Analyze This: The Untold Story Behind Morgan Stanley’s Safeco Snub

Imagine my surprise as I opened my e-mail and saw a National Underwriter story titled “Analyst Sees Safeco Distribution Blunder.” Knowing Safeco to be a prudent insurance company that has garnered much success with its independent agent-driven distribution model, I was curious to see the reasoning behind this headline, so I started reading.

The story quotes Morgan Stanley p-c analyst William Wilt, who announced he would maintain an “underweight” rating for Safeco stock after a day-long Safeco meeting with investors and analysts that revealed no major strategy changes for the company. Wilt noted that Safeco’s competitors had embraced a worldview that insurance was a consumer product that called for branding direct to consumers, while Safeco chose to stick by building its brand with independent agents and brokers. He indicated skepticism that Safeco’s “tactical focus on the agent” would bear sufficient fruit and that Safeco was likely to lag behind its competitors due to its agent-driven sales strategy.

It won’t surprise you that I say Wilt and his analysis are just plain wrong. The facts show that an agent-driven distribution system remains a highly successful model and that the independent agency system continues to grow and capture market share! Check out Fortune magazine’s Fortune 500, published in April, which included 40 p-c stock and mutual insurers—32 of which were primarily or completely independent agency companies!

In short, more than 6% of all Fortune 500 companies, and 80% of all p-c insurers on the prestigious list, use an agent-driven model. Safeco, whose strategy Wilt panned in his statement, rated 17th among these highly successful 40 insurers. Only in an alternate universe could this kind of success be viewed as a recipe for failure.

Additionally, Wilt’s analysis suffers from oversimplification. The value of the independent agency system to insurers who utilize it cannot be quantified in numbers alone. In most lines of insurance, it takes a trusted agent, with the knowledge, education and professionalism to work with consumers, to arrange proper coverage and make the sale.

The value added by agents, including intangibles like the personal touch, is why raw statistics are inadequate to explain that insurance companies recognize agents and brokers provide the service necessary to sell most types of insurance to consumers. Agents and brokers invest substantial time to identify consumers’ wants and needs. They understand the complex terms of policies available and offer choices to consumers about coverage, price, service, and financial strength of carriers. And they must remain available to assist insureds with questions and policy changes, as needed. This investment by agents and brokers goes far beyond the initial sale or renewal of insurance and adds substantial value to the relationship between the carrier and the insured. That is why so many p-c companies utilize this arrangement, and why so many of them are doing so well. Independent agencies also provide flexibility to enter (and yes, leave) agencies or regions in a relatively easy manner vis-à-vis captive agency companies.

In fact, a 2006 market share report shows that there are efficient companies within every model, and that companies using independent agents to sell their products outperform many captive or direct writers. In conjunction with A.M. Best, the report noted that in personal auto expense ratios, national agency companies’ (such as Safeco, Travelers and The Hartford) average expense ratios were approximately 34, and several of them were more efficient than State Farm (34.58). Some independent agency companies beat both captive agency companies and direct writers in efficiency. The independent agency system is effective and efficient.

The bottom line is that companies use models they consider successful, and no company is going to stick with a model that doesn’t work. Safeco has been successful in employing a highly trained, professional agent/broker sales force to distribute its insurance products.

So with all due respect to Wilt, all the number crunching in the world doesn’t change the fact that numerous companies in the industry rely on, and continue to grow with, independent insurance agents and brokers.

Of course, we’ve seen this story, or variations of it, in the past. The doomsayers have predicted the demise of the independent agency system for decades, and yet it continues to capture market share and produce results. Research firms sing the praises of the independent agency system, and others note that the Trusted Choice® brand is becoming a very positive and important factor for companies and their distribution forces. Analysts come and go, but the independent agency system continues to produce results for consumers and independent agency insurers.

Bob Rusbuldt (bob.rusbuldt@iiaba.net) is CEO of the Big “I.”