Over the last two decades, about half of all travel agencies have gone out of business. Those who remain have become specialists in arranging vacations, while those who went out of business, were mainly involved in finding the lowest price for airline tickets. This leaves us with the question: is an insurance agent necessary?
The need for insurance agents
Between 2010 and 2012, despite a significant number of mergers and acquisitions, the number of independent insurance agents in the United States increased from 37,500 to 38,500. Twelve of the eighteen companies that have outperformed their peers in growth and profitability use independent insurance agents.
How is it that two industries, which seem quite similar, have had such dissimilar results in the same economic market?
Agents are Problem Solvers
Perhaps taking a look at what has occurred with the Affordable Care Act offers a partial explanation. In my opinion, much of the fiasco of the last several months could have been avoided, had the government cared enough about the consumer, to include insurance agents in a meaningful way during the sales process. Agents have solved problems created by insurance corporation bureaucracy for years, and could have done the same for the electronic boondoggle created by bureaucrats in Washington, but agents were either excluded or had to work with their hands tied by illogical restrictions. They can’t provide the normal advice they give.
Government and big insurance companies are a lot alike. At times accountability is almost non-existent in both worlds. At other times, the right hand is barely aware that the left hand is part of the same body. Both governmental committees and big corporations have a positive purpose that can be lost in the shuffle of personal careers, quarterly profit reports, and opinion polls.
Without agents to mitigate the day-to-day chaos of the corporate world, people would have become extremely frustrated and disenchanted with the insurance process, just like they have (at least initially) with the purchase process for health insurance for Obamacare.
What Does the Public Think of Agents?
Agents can do marvelous things, yet, how does the public really feel about them?
Let’s start this discussion with a question. Would you want your son or daughter to become an insurance agent?
Unless you are an insurance agent, you probably would not.
If you could pick a profession for your child, it would probably be medicine or engineering. A Gallup poll in December of 2012 indicated only 15% of those surveyed had a “very high” or “high” level of respect for insurance salesmen. This compares to 85% for nurses and 70% for doctors. Members of congress and cars salesmen were notably below insurance salesmen in trustworthiness at 10% and 8%.
The average United States agent made a respectable about $63,000 in 2012. This mean salary is 37% more than the average worker makes in the United States. Further, the job satisfaction is immense in being a trusted advisor who makes a significant positive impact on your customer’s lives. Yet, the profession is not held in esteem.
Perhaps the general public distrust is a derivative of the Hollywood stereotype of insurance agents as commission-centered wind-up toys who wear down your resistance in order to sell you a life insurance contract you don’t need. For example, Ned in the movie “Groundhog Day” attacks Phil with his sales pitch:
“Do you have life insurance, Phil? Because if you do, you could always use a little more, right? I mean, who couldn’t? But you wanna know something? I got the feeling. . .you ain’t got any. Am I right, or am I right? Or am I right? Am I right?”
Progressive’s Flo Is an “Agent”
Thank goodness for Progressive’s spokesperson “Flo”. Flo’s undying exuberance for selling you “just the right amount of insurance” is crammed down the public’s throat in huge doses twenty-four hours a day. She is the quintessential “agent”, even though at times she is pushing people toward Progressive Direct, which is supposedly an agentless company. That’s an oxymoronic logic I find confusing.
I like to think that at least part of the reason Flo is so popular are the years of service that insurance agents have put in serving as a buffer between the corporations who underwrite insurance and the general public.
Progressive has for years published its financial information on their website, including the expense ratio for the two divisions of their company. The expense ratio is the measure of cost efficiency for acquiring a servicing business. Progressive’s expense ratio for placing insurance direct without an agent has been almost exactly the same as it has been with an agent about 21 cents out of every premium dollar, with less than 10 cents going to the agent; some months the direct ratio is even a little higher. In essence, the public has received the Cadillac service of an agent’s involvement at no cost.
I would like Progressive’s (Flo’s) depiction of the average agent a whole lot better if she spent much more effort trying to help the client determine their personal risk and exposures. It’s hard for Flo to do a decent job for the customer in determining which “box” of insurance they should purchase without asking dozens of questions that reveal the customer’s need. Insurance agents use insurance as only one tool for handling risk. They can suggest others ways to mitigate or avoid such risks.
Maybe Flo should take a second or two to ask the buyer if they have a home business, a swimming pool, or unusual architecture? Perhaps she should ask about the ownership of the home or who will be driving the cars. She seems to assume the customer is a married man and a woman with 2.3 kids. In this regard, she is much like the websites that offer insurance to people who really don’t know what they need.
Agents Care About Their Customers
From my observations over many years of working with independent insurance agents, they are very impressive people. They are amazingly resilient. They go to work every day knowing that without fail, someone will do something incredibly stupid and that without the intervention of the agent, this would cause a great deal of angst and financial difficulty for their customer. They know their friends and neighbors will judge their professionalism based on the performance of adjusters, billing clerks, and underwriters who are largely insulated from the insurance buyer. These people are shielded so that they can make the tough underwriting calls needed for the corporation to prosper. I worked for an insurance corporation for over a decade. Had I been more aware of the consequences of my decisions, I would have had a much harder time meeting my corporate goals.
I started in the insurance industry on June 8, 1970. I had been hired as a management trainee after flying to Chicago for an interview. It was a whole new world for me. It was my first time in a plane and first time trying honeydew melon. I thought I had certainly lost any chance of a job when they took me to the executive dining room for lunch and I asked what the green melon was. The flesh of the muskmelons I’d eaten had always been orange. Lucky for me, they still hired me and I began my venture into the world of insurance.
My first day on the job, I was riding with the North Dakota State Agent fieldman. We were working out of the Fargo office until the company could arrange a spot for me in the Minneapolis branch. He took me to a meeting with an agent in Valley City, which is sixty miles west of Fargo, a place not far from where I was raised.
The meeting was with a woman who worked out of her apartment above a J. C. Penney store. I was surprised when looking at the pictures on her wall to see that she was the grandmother of a girl who was in my high school class.
We were there to terminate her contract as an insurance agent with the company. Looking back now, she must have been in her early 70’s. Before we left, she pointed to the wall at pictures of her and past CEOs of the large corporation I represented. She said to me, “Jim, you remember this day. I was once honored as one of your company’s best agents; and now I’m being thrown aside.”
I’ve never forgotten.
As I recall, we were her only company, which meant we were effectively putting her out of business. Of greater concern to her was the fate of her customers. Their policies would be cancelled and, as many of them were past retirement age, it would be hard to replace their auto coverage. Many states now have laws that protect the elderly in such circumstances, but at that time they were in a painful position.
On the way back to Fargo, my mentor explained to me that her agency had become unprofitable because her clientele had aged as she had. He was a true gentleman. He had played football for Notre Dame and was himself only a few years from retirement. “Sometimes,” he said, “the people in New York at our corporate headquarters make us do things that aren’t easy to explain.”
Agent VS a Corporate Employee
Insurance corporations aren’t the “Evil Empire”, but at times they lack a realistic perspective of the world around them. They make quantitative decisions based on insurance statistics. When the public puts themselves into a corporation’s hands for something as important as protecting their assets, they need to realize that creating corporate profits is by far the company’s main goal. Their individual welfare is secondary.
Agents work where the rubber hits the road, so they’re keenly aware of the consequences of a company’s decision to cancel, restrict coverage, or increase a deductible.
Agents are much more creative than the average insurance corporation employee because their creativity is monetarily rewarded rather than questioned. They work in an environment that can implement changes overnight. Their energies are directed toward servicing their customers and developing deep and lasting relationships. Corporations like the ones who promote a smiling “Flo” to get your attention seem to focus more on new business sales than they do on retention, a mistake not commonly found in successful agencies.
Agents have several good reasons to protect their clients’ interest.
1. If the company fails to respond properly in the event of a loss, the unhappy customer will likely find an attorney who will not only sue the insurance company, he will also sue the agency, seeking a settlement or court award, under the agency’s professional liability policy.
2. The agent usually lives locally and will have to see the customer at church, at PTA meetings, or attending a high school football game. The customer likely has many local friends and relatives who are also either current customers of the agency or are potential customers.
3. Property and casualty agents make about 14% of the premium the first year (on average) and about 11% thereafter (on average). Their expense in obtaining a new client is heavily front-loaded. It is commonly held in the property and casualty industry that an agent doesn’t make any profit (on average) until they’ve had a customer for about four and one-half years.
4. It is a matter of pride and job satisfaction for an agent to help a customer select the right insurance and insurance company. An agent’s stock-in-trade is the trust she has developed with her clients. The more trust, the more intimate the relationship. The more intimate the relationship, the better job the agent can do helping her customer identify personal and commercial risk and determining methods to deal with it.
While a corporate employee has an indirect profit motive, customer satisfaction is only a small portion of their overall job. Most corporate employees have such a narrow band of responsibility that they do not grasp the real world implications of their actions. To them, the customer might be so many bytes of data, while to the agent the customer is a real person who needs help with real-life problems.
In order for an agent to help a customer find proper coverage, the customer must trust the agent enough to provide intimate information. The chance of the customer ever trusting a nameless/faceless corporate employee, who is working a company phone bank, to that same degree — is very low.
The News of Your Death Has Been Exaggerated
Many industry pundits have predicted the demise of the insurance agent. Peter Lewis, who was responsible for much of the innovation in the industry during the last half-decade, predicted forty-six years ago that the independent agent would go away. He recently died, but before he did he renewed that prediction, once again missing the heart of the issue.
He believed that people buy insurance based on price. This may be true for those with limited personal assets and simple insurance situations. Those people with extensive assets to protect and a degree of complexity to their insurance needs want an insurance agent to hold accountable. Further, the number one factor for the average person’s buying decision is trust, followed by suitability of coverage, followed by belief there will be good communication, and then price. Many of these aspects require the personal attention and care of an independent insurance agent.
Forty years ago when I wanted to fly somewhere, I called my travel agent. They hand-delivered my tickets to my office within hours. I didn’t have the option of buying direct without making a trip to the airport and putting up with a usually surly airline employee.
Insurance is much, much more complicated than travel. The general pubic wisely has elected to keep a local, trusted advisor who is a problem solver and who can be held accountable. The general public is well served by insurance agents and will continue to be well served far into the future.
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Enhanced Insurance is not written by attorneys. If you’re looking for legal advice, you need to contact a lawyer. Further, insurance practices and forms change constantly and are varied from state to state. For definitive answers in your area, contact a local agent.
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