Are networks the distribution channel of the future?
While the debate about online insurance sales versus in-person agents isn’t particularly novel, it has escalated with the rise of “Insurtech” as an attractive investment sector and the emergence of new, more robust online carriers and insurance markets.
Absent from this ongoing discussion are networks. At a fundamental level, insurance networks provide their agency members the opportunity to scale, which is necessary to survive. As in any industry, a scalable agency will not only grow, but its profits will increase at a greater margin.
For network members, agency revenues are rising, net margins are growing, capabilities and capacity are increasing, yet they aren’t spending more money.
Given the centuries-old insurance industry, agency networks are a relatively new model. Traditionally the industry has recognized independent and captive as the only agency distribution channels. Today there is also a distinctive network distribution channel. Many carriers agree that captive, independent, and networks are three separate channels.
You’ve heard many different terms used to define a group of agencies that gather to share carrier access and other resources. Terms include cluster, aggregator, network, marketing organization and cooperative. These business models and the benefits and services they provide vary greatly. Depending on location, product focus, and size, networks need to operate differently. A commonality is that networks can and do provide more than market access. Agents need to carefully evaluate contracts to fully understand the network economic relationship.
We work daily with agency network members who have effective marketing tactics, robust products and carriers, high retention, low loss ratios, and excellent contingencies, and who are very tech savvy. Their overall expenses are less than or comparable to industry standards, and they can make more money being a member of a network. That is scale in action. For network members, agency revenues are rising, net margins are growing, capabilities and capacity are increasing, yet they aren’t spending more money.
A year ago we conducted an informal survey among networks and carriers. The results showed that networks are appreciated by their carrier partners, yet there is ample room to evolve, enhance and understand the relationships. The desire is not to create uniformity in the network model but to better meet the opportunities and needs of the market.
Eighty percent of the carriers surveyed see networks being a bigger part of their distribution strategy in the future, as networks provide speed when entering new markets and partnerships for expanding products. The agent data, screening and training performed by networks provide a clear value to carriers; however, these benefits were not fully understood by the carriers that participated in this survey.
Half of the carriers surveyed want networks to improve the management of small agencies and provide better training and education on products and services. The other half said they’d like to see improvement in the areas of underwriting profit and data gathering in their agency plant. We found that both carriers and networks are interested in scaling technology, data, speed and education.
The networks surveyed said the most critical factors for their future success are: (1) technology and data management; (2) carrier relationships and products; and (3) helping members grow and perpetuate. Improved commissions and profit-sharing potential are strong value propositions that networks can offer members. In addition to quantitative benefits, many networks provide credibility by affiliation to the member agencies.
Another benefit of being part of a network is the accountability among members to keep each other honest with strategic planning, management and growth. Peer relationships with similar-sized and like-minded agents provide energy, ongoing relationships and valuable conversations. This bit of soft infrastructure is important, as are the obvious market access, stability in profit sharing, technology, training and other quantifiable benefits of a network.
Networks reinforce and encourage action, such as marketing new products, perpetuation and agency management. Many agents know about the new products available but aren’t putting that knowledge into action. Are they taking the steps necessary for agency perpetuation? Often, independent agents appreciate the management support they receive from networks.
Many independent agencies perform well on their own, absent any network-type relationship. Such agencies have grown and developed the strategic discipline to thrive. The success of these agencies will surely continue; yet a much larger number of agencies will perform better as members of a network.
Agencies are adapting their operating models to be modern and relevant for decades to come. Clients and carriers continue to value the in-person agent. Networks have a vital role in the distribution model.
Many online insurance providers have been challenged by the complexity of the product, customer acquisition methods and overall market acceptance. Indeed, there has been enormous progress in online insurance sales. At the same time, networks have evolved to provide agents the tools they need to scale and succeed.
The conversation about the future of insurance distribution is not complete without acknowledgment of the agency network model.
The author
Kelly Drouillard is general manager of insurance lending at Live Oak Bank. You can reach her at Kelly.Drouillard@LiveOakBank.com.
