Competitive pressure, increasing capital availability (even at present rates), and an altering business landscape (due in part to the pandemic) have created an opportunity for independent insurance agents (IAs) to be innovative in order to expand and remain independent in the insurance market.
As a result, several IAs have sought out agency networks that give benefits that were previously difficult to obtain as a separate firm or agency. Understanding the function of agency networks and why they are necessary will be key for carriers in making successful use of this distribution structure. Understanding why agencies join and leave networks may also assist carriers make future strategic decisions.
We will now go over these themes, as well as the advantages of participating in agency networks and how carriers should adapt to this rising distribution trend.
To begin, consider the competitive pressures and higher funding availability that are driving agencies to seek new networks.
The agent’s “death” has been excessively exaggerated.
For the past two decades, the industry has concentrated on the effects of direct and alternative distribution, such as insurance incorporated in the car buying process and other point-of-sale offerings. According to our findings, IAs continue to be the leading channel, particularly in commercial lines.
Independent Insurance Agents and Brokers of America is the source.
We believe that IAs will continue to extend their market share and relevance as exposures become more complicated and commercial working arrangements develop. In summary, the agent’s “death” has been substantially exaggerated.
Pressure is increased by changing landscapes and operating needs.
While IAs continue to dominate, various forces continue to have an influence on this channel, including:
Private equity investment: Agency consolidation is fast rising, fueled by private equity investment, and despite the interest rate rise halting some M&A activity, the transaction pipeline remains robust and funding accessible for target agencies.
Changes in the workplace: For agencies to function, retain competent people, and so on, the virtual or hybrid work environment necessitates higher competencies than ever before, creating a skill and capacity gap for many agency owners.
Continued talent competition: Despite the growth of alternative staffing models (e.g., temporary or gig workers, virtual workforces), IAs face challenges in securing and retaining the talent they require to run their businesses; additionally, the average age of producers and account management staff exceeds 50, indicating that younger talent is not entering the insurance workforce at a sufficient rate to meet the upcoming waves of retirement.
The prospecting process has “gone digital”: The requirement for IAs to be “open for business” on whatever channels a prospect or client selects necessitates the importance of an online presence. As a result, the need for digital marketing capabilities has grown significantly, leaving IAs seeking help on how to implement the optimal digital strategy.
When these variables are considered together, they have altered the playing field and modified engagement models throughout the sector. The performance gap between small- to medium-sized independent agencies and bigger agency/brokerage roll-ups has expanded, as larger firms have used their cash to acquire the enhanced skills needed to outperform the competition.
IAs benefit from agency networks because they level the playing field.
Simply put, networks assist agents who wish to be competitive while staying autonomous overcome the gap produced by these circumstances. In exchange for a fee, many networks provide various capabilities (e.g., marketing, training, technology) and access to enhanced remuneration (through pooling premiums to overcome entry gates for increased base and variable pay). Small and mid-sized IAs may compete on a more level playing field with bigger independent agencies and agency roll-ups because to this framework. Furthermore, network architectures have provided an appealing opportunity for EAs to obtain the best of both worlds – they may choose their carriers while still receiving the business and operational assistance they want from their network. This has created an option for previous EA talent, expanding the pool of possible IAs and confirming the value networks are adding.
Because of these benefits, networks are becoming increasingly popular. As of 2022, there are approximately 40,000 autonomous agencies in the United States, a 4,000 rise from 2020. Given that two-thirds of agencies have $500k in income and might benefit from collaborating with other agencies, we are not surprised that the vast majority of organizations are part of an agency network. According to our study of 500 IAs across the United States, more than 70% of agencies are members of one of the approximately 150 networks.
And what about the carriers’ costs?
That is one of the most pressing concerns. What does the fast spread of networks and their increasing market power entail for the industry? What about the impact on total distribution costs?
While the rise of agency networks is generally beneficial to IAs, it comes at a great cost to carriers. Carriers will require a deeper grasp of key IA concerns and why they are joining networks in order to connect with networks and weigh the advantages vs. costs.
What motivates agencies to join networks?
A widespread misperception is that independent agents (IAs) exclusively join networks to maximize their earnings. The reality is that these networks provide extra benefits in addition to money and may be beneficial to carriers as well.
The motivation for organizations to join networks is many. Understanding why agencies join networks can help carriers make future strategic decisions. We must evaluate the problems and aims of agencies to have a better grasp of the major motives.
The most important difficulties and ambitions for insurance companies today
The operational pressures discussed previously in this essay are exacerbating the evergreen issues of isolated IAs. This is evident in four dimensions:
Skill: The skillsets required to operate the business take precedence over the skillsets required to build the firm. Furthermore, agencies have struggled to keep up with the technological capabilities necessary to recruit and serve consumers online.
Scale: Smaller agencies find it challenging to attract and retain talent, as well as gain influence with carriers.
While the breadth of product is a crucial value proposition for agencies, many smaller agencies lack the capacity to grasp a wide range of goods and brands; also, their smaller personnel base means they cannot have specialized jobs and must rely on a generalist model.
Capital: Investing in skills and technologies that will enable distinct expertise, size, or breadth necessitates capital that many IAs do not have.
When we asked agencies about their goals and challenges, we were not surprised to learn that the top three challenges preventing agencies from achieving their main goals of growth and increased retention were a lack of skilled employees (skill), competition from other agencies (scale, scope, and capital), and a lack of marketing capabilities (skill, capital).
To meet these issues and aims, agency networks have emerged as a useful solution.
The three most important reasons why independent insurance businesses join agency networks
According to our findings, networks met three major objectives: talent, marketing sophistication, and carrier availability and breadth.
1. Develop talent:
IAs frequently lack the scale and resources needed to conduct efficient recruiting, training, and staff development. Finding individuals with the necessary skillsets is a main difficulty for more than 55% of our respondents. Additional issues for agencies include offering competitive remuneration and benefits, training, and employee development.
Our survey respondents saw improvements in their talent concerns in terms of both the experiences they were able to provide to their customers (e.g., service quality due to upskilling or access to customer service capabilities) and benefits that allowed for further upskilling and employee retention.
2. Gain access to more marketing resources:
An internet presence is essential in today’s “always on, always open” lifestyle. For IAs, the digitally driven marketplace has increased marketing complexity. As with the other topics, agents who belong to organizations feel they have profited from their membership, but there is still room for improvement. Approximately 50% of survey respondents indicate that developing extra marketing skills is a near-term goal as well as a problem for their agency in terms of driving additional development.
Because of the relationship with their national network brand, independent agents who were members of networks reported an increase in IA brand recognition. Furthermore, IAs inside networks gained access to more cost-effective digital marketing and marketing technologies.
3. Broaden carrier availability and coverage:
We discovered that 48% of IAs wish to increase the number of carriers with whom they do business. Another 25% of IAs point to a lack of viable carriers, while 23% believe a lack of competitive goods is a hindrance to fulfilling their objectives. Given the importance of the ability to place business with various carriers across a range of product offerings and pricing points to the IA channel’s value proposition, this creates considerable opportunity for networks and carriers alike.
Indeed, 91% of our respondents believe agency networks enable smaller agencies to have better placement or service alternatives. Agencies claim to be able to acquire access to additional carriers through their networks and to specialists for complicated risks.
Given these facts, the current rate of IA network engagement is not surprising. Carriers must decide the best ways to engage and use networks in response to the participation rate.
4. Ways carriers may gain from agency networks
While networks have generally benefited IAs, they have increased the total cost of distribution for carriers, who are now paying more for business that they already had on the books. Carriers must seek for methods to optimize their own gains from agency networks in order to protect profitability.
Consider the following four options:
1. Design compensation schemes that suit both parties.
Carriers may develop simple and transparent base & variable compensation schemes for agencies that encourage desirable agency behavior to optimize network scalability and avoid overpaying for performance that is not aligned with the carrier’s aims. As an example:
improvements in network access costs (overrides) should be linked to improvements in mutually beneficial outcomes for a pay-for-performance strategy.
Require the network to pay a percentage of the access price to the network’s producing agencies, not only the variable compensation or profit sharing commission.
2. Fill skill and technology shortages
Agencies require assistance in developing skills and technologies that are vital to their operations. While networks address some of the gaps, carriers could consider forming partnerships with agencies to increase efficiency through the use of technology and non-carrier specific methods. As an example:
Employee digital marketing training
Client self-service features that minimize operational workload
Use generative AI to react to an agency’s request swiftly and accurately the first time.
3. Complement rather than duplicate
Hundreds of agency networks compete to offer skills and advantages to the 40,000+ IA market. Carriers should assess the network’s capabilities for agents and where the carrier can fill the gap. Understanding the networks that are most significant in the carrier’s distribution strategy and what they offer to their agencies is required. Carriers can then investigate where they can step in to supplement their skills.
4. Choose the winners and partners
Carriers should determine the set of networks that can support their business objectives since networks may be utilized as a relevant avenue for expansion in the context of a larger distribution plan. Furthermore, defining an engagement strategy tailored to that network partner and agreeing on how they will collaborate to meet agency goals will be critical success factors.