The future of the insurance agent and independent brokers
Will Fintech disrupt the insurance space?
How will this impact retail agents and brokers?
The implementation of improving technology is a buzz in the insurance world. Every article predicts the disruption by Instech/Fintech companies and eliminating the need for the traditional insurance agent, broker or insurance consultant. Value chain compression is a hot topic.
We have written about the Future of Insurance from the carrier or Reinsurance perspective. But now it is time to look at the broker and agent.
Although we believe the introduction of Fintech will help the industry become more efficient and these new technologies/platforms will add value. We have a few reasons why we believe the insurance agent or broker is here to stay- contrary to popular opinion.
Long lasting Relationship with the customer.
Controlling the content is key in any business and the agents have all the customer control. Most often they attend local charity events, sponsor local little league, are an active part of their local community, etc. this relationship focus seems tough to disrupt overnight.
We doubt insurers will disrupt their distribution model and alienate their long term agents who have the customers eyes/ears/hearts. This wont be a throw the baby out with the bath water approach, if anything it will just be an added distribution platform.
Agents handle many lines of business and independent agents are responsible for production through many carriers, exclusive agents helped build some carriers and are long term partners with these carriers. It would be extremely harsh to abandon the partners who help build your company. A negative of this approach may be carriers might be adversely selected by the agent when he/she cherry picks a book from the carrier that just dropped its agency model.
Agents and brokers have the ability to adapt to new role or service. If agents are less involved in the transitional focus of the purchase, they will evolve to consult on risk management, or joining /forming the right peer to peer insurance groups, or be a point of contact with claims notice and settlement. Did TurboTax eliminate the personal accountant? No, if anything it made the CPA’s job easier.
Customer acquisition costs will be high for new Fintech companies in the first few years. To go from a start up to >2m customers …also it will not happen cheap or overnight for “XYZ Fintech”.
For example, Geico has a large annual marketing budget to maintain and grow its customers. These costs are ultimately is paid by the customers, same will happen with these new start ups. A great platform with the ability to scale and no customers is not a highly valued business. The PE and VC firms backing these start ups are looking for dramatic customer growth to validate their rich valuations and customer acquisition will be expensive.
Vast expertise by traditional model. Agents and brokers have seen and have access to large amount of data to help customers understand the price and the exposure or risk of the customer. Customers don’t have the experience to understand how they can have a $5M loss, a good agent will be able to give them a scenario or explain where the customer is under-insured.
The risk of a poor insurance purchase or under insurance in the event of a loss will be pushed down to consumer. In the event a customer uses the direct purchase model or “do it yourself” model via a new App, the risk of being under insured is borne by the customer. There is no one to blame but yourself for being poorly insured. Although this is technically small change from the current model, previously the agent or broker model provided another form of recovery through Agency’s Errors and Omissions coverage. As an example, this coverage was tremendously valuable for consumers in 2005, when it provided homeowners with the benefits of millions of dollars after hurricane Katrina as it resulted from agents failure to advise their customers about the flood risk in that region. If we have learned anything from the recent Court cases, these technology companies see themselves as “platforms” not advisers, employers, or agents, so we will suspect they will not be quick to volunteer to buy E&O coverage unless mandated by a regulator.
Regulatory hurdles for startups and the industry well insulated by the McCann Ferguson Act. Plus the agency and broker licensing system was established to protect consumers. The issues in the news around the firmZenefits highlights the issues that can occur without regulatory oversight or rapid growth out pacing regulation.
The size of the risk to consumers
As we discussed in this article. Sometimes the individuals’ or business’ largest assets are being protected by insurance. If an individual is looking to protect their largest assets, data suggests they want the advice of an experienced adviser to help them make the right decision. If is a terrible feeling to think you were covered for something and find out after a loss you are not.
Millennials have low excitement for insurance, regardless of distribution platform it will be tough to generate an app that increases the excitement for insurance purchasing. As millennials are also big supporters of the shared economy, the data shows they are buying less assets (cars, houses, boats, etc.) that need insurance protection. So an App or platform designed at an audience buying less insurance seems like it will have a smaller impact then predicted. We believe millennials will adopt to the insurance technology easier if it was sold from platforms they already use as part of their everyday lives (ie. Facebook or Waze)
Not all buyers are bottom price buyers. This is where the experience of an agent can compare the reputations, claims paying ability, and financial strength that a Robo-adviser or app cannot.
Bundling discounts are tough to replicate. These discounts provided by traditional carriers with agency model may be greater than the cost savings Fintech can provide. The traditional agency model has a short term advantage with the ability to bundle/discount.
We are not saying the introduction of new Fintech will have no impact, we have a few articles that outline the importance of tech in the industry. We recognize the impact that PolicyGenius, The Zebra, and Peer to Peer insurance like Lemonade will have — however we think it will not replace the entire industry as many Venture Capital firms are predicting, just act as an added form of distribution.
We recognize the role of the agency system will be constantly evolving and their may be downward pressure on commission and compensation structures. However, we fail to see how the entire agency distribution challenges will be eliminated.
There are industries where people like to see, know and have a relationship with the person selling them the product. For example the jewelry business, although BlueNile.com is a great price check and resource for obtaining information, many people still buy jewelry in person or from a store to ensure the authenticity or the product quality. Since insurance product is a promise to pay, the quality is based upon who your receiving the promise from. Most people want to know, meet or have some point of contact representing that promise when the time comes to file a claim.
The Fintech industry will improve efficiency and make things better for the customers. That’s a good thing and not something to fear.