The rapidly emerging direct-to-consumer business model will be the death of local insurance agents. Today, we look at the building where the former bookstore was located. Now the bookstore is gone and we buy our books over the internet. Near the space where the bookstore used to be located is the office where the travel agent had an impressive network of computers and pleasant personnel. That office also sits empty. Now we easily arrange travel via the internet.
The bookstore and the office of the travel agent were landmarks. Not long ago it was unimaginable these businesses would disappear so rapidly. Soon, consumers will look at the office currently occupied by their local insurance agents and wonder why insurance used to be so expensive and so complicated. Rest-in-peace local insurance agents.
While much of the insurance industry denies this reality, selling any high-volume product through an expensive sales channel is an outdated business model. Industry analytics shows this reality is happening faster than industry expert are predicting.
High-Cost Sales Channels do not Survive in the age of the Internet
ValChoice, an insurance analytics company, has data that shows the death of local insurance agents is just over the horizon. The statistics below summarize the analysis. For each of the three primary distribution channels of insurance, the analysis shows the percentage of insurance (writing) companies that sell primarily through each channel and the percentage of insurance companies offering high-value products sold through the same channel.
- Independent agents represent 66% of all auto insurance companies, but only 33% of the high-value products.
- Captive agents represent 11% of auto insurance companies, totaling 14% of the high-value products.
- Direct-to-consumer represents only 15% of car insurance companies, but 52% of the high-value products.
It is a certainty that consumers always find, and find quickly, a good value. With the price of insurance increasing faster than the Consumer Price Index and with incomes stagnant, consumers need to find better values in insurance. The alternative of paying more of the monthly budget on insurance is unacceptable to most consumers.
Who's Impacted by the Death of Local Insurance Agents?
For agents, the cost of disruption is clear. Their lifestyle will get progressively harder to maintain, until they're forced to retire early or change careers. For well-established insurance companies, the cost is loss of marketshare as a result of not embracing the direct-to-consumer sales channel. For less well-known insurance companies, the cost of not embracing the switch to a direct-to-consumer model will be devastating. Either these companies take the offensive with a direct-to-consumer model or risk losing market share to more cost-effective offerings.
It's yet to be determined whether consumers or big insurance companies will be the beneficiary of the death of local insurance agents. Consumers are currently benefiting from price competition largely created by the direct-to-consumer model. However, when the inevitable industry consolidation that results from companies struggling in the face of flagging market share begins, prices will naturally trend upward at an accelerated pace. Whether consumers are the ultimate beneficiary depends on how many second tier companies -- defined as not top ten insurers -- work aggressively to carve out a position in the emerging direct-to-consumer market. If this is a sizable group of companies, competition will prevail and consumers will be in a good position.
Consumers and Local Insurance Agents are in this Together
Both consumers and local insurance agents need tools that help them decipher the good products from the bad. Agents need to find new ways of retaining their clients by proving the products they are offering provide the value expected. Consumers need shopping tools that help them understand what they are buying since the migration to a more self-service model could leave them with a lower price, but also less protection.
What Options are Available for Insurance Companies?
Some companies will look for alternatives to changing channel strategies, including reducing the up to 15% commission rates often paid on auto and home insurance products. This approach is not a viable strategy, only delaying the inevitable. Instead, companies and agents must focus on offering better products with more value for the consumer. Offering better products will become the new frontier in insurance sales. Companies competing to gain marketshare will compete on this basis. Companies offering good products and working to maintain market position will also use this approach to hold their clientele while adapting their channel strategy to fit the new consumer buying pattern.
Dan is the founder and CEO of ValChoice, an insurance analytics company.
Follow Dan Karr on Twitter: www.twitter.com/ValChoice
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