I read an article recently inoneof the insurance business trade magazines about an agent that had come up with a new occupational description to replace "insurance agent." The anecdotal catalyst for this was the fact that people recoiled from him in social situations upon learning he was an agent. This made it clear to him that the "insurance agent" brand was so badly tarnished that he was better served by an alternative. He prefers to call himself a "risk architect," and has taken steps to legitimize this as a formal designation. This is an interesting new title, and does reflect something about the true value of an expert agent to a prospective insured.
This rebranding effort reminded me of State Farm's market education campaign, at www.whyagent.com with the title "Do Agents Actually Help?"
One can argue back and forth about the value of an expert intermediary in the insurer-insured relationship, but these two initiatives make one thing pretty clear: the perceived value of the agent among the general public is waning.
Why? Because the agent/intermediary system was not handed down on stone tablets. It was primarily a solution to an information technology problem: how can insurers get information to a large dispersed marketplace and how can they transact business with that marketplace?
Some personal lines and life insurers established a retail presence, with branded agencies. But a retail presence is really just another information technology-physically locating an information distribution capability (people talking and handing out paper) and transaction processing capability (people listening and accepting paper to transmit to a central processing capability) near the marketplace. Companies without these physical presences relied on a network of independent physical distributors to accomplish the same tasks.
TECHNOLOGY'S EFFECT
Now that the available information technology has changed, and it is much easier to provide rich information and transactional capabilities to prospective insureds without a human conduit, the value of this informational and transactional platform (which was expensive to build and which is deeply ingrained in the operating model of most insurers) is greatly diminished.
Of course, acting as a channel is only half of a good agent's value to the insured. The other half is their role as an expert adviser. But while a good insurance agent offer a lot of expertise and value to his clients, the bigger question remains one of business model. Most insurance agents are still paid primarily on sales commission, which is one of the reasons that they are often regarded by the public as salesmen to be wary of rather than as experts to be respected.
In this way, insurance agents are much like the full-service stock brokers from a decade or so ago. Stock brokers were paid (by the customer) by the price of the transactions (trades) they originated for their clients. But today, many full-service stock brokers are paid wrap fees for assets under management rather than per transaction. What happened? In stock broking, the value of the transaction was decimated by the discount channels, and clients were no longer willing to pay hundreds of dollars just to execute a trade. Why not? Because changes in information technology (i.e. the Web) meant that a rich informational and transactional platform could be delivered directly to the end buyer, bypassing the intermediary human channel.
While there are still plenty of full-service brokerage clients, most of them now pay for growth in assets, rather than on a per-transaction basis. It was a wrenching adjustment for most full-service brokerages, but now the business model is much more aligned to the actual value delivered to the end user.
While it's good for insurance agents to emphasize their advisory value to insureds, their business models are still based on a sales commission from the seller. Up to now, the limitations of information technology have made it cost-prohibitive for insurers to sell directly to end users. But today, insurers have the technical capabilities to extend both detailed educational materials and transactional capabilities directly to their end buyer.
The common wisdom is that insurance is too complex to be bought without an expert intermediary. Maybe this is true, although personal lines has clearly solved this question, and complex commercial lines have expert buyers (risk managers) already. Investing also requires expert advice. But in investing, two things happened. First, brokerages figured out how to use new information technology to provide advice at a lower cost; second, the adviser intermediary persisted, but was paid for his overall guidance (wrap fee) rather than per transaction.
It will be interesting to see if the insurance intermediary business model will evolve in the same way, so that they are paid for managing their clients' risk rather than selling their carriers' policies.
It will also be interesting to see how insurers adapt to that change. Under the current intermediary-based systems, insurers have essentially outsourced their marketing and customer service functions to agents, as well as relying on them in their transactional workflow. If the model shifts to dealing directly with the customer or dealing with an intermediary who is now truly the customer's agent rather than the company's, insurers will need to greatly increase their own abilities in marketing and customer service.
Many insurers continue to believe that the agent is their customer. But while the agent may be a critical part of the value chain, and may be the proximate source of revenue to the carrier, he is not the customer. The agent is a paid service provider. The customer is the one spending money. And the customer will determine what is worth spending money on, and with whom.
Matthew Josefowicz director of Novarica, a New York research and advisory firm. He can be reached directly at mj@novarica.com
