Released by McKinsey & Company in June, “Agents of the Future: The Evolution of Property and Casualty Insurance Distribution” provides useful guidance for how agencies can position themselves for success, while raising several issues for carrier executives regarding management and compensation for the future distribution force.

Focusing particularly on local agency distribution (including both independent agents and exclusive agents), the report identifies a “gradual shift” occurring in the “value that carriers and customers (both retail and small business) place on many activities traditionally performed by local agents.” According to McKinsey & Company, advances in predictive models are making the agent’s role “as the front line in risk selection and pricing” obsolete—at least for personal auto insurance, though not yet for homeowners and small commercial.

But “Agents of the Future” fails to consider a few key factors that solidify the future importance of the independent agent.

Agency Distribution Trends

The report argues that where the agent was once “the face of the insurance brand,” that is no longer the case since customers are increasingly using multiple channels to connect carriers. The carrier’s brand continues to gain predominance thanks to extensive advertising and online capabilities for insureds, including contact centers for client inquiries.

Further, auto insurance—which McKinsey & Company says accounts for 70% of personal lines premiums—“is fast becoming commoditized.” The report says that most agents “have neither the scale nor operational efficiency to profitably sell a commodity (or even a near-commodity).” McKinsey & Company sums up these trends as “The End of an Era for the Local Insurance Agent,” arguing that “only a subset of current agents will transition successfully.”

But the report does not distinguish between the impacts of these trends on exclusive agents vs. independent agents, and McKinsey & Company does not even mention an important recent trend: More exclusive agents are moving to become independent agents in order to better position themselves to offer their clients a broader array of markets.

And while “Agents of the Future” anticipates the local agency population waning in coming years, the report observes that “these trends have not yet led to significant change in the local insurance agent landscape.” In fact, the Big “I” Agency Universe Study found that the number of independent agencies has actually grown from 37,500 to 38,500 between 2010 and 2012, for the first time in several years.

Finally, agents can successfully counter the emerging perception of auto insurance as a commodity by “going opposite” with their marketing strategy, taking back personal lines in the process.

The continuing strength of the agency force results from two factors that McKinsey & Company fails to acknowledge in its report: the continuing importance of personal relationships in insurance (agents have them; most carriers don’t), and the greater trust consumers place in individuals they personally know and do business with, as compared to large institutions.

Predictions and Recommendations

Over the next 5 or 10 years, McKinsey & Company predicts that most personal lines and small commercial customers “will interact with their agents and carriers across the full range of channels,” including mobile, Internet, video conference, phone and in person.

While carriers “will continue to use technology to increase their direct interaction with the primary customer,” allowing them to deliver more consistent service at lower costs, “agents will be compensated only for the unique value they deliver to the customer and the carrier.”

According to “Agents of the Future,” that means successful agents will need to “deliver tailored and relevant expertise and excel at multichannel marketing, while increasing their scale and operational efficiency.” But many agents are “not currently positioned to succeed in a world where scale and operational efficiency, sophisticated marketing tactics and deep product expertise are critical,” says McKinsey & Company.

But the agent still has plenty of opportunity to thrive. In their report, McKinsey & Company offers several recommendations for how agency principals can keep up with changing times:

• Develop a value proposition that is compelling for both carriers and consumers
• Define and reach target markets, rather than just being a generalist in the local market 
• Increase digital presence
• Be more flexible in communication by using the tools clients prefer, including social media
• Develop new ways to get in front of your audience, both to locate new prospects and reach out to existing clients
• Deliver deeper expertise than the general information clients can simply find on the internet (this might mean bundled insurance packages for personal lines and industry-tailored advice for small commercial risks)
• Use technology to do more with less (increase operational efficiency)
• Increase scale, whether through organic growth, mergers, banding together, clustering or outsourcing certain functions
• Search for new revenue sources

The fast-changing environment of the insurance industry will also impact agent-carrier relationships moving forward. Regardless of how independent agencies choose to approach the evolving landscape, it is obvious that in order to ensure long-term survival, they must take steps to become agencies of tomorrow, today. 

Jeff Yates is executive director of the Agents Council for Technology.