As insurance carriers move forward to sell policies directly to consumers, they walk a precarious bridge between the Old Economy, where their agents dominated the distribution channel, and the New Economy where the Internet is now a player.When Allstate Insurance Co. announced its multichannel initiative last year, industry analysts applauded the company for taking this bold and necessary step to sell insurance online and through call centers, as well as through its traditional agent force. But some Allstate agents are not clapping as the company marches into the New Economy.That's because approximately 6,000 Allstate employee agents had to decide whether to become independent contractors or leave the company. About 2,000 agents opted to leave.

To make matters worse for the Northbrook, Ill.-based company, the U.S. Equal Employment Opportunity Commission in mid-September determined that the company violated the federal statutes the EEOC administers, after approximately 70 agents filed charges with the EEOC. The agents claim that the release and waiver they were required to sign to convert to independent contractor status amounted to retaliation under Title VII of the Civil Rights Act, the Age Discrimination in Employment Act and the Americans with Disabilities Act.

"The EEOC determination is not a charge against Allstate that any type of unfair discrimination has taken place or that the company's new contract with agents is not okay," says Sharon Cooper, spokesperson for Allstate. "The issue is over the use of the release and waiver."

Nonetheless, the situation does illustrate the challenges carriers face as they begin to adopt new business models to remain competitive. How can they create around-the-clock sales and service that consumers are demanding-and garner the cost savings associated with direct distribution-while not cutting off their traditional life-blood-their agents?

"Change is not easy," Cooper says. "We knew converting employee agents to independent contractors was going to be very difficult, and there were going to be some people who were going to make the choice not to stay with us." As for the company's integrated multichannel initiative, called the "Good Hands Network," the company has tried to be as fair and inclusive as possible with its agency force, Cooper says. "They're the core of our business."

Channel conflict is unavoidable, says Chuck Johnston, vice president and director of Insurance Information Strategies at Stamford, Conn.-based Meta Group, a research and consulting firm. "As one of my colleagues says, 'sometimes you just have to embrace the pain.' In this case, if you try to avoid it, it's going to run you over like a freight train. The real questions are: How are you going to manage it, and how are you going to turn dissonance into advantage?"

Hitting the wallet

One of the main challenges with the Internet is issue of agent compensation," says Stephen Wu, Web strategist for Destiny WebSolutions, a Conshohocken, Pa.-based Internet consulting firm that specializes in the financial services industry.

Historically, producers received 10% to 30% commissions, Wu says. But the direct channel cuts commissions significantly.

Although a majority (83%) of agents appreciate the increased visibility and advertising associated with the Internet, nearly half of them (49%) are concerned that they will lose income if customers purchase directly through a Web site, according to Booz-Allen & Hamilton, New York, in its third annual Internet insurance survey study of usage and trends (see chart, page 36).

"The compensation issue hasn't been well addressed by the insurance industry yet," Wu says. "And since compensation really determines your behavior, until they solve that political problem-which has nothing to do with technology per se-they really can't move forward with the technology."

Carriers can create discord with agents even when they try to design what they believe is an equitable commission structure. Allstate, for example, automatically assigns an agent-based on geographical proximity or customer request-to a customer who buys a policy online or through the call center, and that agent receives a 2% commission. If the customer has purchased an auto policy and has agreed to be contacted by an agent, the agent can sell another policy to the customer and will receive full commission for it. If the customer does not want to be contacted by an agent, the agent still receives the 2% commission.

Industry analysts consider such service commissions associated with direct-to-consumer insurance sales to be more than fair to agents who did not sell the policy.

But some agents disagree. "You can imagine the cost problems for an agent over time who has more and more of these service accounts assigned to them," says Rod Guilmette, spokesperson for the National Association of Professional Allstate Agents, Canton, Mich. "They must service the account. They have to give it their full attention like any other policy. If you start getting too large a percentage of your book of business this way, you're going to go down the tubes."

Agents are also concerned about call centers stealing their business away from them. If agents are required to forward their phones to a customer service center after hours, and call center representatives sell policies, traditional agents will lose sales that are rightfully theirs, Guilmette says. "Agents spend money working their books of business. They pay money to advertise in the Yellow Pages. They pay money for mailings. And to have the fruits of their labors and their monies taken away from them because they call-forwarded their phones is . . . more than channel conflict," he says.

That explains why Allstate's strategy should be viewed as a work in progress, Meta Group's Johnston says. "Allstate took a step forward, and there are certainly going to be bumps and problems. And that's a reasonable issue that should be worked out between agents and carriers. But the real issue is: What should agents be doing? What should they be selling? Where are they going to be most effective? Agents should not be selling standard auto. Standard auto should be sold through the Internet."

The agent's new role

Driven by deregulation of the industry, insurance carriers are striving to become financial services providers. Inevitably, as the carriers expand their products and services, the role of the traditional insurance agent will change.

"We see ourselves down the road as a one-stop shop financial services portal," says Robert Reiner, manager of enterprise Internet services at State Farm Insurance Cos., Bloomington, Ill. "That's really the goal of everybody in this arena."

Agents are beginning to take on the role of financial advisors as standard personal property and casualty policies become commoditized. "Insurance products live on what we call a commodity continuum," Johnston says. Standard auto insurance is at the low end of the spectrum, while products from a company such as Hartford Steam Boiler, which insures nuclear reactors and other commercial equipment, are at the high end, he says.

Depending on where an insurance product falls on that continuum, different selling models are appropriate-from very high-touch, personalized service at the high end to the Internet at the low end.

"A producer can provide advice and consultative skill for complex products, such as a variable life contract, a variable annuity or other investments," says Robert McIsaac, first vice president, technology initiatives, The Prudential Insurance Co. of America, Newark, N. J. "Those are not self-service applications. In fact, those are where the deeper and stronger relationships with the client will be-not with the people who are just price shopping."

Some captive P&C agents say they find the prospect of becoming financial planners unlikely and even mind-boggling.

The Booz-Allen & Hamilton study found that 44% of agents expressed concerns about their role changing with the rise of Internet insurance, and only 29% of them believe their role will shift from insurance salespeople to financial advisors.

Yet, some captives are beginning to expand their lines. "We have a lot of agents who are now certified to sell bank products, and many who are licensed to sell annuities," State Farm's Reiner says. In July, State Farm joined forces with Milwaukee-based Fortis Health to sell individual medical insurance products through State Farm agents worldwide.

Many independent agents appear to be up to the challenge of broadening their traditional role. In 1998, 91% of the members surveyed by the National Association of Professional Insurance Agents (PIA) reported that they intended to expand beyond P&C products into life and health and financial services over the next three years. In 1985, only 15% of the members of the Alexandria, Va.-based organization reported selling life, health and financial services products; by 1999, more than 42% of its members were engaged in those lines.

"We firmly believe that the person who owns that customer relationship and owns that market territory data is the entity who will succeed," says Patricia A. Borowski, division vice president and Internet analyst for PIA. "And we think independent agents and brokers are beautifully positioned for that."

The Internet eventually could reduce costs in the insurance industry by 25% to 30%, says Gil Irwin, partner in the Insurance e-business practice of Booz-Allen & Hamilton.

Those costs include commissions, which are 30% to 40% of the cost structure of an insurance company, as well as the costs of getting a policy set up in a carrier's system.

Data entry and underwriting processes will be reduced significantly as they become automated, he says, with consumers filling out applications and making changes to their policies on the Internet, and with expert systems handling requirements such as Motor Vehicle Registration and Medical Information Bureau inquiries.

Internet-enabled agents

As a result of Internet efficiencies, analysts predict that the agent force will shrink, and those who remain will be those who adapt to the New Economy-expanding their use of Internet-based tools as well as their product lines.

"Agents who only sell standard auto because it's easy had better find something else to do in five years," Meta Group's Johnston says.

Indeed, throughout history, new technologies have forced people to change jobs or to change the way they work. So it's not surprising that some insurance agents are feeling threatened by the Internet.

Many industry observers are saying carriers need to use the technology to help their agents, rather than to compete with them. For example, the technology exists to take all the data that sits in carriers' massive databases and move it out to be used at the point of sale, says James Luscombe, a consultant who specializes in how the Internet influences agency distribution at New York-based PricewaterhouseCoopers. "Let's put that data into the agents' hands."

Since compensation is a fundamental concern of agents, carriers should use the technology to give them information about their compensation, says Ashwani Dhar, director of business development in the financial services group of Trilogy Software Inc., an Austin, Texas-based e-business company that sells distribution channel management tools. Hitting them in their wallet is the "hook" that will encourage agents to see how the Internet can help them, he says.

Before the end of the year, Progressive will be delivering commission statements to its agents, with an internally developed application, through the company's extranet

"Our goal is to integrate the Internet into all our business processes, taking the hassle out of auto insurance for both our consumers and our agents," says Toby Alfred, Internet site manager at Progressive Insurance Corp., Mayfield Village, Ohio.

Agent locators are a common feature on carriers' Web sites, and agents obtain sales leads through carriers', their own and aggregators' Web sites. Progressive has 28,000 unique visitors per month that use the agent locator on its Web site,, according to Mary Beth McDade, a Progressive spokesperson. "This feature gives our agents somewhat of an Internet presence in terms of directing our Web site visitors to them."

With the introduction of Progressive's wireless technology in September, which also enables customers to find an agent in their zip code, the company expects the number of people requesting a local agent to grow (see related article, page 8).

Beyond sales leads, however, the Internet can help carriers reduce communication expenses and supply accurate and timely news and data to agents. Carrier extranets can provide agents with the most up-to-date information on policies, products and customers. They also can be used to quickly transfer applications and forms.

Carriers need to think about their producers as their customers, and service their agents over the Web and through their call centers, Trilogy's Dhar says. "When we think of an Internet-enabled solution for producers, the producer should be able to go on to the carrier's Web site, type in the customer's name and find out that this person has an auto policy, a life policy and a long-term care policy with that carrier."

Furthermore, when the agent is on a carrier's Web site and has a question, the agent should be able to hit a button on the screen to initiate a Web chat session with a carrier representative, or the agent should be able to pick up the phone and talk to a call center representative who knows where the agent is on the Web site, Dhar says.

"This is how insurance carriers can really provide a huge value-added service to their channel-by exposing the wealth of information they have in their policy administration systems as well as in their call centers."

When Prudential determined that customers wanted online account access, the company first spent time in two of its agencies in California to determine how agents use customer account information. This way, the company could integrate the customers' and the agents' online experiences.

"We created an icon within the agents' contact management system, and said, 'Just do your work the way you normally do it, and, by the way, if you need to get the current view of your customer's relationship with the company, just click here and we'll fire up a browser so you'll see exactly what the customer sees,'" Prudential's McIsaac says.

Channel integration

P&C carriers that depend on independent agents need to have a good multichannel strategy that takes care of their agents, PricewaterhouseCoopers' Luscombe says. Otherwise, those agents are going to exercise their independence and vote with their dollars-by heading out to a carrier that has a better strategy.

There's also the possibility that independent agents will leverage the technology to work on their behalf, thereby "disintermediating" carriers, Destiny Web Solutions' Wu says. Independent agents can use aggregator and "screen-scraping" technologies-which give consumers an instant view of all their financial information-to provide services that traditionally have been offered by carriers, he says.

"The wrong strategy is for carriers to create a pure carrier-to-consumer channel, and to have that channel as a separate, siloed effort that doesn't involve agents," says PricewaterhouseCoopers' Luscombe. "A better strategy is to create a business plan that includes the agents, the call centers and the consumer-direct as part of the same distribution channel. So the consumer can buy on one channel, be serviced on another, and take their claims through a third."

"Our strategy is to integrate the bricks-and-mortar world-the personal relationship that our customers have with our agents-with the benefits of the online world," says Ann Baughan, vice president, enterprise Internet services for State Farm.

"We allow the customer to contact us by any means of their choice. There are still some people who will walk into the agent's office with their cash payment for their insurance policy. So the Internet is a tool for utility and self-help that appeals to a large segment of the population. But it's not an either/or situation."

Ultimately, what will happen is people will use multiple channels when purchasing insurance, Booz-Allen's Irwin says.

"Most people will use the Web to gather some information, and some portion of them will continue and close the deal there. Others will want to talk to somebody live, whether that's at the kitchen table or through a Web chat. It will move to that. But the transition will be seamless. You won't think about it the way you think about it today."

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