Many IAs have turned to agency networks for benefits traditionally harder to obtain as standalone businesses. Understanding the role of these networks is crucial for carriers aiming to leverage this distribution structure effectively. Additionally, knowing why agencies join and switch networks can guide carriers in making strategic decisions for the future.
The Impact of Competitive Pressure and Capital Availability
The Resilience of Independent Agents
For over two decades, the insurance industry has been focused on the impact of direct and alternative distribution methods, such as insurance embedded into vehicle purchases and other point-of-sale offers. Despite this, research indicates that independent agents (IAs) remain the dominant channel, especially in commercial lines. Contrary to predictions, IAs continue to grow their market share and relevance as exposures increase in complexity and commercial arrangements evolve. The notion of the "death" of the agent has been greatly exaggerated.
Challenges Facing Independent Agents
While IAs maintain dominance, several forces impact this channel, including:
- Private Equity Investment: Agency consolidation is increasing, driven by private equity investment. Despite interest rate hikes slowing some of the M&A market, the deal pipeline remains strong, and capital is available for target agencies.
- Changing Work Environment: Virtual or hybrid work environments require greater capabilities for agencies to operate efficiently and retain talent, presenting a skill and capability gap for many agency owners.
- Talent Competition: Despite alternative staffing models (e.g., temporary or gig workers, virtual workforces), IAs struggle to secure and retain the necessary talent. The average age of producers and account management staff exceeds 50, indicating a shortage of younger talent entering the insurance workforce.
- Digital Prospecting: The need for IAs to be "open for business" on all channels necessitates a strong online presence. The rise in digital marketing capabilities requires IAs to seek guidance on executing effective digital strategies.
These factors have changed the industry landscape, widening the performance gap between small- to mid-sized independent agencies and larger agency/brokerage roll-ups, which use their capital to enhance capabilities and outperform competition.
Benefits of Agency Network Participation
Levelling the Playing Field
Agency networks help bridge the gap for agents who want to remain competitive while staying independent. Networks offer various capabilities (e.g., marketing, training, technology) and provide increased compensation through pooling premiums to overcome entry barriers for enhanced base and variable compensation. This structure allows small and mid-sized IAs to compete more effectively with larger standalone agencies and agency roll-ups. Additionally, network structures offer a compelling alternative for exclusive agents (EAs), providing choice of carriers and business and operational support from their network.
Growing Popularity of Networks
The advantages of agency networks have driven their popularity. As of 2022, there are nearly 40,000 independent agencies in the United States, an increase of 4,000 from 2020. This growth reflects the value networks add to IAs.
The Cost for Carriers
Strategic Engagement with Networks
The rapid expansion of networks and their growing market power pose questions about the cost for carriers. Engaging with networks while balancing benefits and costs requires carriers to understand key IA challenges and the reasons behind agencies joining networks.
Motivations for Agencies to Join Networks
Addressing Key Challenges and Goals
The challenges of standalone IAs are exacerbated by operational demands. These challenges span four dimensions:
- Skill: Managing the business often detracts from growth activities. Agencies struggle to keep up with tech skills required for digital customer acquisition and service.
- Scale: Smaller agencies face difficulties in attracting and retaining talent and achieving leverage with carriers.
- Scope: While agencies' broad product offerings are valuable, smaller agencies lack capacity to understand a wide variety of products and brands, necessitating a generalist approach.
- Capital: Investing in capabilities and tools to enhance skill, scale, or scope is often beyond the financial reach of many IAs.
Top Reasons for Joining Networks
Our research identifies three primary reasons IAs join agency networks:
Building Talent: IAs often lack the resources for effective recruiting, training, and employee development. Network members report improved talent management, service quality, and employee retention.
Accessing Marketing Capabilities: The digital marketplace necessitates a robust online presence. Networks provide cost-effective digital marketing solutions and better technology, enhancing IA brand awareness and marketing capabilities.
Increasing Carrier Access and Breadth: Many IAs seek to expand their carrier partnerships and access competitive products. Networks facilitate better placement and servicing options, offering access to specialists for complex risks.
Strategies for Carriers
Maximizing Benefits through Agency Networks
Carriers can unlock benefits from agency networks by adopting the following strategies:
Create Compensation Plans Benefiting Both Partners: Design simple and clear base and variable compensation programs that drive desired behaviors and align with carrier goals.
Address Skill and Technology Gaps: Support agencies in developing skills and technology critical for business operations, such as digital marketing training, self-service client capabilities, and AI-driven responses.
Complement, Don’t Replicate: Understand the capabilities provided by networks and identify areas where carriers can complement these offerings.
Pick Winners and Partner: Identify networks that support business objectives and develop engagement models that align with both carrier and network goals.
Conclusion
Agency networks are a significant and growing force within insurance distribution. They provide tangible benefits to agencies, helping them achieve their goals and address challenges. By understanding how to complement and incentivize networks, carriers can leverage agency networks as a strategic tool to achieve their objectives and support the broader re-invention of the insurance enterprise.
