It's a Question of Loyalty

IT'S A QUESTION OF LOYALTY

Latest Conning study is criticized by IIAA president

By Phil Zinkewicz

roadsign The question of whether traditional agency property casualty insurance companies are truly loyal to the independent agency system has surfaced again, this time as the result of a recently released study by Conning & Co., based in Hartford, Connecticut. The study, titled Property-Casualty Distribution Channel Strategies--Wiping The Slate Clean, is authored by Nancy Carini, assistant vice president of Conning. It says that insurers, rather than sticking to their traditional methods of selling insurance, are experimenting with multiple distribution channels. The Independent Insurance Agents of America (IIAA) agrees with the report that insurers are tinkering with alternative distribution, but it questions the report's conclusions about what the effects of alternative distribution systems will be.

"Conning's implication that these experiments equate an erosion of the independent agency system is a real stretch," said Bud Wilson, IIAA president. "In fact we see companies of all kinds looking to expand the business they write through agents."

"In the past," says Carini, "most agency writers used agents or brokers, while direct writers used captive agents, salaried employees, the phone or mail. Life was straightforward within a company's distribution channel. Do it well, do it consistently, and stick to your knitting. Today, distribution is changing for both personal and commercial lines--where multiple distribution channels are being used by some. The shift in the way insurers are thinking about distribution has been embraced by only a few, but talked about by many."

Carini says that insurers that are experimenting with multiple distribution channels are "taking some heat" in the marketplace, and heat is certainly what emanated from the halls of the IIAA recently.

This is surely not the first time that the Big "I" has dealt with the issue of a traditional agency company experimenting with alternatives to the independent agency system. In the mid-70s, the Insurance Co. of North America (now Cigna) announced that it would experiment with direct writing auto insurance in Indiana. The roar of protest that came from the Big "I" (then the National Association of Independent Agents) could be heard throughout the entire insurance industry. Agency insurers were quick to re-state their loyalty to the agency system, although some were secretly considering such experiments themselves.

But the Indiana experiment failed, primarily because the market was not ready for such a change, and all became right with the world once more. Today, however, market conditions are quite different as the Conning study points out.

In its summary and conclusions, the study says that conditions in today's marketplace demand that all companies make changes in the way they do business to meet the needs of a changing customer base and that insurance is no exception. "Today, there is a cautious yet calculated revolution going on within the property-casualty insurance industry," says the study. "Distribution channels are being mixed and matched. They are being tested and then retained or discarded."

sign2 The study summarizes thus:

* The two traditional classifications of exclusive distribution--agency writers and direct writers--do not fit all insurers anymore.

* The use of multiple distribution channels may be further along than anyone suspected. The concept is a strategic issue that all insurers must confront or risk being left behind. The actual number of insurers that are mixing distribution channels is growing. New ones are being added to the list each month.

* Agents and brokers continue to be the preferred channel of distribution for commercial lines business. MGAs are playing an increasingly significant role in commercial lines distribution after a decline in popularity during the 1980s because of some MGA-related insurer losses of significant size and some insolvencies.

* Direct access in personal lines is here to stay and is on the rise.

* Use of direct access in commercial lines distribution has not yet taken root in the industry, but our perception is that the small commercial market--and perhaps the middle commercial market--will see more of this type of activity in the future.

* It is time to stop battling about distribution channels and let the customer be the focal point.

Says the Conning study: "Insurers that are moving into the use of multiple distribution channels are asking themselves:'What does the customer want?' They recognize that customer choice should be readdressed today in light of a changing customer base, technological advances, heightened competition and a maturing industry. For those who are willing to change and take risks, we suggest a prospector model for selling property and casualty insurance. It supports the idea that distribution is a two-way street. From the customer's perspective, the benefit is choice. From the insurer's perspective, the benefit is access, with the customer being the primary focus. Emphasis is on segmenting the population in such a way that the channel of choice is available to the customers the insurers want to serve. But segmenting the most desirable customers may cut across several distribution preferences, thus more distribution channels need to be offered," says Conning.

Bud Wilson, president of the IIAA, said that he disagrees with the study on a number of points. "The report claims that that captive agency companies and companies with blended distribution will either decrease or hold the number of independent agents selling their products," said Wilson. "Yet, IIAA has been told by such companies as MetLife, Nationwide and Allstate that they will be growing their agency forces and the business they write."

Furthermore, said Wilson, the bulk of personal lines marketshare that national agency companies have lost in the last decade has been picked up not by direct response companies but by regional agency and captive agency insurers--reinforcing the continued value that customers place on the role of an insurance advisor. Wilson said that Conning's study implies that customer preference is at the bottom of insurers' experimentations with multiple distribution channels. Yet, he said, the study's findings indicate that insurers are using multiple distribution channels because they are merely "experimenting" or attempting cost savings.

Said Wilson: "Companies moving towards other methods of distribution should not assume that their agency business will remain steady as they focus on other means. Agents, too, will be forced to make other business decisions and they will choose to partner with those companies that place the most value on agents in the insurance buying process."

However, when asked about Wilson's response to the survey, Carini said that this study was one in a series on the use of multiple distribution channels. The previous study, she said, talked about agents fighting back. This latest one was a study of insurers' views of the matter. They, she said, reported that their customers wanted to have a choice, leading to their consideration of multiple distribution channels. *