By Dennis Pillsbury
For years now the independent agent has been placed on the endangered species list in personal lines. Articles have been written predicting the end of independent agent involvement in auto and homeowners insurance as direct writers triumphed completely.
Of course, even these atrabilious prognosticators always included one or two caveats, usually admitting that independent agents would remain important players in the up-scale market because the individuals in that market were willing to pay for the service. That, in and of itself, is an interesting admission for these people to make--that the agent's service is of value. And it is that fundamental premise that has given rise to the micro-insurance company concept, the brain child of Steve Doucette, president of Great Northwest Insurance Company.
As Doucette explains: "We looked at the same equation that had given birth to the direct writers--you don't need all those administrative layers to handle auto, homeowners and BOPs. GEICO cut costs by eliminating some of those layers and some independent agency system companies have experimented with 'alternative' marketing in an effort to penetrate that market, usually bypassing the agent. Our solution to that equation, however, was quite different. We came to the conclusion that it wasn't the agent who was the endangered species; it was the home office and the branch office."
He continues by pointing out what even the most vociferous critics admit, that the local agent offers a significant service advantage. The micro-insurance company concept allows agents to compete cost-effectively with the direct writers while still offering the superior service that has resulted in significant retention of up-scale accounts. Steve adds that their research found that customers preferred to buy insurance on a local basis and that "their reasons for going outside the neighborhood, or to a distant direct mail insurance house, was simply to save money."
It became clear, he says, that what was needed was a way to cut costs while still focusing on the strength of the independent agency system--local representation and service. "What made sense was to move the insurance company into the neighborhood of the customer and to enlarge the role of the independent agent, not lessen it," he affirms.
A major shift in roles
Under the concept, an agency basically becomes the insurance company for auto, homeowners and BOPs. Everything--marketing, underwriting, claims processing, policy issuance and so on--is done at the agency. Great Northwest provides the financial backing and the computer hardware and software that allow the agency to handle all the pieces of the insurance transaction. And Great Northwest itself is extremely lean since its primary function is that of a quality control center. As Steve points out, "There is no home office underwriter; no home office claims staff; no home office mail room; no home office human resource staff."
Implementation basically involves three steps--selection of the agency; appointment of an autonomous underwriting and claims manager in the agency; and a regular audit. And this is where the home office comes in as the quality control center.
Doucette says he views the first step as the most important. "We look for agencies that have a proven history of being able to underwrite and who also view personal lines as an important part of their book of business." He continues by pointing out that one of the reasons the concept is viable is because of the maturing of independent agents into much better business people. Over the last few decades, independent agents have had to deal with all the problems that faced other American businesses, including shrinking margins and the need to exercise careful expense control. The agencies that survived were those that were strong businesses.
The appointments are quasi-exclusive in that competitors in a marketing area are not appointed. "We're looking for the right agents, not a lot of agents," Steve says, noting that in the state of Wisconsin, the company has only about 20 agencies total.
Once an agency is selected, an underwriting and claims manager is appointed in the agency. That person is trained by Great Northwest on site. The individual must have autonomy to make underwriting and claims decisions. That autonomy is spelled out in the contract.
Mentoring the agent's record
The third step in the quality control process is the auditing. The computer system includes electronic early indicators that measure decision patterns. "If those patterns begin to develop red flags, there is a second part to the audit process that includes more interrogation all the way down to on-site physical inspection," Steve says. He continues that these patented systems are designed to identify things in the process itself that will result in poor loss ratios in the future. These systems were developed by looking at expert systems designed for Malcolm Baldridge award-winning manufacturers rather than looking just at the measurements used by insurance companies.
Currently, Great Northwest, which is based in Boise, Idaho, is licensed in Montana, Idaho and Nevada. Plans call for expansion into six additional states over the next 18 months, all centrally located. Doucette anticipates being in 30 states in five years. One of the principal investors in the company is St. Paul. Reinsurance is provided by General Re. Products include personal auto, personal home and uncomplicated commercial P&C coverages.
Low costs, faster service
Doucette continues that the concept already is proving itself. "We now are marketing these products at the same cost factors as GEICO, and we will be lower than they are next year. And we're providing local service. In 90 seconds, a person can have a policy. Claims can be settled immediately. Rework is eliminated. It's a 'one and done' system."
Great Northwest also is creating a preferred provider network of body shops that will be integrated into the system.
Steve sums up by pointing out that "The tremendous resource of talent in the insurance industry is in the agency system. This industry needs the kinds of systems that allow for decentralization and utilizes this talent. We need to empower the people, not the organization."*
©COPYRIGHT: The Rough Notes Magazine, 1998