In the summer of 2016, I gave a presentation to insurance distributor related executives that was the epitome of the “Come to Jesus” moment. That presentation remains the hardest I’ve ever given because I knew the audience was going to viscerally react. I knew they were going to circle the wagons and completely reject reality. They were going to don denial as if they were putting on a helmet.
I reviewed that presentation to learn if I went too far, didn’t go far enough, or was completely wrong.
At the time, Zenefits, The Zebra, Lemonaid, Next, CoverWallet, Trov, CoverHound, Insureon, AssureStart, and Berkshire Hathaway’s Direct Insurance Company were all getting started and most had significant investment capital behind them. A large portion, sometimes 100%, of the capital was from other well-known insurance companies. These were threats to agents because they were promising services and more transparency that agents generally didn’t provide. Moreover, they had a lot of money behind them.
I suggested that regular agents were at a disadvantage because these companies spent capital rather than revenue and that gave them the opportunity to spend more than regular agents to get business. My point was accurate but wrong in some ways. It turned out the bigger threat was to carriers.
My next point was that carriers would become significant competitors to agents. This has happened but from an interesting angle. The carriers that provided the start-up capital for these virtual agents were indeed competitors. But the major change again affected other carriers. The reinsurers in particular seemed to have realized that a large proportion of regular carriers were mismanaged. Rather than selling reinsurance at the same price to them, they may have reduced the amount of capital available to traditional reinsurance and reallocated those funds to new markets, especially in the MGA/DUA world.
In this hard market, the winners are these alternative markets and surplus lines. The admitted carriers’ growth rate has been about industry standard growth, at best. Almost all true net organic growth (it drives me up the wall to read analysts identifying rate increases as “organic” growth – that’s hiding reality) has been in surplus lines for commercial insurance.
I suggested the development of amazing risk management and loss control products would reduce the need for traditional insurance. This has happened but other forces were factors too. The best example is how soft the workers’ compensation market has been in the last ten years. The work environment is much safer today.
But some of the other loss control devices which were obvious improvements haven’t gone far. This makes me wonder if, because so many carriers’ only “organic” growth is rate inflation, they really do not want to fully credit safety improvements on structures in particular because then, if widely adopted, the result would be deflation? The insurance industry, both carriers and distributors, largely work on the antiquated but enriching cost-plus model where they make a profit no matter how much something costs. In other words, if lost costs increase, they get rate permission to increase rates. The more premium that exists, assuming the number of shareholders remains steady, the better the C-suite looks and rate increases rather than safety might just be the better selfish solution. I’m sure this is just a wayward thought but one I should have offered in that presentation.
I also suggested that carriers would reduce agency commissions. They should have by now, but they haven’t. A.M. Best released an important study early in 2024 showing commission expense has increased. It is now more than 50% of some carriers’ total underwriting expense! What happened?
My theory is that between the consolidation of distributors through acquisitions and networks, the tail is now convincingly wagging the dog. Most carriers do not offer anything all that distinctive. Many do understand their lack of truly tangible competitive advantages so to avoid losing business to these very large distributors, rather than fixing the problem, they pay them more money. There are however a few carriers who have highly distinctive advantages. My research today proves this and their commission expense is far lower than normal.
My key point though was that the number of traditional agencies, agencies that participate in education programs and association meetings and are locally owned/managed, would decrease significantly. That has happened. The offset has been thousands of start-ups but almost all within a network environment because carriers refuse to think through how they can offset their concentration of risk by sponsoring start-ups like they used to do 40-50 years ago.
I then predicted the financial pressures supporting organizations would incur and I was dead-on about this, though the audience even more aggressively rejected this prediction.
Overall, my predictions were correct but flawed in two ways. The first was how the start-ups, funded mostly by carriers, especially reinsurers behind the scenes, would cause more disruption at the distributor level. But especially with their inside carrier-level knowledge, aided by their investors being reinsurers, the disruption took another turn aimed at carriers. Old, out-of-date carriers were the easier targets.
Second, this industry moves so slowly I still cannot believe some of the inevitable outcomes haven’t happened. I came to this industry from IBM. When I walked into the insurance company office the first day 35 years ago, and the carrier for whom I worked was one of the more advanced in many ways, it was obvious the carrier was 20 years behind in technology and thinking. This industry is still behind. Part of its slowness is endemic to insurance because this industry does need to move somewhat slowly, but not this slow. Its savior is that P&C insurance is mostly mandated, a de facto public utility, with slow regulators too.
I think change is finally accelerating mostly because a handful of carriers have developed far better underwriting models than anyone else, enabling them to grow far faster while remaining profitable. They possess tangible competitive advantages enabling them to pay agents less money. One way or the other then, competitors will finally catch up or lose the business. Either way, the dogs might wag the tail again in the foreseeable future.
NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.
None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.
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