The Numbers Are In

Ten short years ago, only 8% of agencies had Internet connections. Today, agencies cannot work with a carrier without one. Technology is advancing rapidly, and agencies are evolving to keep up with it. That’s just one of the many findings in the just-released 2006 Future One Agency Universe Study, the eighth installment in the study series widely regarded as the most comprehensive and authoritative investigation available on the independent agency distribution force.

Conducted biennially, the study contains a wealth of information about independent agencies operating in the United States: their numbers, revenue base and source, number of employees, ownership, business mix, product diversification, technology uses, non-insurance income sources and marketing methods.

Overall, the study conveys a consistent message of positive agency evolution. Issues once considered threats have many times developed into new ways of doing business. Concerns about the contraction in the number of agencies have been assuaged with consistent growth in overall agency revenues and staff sizes. Some anxieties remain, as agents continually report concerns with carrier commitments to the channel and direct writers making inroads into their markets. Lack of agency staff diversity and the aging of agency owners are some of the additional issues that will continue to be viewed as possible deterrents to future growth.

Agency System in 2006
In 2006, there are about 37,500 independent agencies in the United States. This number has decreased by about 15% since 1996. One in 10 agencies were established in the past five years, but on average agencies are about 40 years old, with more than half established in 1972 or later. About 85% of agencies are wholly owned by the principals, while bank ownership of agencies has been stable at about 5% during the past two cycles. About two-thirds of agencies have only one location, while 17% report having three or more. Relatively few agencies have locations in more than one state.

Similar to 2004, one in seven agencies were involved in a merger or acquisition during the past two years, with acquisitions being much more common, accounting for 92% of the M & A activity. As expected, larger agencies are doing the buying, but most deals involve only two agencies. While there are most likely differences in motivations among agencies of different sizes, most agencies cite that the primary reason for selling is the owner nearing retirement age. Following closely are the fact that many believe that they are too small to have any leverage with their carriers and they are not able to get access to needed products.

Revenues Rising
The average agency size continues to grow. In 2005, 22% of agencies had insurance revenues of $2.5 million or more, compared to 15% in 2005. The study indicates that the smallest of agencies, those with $150,000 or less in revenues, continues to decline and now account for only 12% of agencies, compared with 20% in 2001. Reflective of increased merger and acquisition activity, agencies with $10 million or more in revenues now make up 7% of the universe.

About three-quarter of agencies report increases in their insurance revenues in 2005, with the sources of that revenue varying markedly by agency size. Overall, smaller agencies derive more of their revenue from personal lines, and larger agencies more from commercial lines. As well, larger agencies are beginning to generate a higher proportion of the revenues from employee benefits and life-health sales. (See table on page 38.)

As agencies grow, they are also offering other related services to their clients with 16% reporting revenue from risk management consulting and 14% offering fee-based consulting. Estate planning and administration of self-insurance programs and 401(k) plans are some of the other services adding to agencies’ bottom lines.

Carrier Consolidation
The number of carriers an agency represents has decreased since 2004. On average, agencies represent 5.4 carriers for personal lines, 5.3 for commercial lines and 4.1 for life and health insurance.

Fewer agencies report terminating their relationships with carries in 2005, down to 15% from 27% in 2003. Insufficient volume continues to be the most prevalent reason why carriers drop agencies. This same reason, coupled with pricing, are the primary reasons that agencies choose to terminate carrier relationships.

As in the past, the study explores agency satisfaction with carriers very thoroughly, allowing agencies and the carriers they represent the knowledge needed to focus their time and resources in areas that need the most improvement to enhance agency growth and competitiveness.

Overall satisfaction with their No. 1 personal and small commercial lines carriers is up significantly from 2004. Gains in the agency satisfaction measures are marked in terms of commissions and underwriting flexibility, ability to offer special insurance programs and contingent commission payments.

Working Relationships
In 2006, a significant percentage of agencies (65%) are working with outside organizations to place and package client risks and to access coverages not available from appointed carriers. Twenty-one percent of agencies use wholesalers, placing 15% of their business through them. When it comes to Internet market access, providers such as Big “I” Markets, Insurance Noodle, etc., 18% of agencies report using them—although usage is limited. Most current users of these technologies indicate that they intend to use these services more in the future. Eleven percent of agencies are members of networks and 7% are members of clusters/huddles, both of which provide a broad range of services to members helping them realize greater efficiencies.

The use of customer service centers has remained stable since 2004, with about one-third agencies using them for both personal and commercial accounts. The number of personal lines accounts being serviced through them has grown significantly in this timeframe from 29% to 41%. Larger agencies seem to be realizing greater benefits from using customer service centers; in fact, 50% of agencies with more than $1.25 million in revenues use them so that they can concentrate on new sales as well as servicing their most important clients. Overall, however, agency satisfaction with the centers is low and there is not a strong agreement that they satisfy staffing issues or contribute to the efficiency of sales efforts. Only one in 10 agencies that currently don’t use customer service centers plan to start using them in the next year.

Around the Office
Since 2004, the number of employees within agencies has remained constant, with the average agency employing 13.7 people. CSR positions represent the largest number of employees.

White men still dominate the ownership and producer landscapes. But, the terrain is slowly changing. One third of all agencies have at least one female principal, with 9% of agencies having solely females, and 24% having an equal mix of male and female ownership.

Minorities, particularly African-Americans, are underrepresented in the agency universe, especially among agency principals. Only 1.5% of agencies reported having an African-American in this position. Also, only 1.1% of agencies report having an African-American manager, while 10.8% of agencies report minorities employed as CSRs or other support personnel.

When looking for their employees, the majority of agency owners would like to find employees with general business knowledge and experience in areas such as ethics, technology and communication, rather than an in-depth knowledge of the insurance industry. Sixty percent of agencies agree that their carrier partners should offer training for new producers and CSRs.

Technically Speaking
In 1996, just 8% of agencies had Internet connections. Today, agencies must have this technology to work with their carriers and clients, so the study didn’t even ask the question. The study did look at advances in agency technology and their impact on agency efficiencies and found that some of most positive improvements in the past year have been the ability to make real-time inquiries through the agency management system and the advancement of personal lines download capabilities. These impacts on efficiencies and improved workflows have been especially positive for small agencies. Nearly a quarter of all agencies have paperless offices. E-mail, laptops, scanning and desktop faxing are quite common.

Nearly 75% of agencies report that their customers regularly use the Internet to communicate with them or to pay their premiums. Larger agencies report that they are more likely to e-mail their clients than smaller agents. About 25% of agencies report allowing clients to obtain quotes via the Internet.

The cost of technology is one of the most difficult challenges agencies face today, regardless of agency size. Other challenges agencies report include the stresses of dealing with multiple carrier interfaces and Web sites and convincing staff to adopt and learn new technologies.

The vast majority of agents report that they sometimes have to enter the same data more than once when completing an application. Four in 10 state that they always have to do so. This number is up significantly from 2004, especially in personal lines. With the increased focus on technology, it may be that agency principals are simply more cognizant of the frequency of this double-entry or their more tech-savvy colleagues assisted with this part of the survey. Agencies indicate that they would be much more likely to do business with a carrier that utilizes real-time data bridge communications to eliminate the need to enter data multiple times.

Attitudes and Perceptions
Agency owners were asked to evaluate the future of independent agencies and the insurance environment on a wide variety of factors. An overwhelming 87% of agencies feel that finding carriers that maintain their commitment to providing the coverages that the agency’s clients need is very important. Nearly 1/3 of agencies are concerned about carrier solvency. Eighty percent of agencies indicate that continued growth is very important, while 77% note that their use of technology to work with their carriers is critical. Spending money for personnel, technology and other growth factors is important to 74% while 53% express a need to find carriers who will provide support for their marketing efforts.

For more on the 2006 Future One Agency Universe Study, go to www.independentagent.com.

Madelyn Flannagan (madelyn.flannagan@iiaba.net) is Big “I” vice president of education and research.