covering other forms of losses than fire. The changes in the industry were more technical rather than market driven. The insurance industry was making the markets and feeling its ways along. Insurance agents were respected and were as sought after as bankers.
1950 to 1984 were the hot times. This period was driven by competition, not by the market. The greatest long-term impact in this period was the advent of the direct writers in personal lines. Some of the insurance professionals in the industry today still remember how the traditional insurance companies disregarded the upstart direct writers assuming that local insurance technical experts, independent agents, could not be replaced by lower cost, commodity insurance sales.
This same period saw almost regular five year underwriting cycles. The competition-driven marketplace priced themselves into underwriting losses, resulting in limited reserves and cessation of writings until fiscal balance was established. Then the cycle repeated itself. Later in the period the insurance market followed several economic turns in the United States as well as the pressures of competition to further complicate the underwriting cycles.
During this period, the carriers continued to be generalists and agents spoke and created relationships directly with their underwriters on an account-by-account basis – relationships between agencies and companies were foremost in the conduct of business.
1984 to 1998 – “The Crush” – The industry has suffered an “eternal” soft market. Market share is being lost to direct writers at the rate of .5%/year with commercial lines losses accelerating. Carriers are responding to competitive pressures by lowering rates, cutting commissions and lowering contingency contracts. They are also trying to focus marketing and segmentation to achieve the highest returns from a risk standpoint. Commercial lines has become market driven due to the continuous soft market.
Market segments find that they can use either size (for large companies) and associations (for smaller companies) to better manage their insurable risks. Programs are evolving for common risk areas. Self-Insurance Groups and Programs are implemented for larger companies and groups. Reciprocals and Off-Shore and Rent-A-Captives are explored by all manners of commercial clients who are learning how to manage their own risk.
Insurance companies failures and mergers are accelerating in this period as product consolidation, cost constraints and economies of scale influence companies to change focus and change their organizations. Insurance agencies feel the pinch beginning in 1990 and, by 1998, the number of agencies have gone from 125,000 to approximately 80,000 through mergers and acquisitions. Automation in agencies was innovative at the beginning of this period. By 1998, automation has become both necessary and, in some cases, mandatory for agencies to continue to operate with their carriers.
THE PRESENT
The market continues to be soft but showing signs of bottoming out in most areas of the country – but selectively. The industries that are desirable are still very hot and competitive.
The Insurance Companies –
The major carriers continue to falter and fail. Aetna becomes Travelers. INA becomes CIGNA and a totally different company than either of its parents. Other major companies are on the “Watch List” for the next five years. They will either clean up their act or they, too, will change dramatically. Meanwhile, the regional companies are becoming stronger and will become the major players for the next 50 years.
Once the stock market changes the insurance market will also change within six months. Insurance companies have been relying on their investments since the mid-80’s. Few are managed by insurance professionals and many are managed by financial experts. Loss ratios have been engineered to be poor simply because of the continuous soft market. When prices fall without adjustments in the loss exposure, loss ratios will grow. Given the loss ratios and reserving practices prevalent in the industry, it will take a few major disasters combined with a turn in the U.S. stock market to either ruin a few major carriers or to harden this soft market. However, the hardening will first be reflected by the cessation of writing in certain areas or for specific types of risks. This backlash will harm customers, who will not have any insurance available, agents, who have to take the brunt of the financial and service burden, and the carriers, themselves, who will further harm their image in the eyes of American business. The direct writers, who seem to have a longer term planning outlook than the stock companies will look like the saviors of the industry, even though they, too, will reduce writings.
The Insurance Agencies –
Most of the agencies that have departed from the marketplace were less than $1 Million in revenue.
Insurance companies have realized that the industry follows the 80/20 rule – 80% of their business comes from 20% of their agents. The more agents they have, the more underwriters and staff they need. Most agents have favored companies and the rest of their carrier plant is used as secondary, alternative markets or to block the markets. So the companies are picking their favored agencies and those that can’t grow to the carrier’s minimum requirements are being terminated or are being encouraged to merge.
Meanwhile, to maintain profits and dividends for their stockholders during the on-going soft market, carriers have continued to apply downward pressure on both commission and on contingency. Even if the market hardens, I wouldn’t look to the companies to increase their commission rates.
While the average commissions continue to decrease toward the 10% level (10 years ago, average commissions were approximately 17%), carriers are requesting and requiring agents to rate common products in house instead of submitting them to the companies. They are requiring upload and download within agencies. That requires additional workload and increased automation competence for agency staff.
THE FUTURE
The Market – Because of the non-traditional forms of insurance and risk management being implemented, the insurance market will become selectively hard and soft depending on the type of industry, the market segment and the geographic area. The marketplace is maturing causing both stock companies and direct writers to scramble to keep up with the insurance needs of their target markets. Many of the common commercial customers will find their best value in insurance programs through their associations. The associations will align with agents, carriers directly and other insurance related entities that can provide the best service for their members.
Insurance Companies:
Many companies realize that they must change to meet the needs of the 21st Century. Some are giving change lip service and continuing their incessant five year reorganizations. Those companies will fade or merge in the next century. Others are committing to the changing insurance marketplace and are creating new, flexible products, simplified methods of writing insurance with them (i.e. artificial intelligence for most underwriting) and seeking the best distribution methods for the new century. Many of the largest companies have determined that, while the insurance agency industry is expected to continue, that it, alone, will not provide them the growth and stability that they need. They are making forays into financial institutions as marketing partners and into direct writing as an alternative for those clients comfortable with dealing with the company instead of through an intermediary. Some companies will abandon the personal lines marketplace to the direct writers. That is unfortunate because, in the long run, personal lines will continue to be the consistent profit base of the insurance industry. The companies that are going to stay in the personal lines business will do so at lower expense rates (to meet the challenge of the direct writing competitors) at a cost to their distribution system. Many would like to become processing centers for personal lines with insurance agents simply acting in a sales capacity.
Other financial based organizations are going to “mix-and-match” with insurance companies. Regulations will inevitably change permitting banks to sell insurance as well as insurance companies to act like banks. But the brokerage firms and other financial markets will also be a part of this mix. This is not as radical a change as has been supposed. Not every bank branch will have insurance agents nor will every customer feel that they MUST be insured with their lender. Coercion aside, the insurance buying public will again move to the path of least resistance where they can find their insurance needs met with the greatest ease, for the fairest price and with the greatest confidence that they will be protected.
Insurance Agencies:
The challenge for insurance agencies in the next 20 years is to CHANGE.
We must maintain our edge in the knowledge base. This is being eroded in two directions. First, we are not spending money continuously training and upgrading our staff. Second, the continuing education requirements of many states are satisfied by the re-taking of basic insurance seminars meant to remind, not to teach – to fulfill requirements, not to innovate.
We must learn or re-learn how to SELL. We may be insurance “experts”. Our customers look to us for our expertise. But they automatically ASSUME that expertise. That means that they assume that expertise in our competitors as well – until they are proven incompetent. And, frankly, many of our competitors, while not as knowledgeable as many independent agents, are not incompetent. Regardless of competency, insurance is a product that needs to be sold because in the last half of the 20th Century and in the 21st Century, it has become a competitive commodity product
We must learn how to innovate. Our fathers were able to manage their insurance businesses like their fathers before them, make a good living and have an asset to sell or pass down. We don’t have that luxury. Our generation can manage our businesses just like our fathers did and, yes, we can still make a good living at it during our tenure. But our asset value is diminishing. Those who do not innovate will neither grow nor sustain their business value to sponsor their retirement or to pass to the next generation.
Innovation involves everything from personnel selection and training and management to efficient workflows and organizations including the use of automation. And, of course, we have to figure out how to better insure our customers within their budgets while remaining profitable for our carriers.
Our father’s agencies are gone. If you wish things were like they were in the “good old days”, please remember that along with 25% commissions, more respect and customers seeking agents services came polio, high infant mortality rates and world wars. The past is, indeed, past. Look to the future and grow and profit and CHANGE with that future.