Reviewing Historic Predictions

Back around 2013 (the copy I have is not dated, so I might be off a year), McKinsey & Company published a study that caused some angst within the industry. The study, “Agents of the Future: The Evolution of Property and Casualty Insurance Distribution,” posited that agents had long been local, and by inference, small.

Then they became controversial in the opening paragraph by noting how carriers and consumers no longer value, at least to the same extent, the historic benefits of the local agent who knew their customers well and generally provided good advice.

Knowing customers well had served carriers and consumers well for 100 years.

From a carrier’s perspective, the upfront underwriting these agents provided was literally invaluable when done well. From a customer’s perspective, quality advice and placing them with the right carrier was also invaluable although less visible.

McKinsey states on the first page this local knowledge had diminishing value because carriers were developing predictive modeling, an early form of AI in many ways, so they didn’t need the upfront underwriting and, therefore, didn’t need to pay for it. And consumers were effectively conditioned that insurance, particularly auto insurance, which is the largest line, was nothing more than a commodity.

The report suggested changes should have already happened, but the authors were seeing signs the changes were accelerating. They stated the following:

“Within five to 10 years:

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Most personal lines and small commercial customers will interact with their agents and carriers across the full range of channels: in-person, through mobile devices, and by phone, Internet and Video conference.

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Carriers will continue to use technology to increase their direct interaction with the primary customer, delivering more consistent service at a lower cost.

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Agents will be compensated only for the unique value they deliver to the customer and the carrier.

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Carrier agent management models in both the IA and Exclusive channels will focus resources on those agents that deliver profitable business.

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Winning agents will deliver tailored and relevant expertise and excel at multichannel marketing, while increasing their scale and operational efficiency.”

If the authors were surprised these changes haven’t already occurred, they should be floored because the last three outcomes haven’t come close to happening in the 10-year window they forecast!

I don’t possess any true facts showing most personal lines and small commercial customers interact across the full range of channels. It seems to me most people like two channels, not three and not one, and preferences vary materially. I don’t have any facts to prove I’m right, just anecdotal evidence in working with agents every day. Because preferences vary materially, agents need to be able to work across all modes, but any given customer doesn’t communicate using all modes.

Use of Technology

Carriers are definitely using more technology. Whether the use of such technology is delivering more consistent service at a lower cost is highly debatable. Similarly, whether carrier predictive modeling systems work is also debatable.

To prove the former point, per AM Best’s Aggregates & Averages for the year 2012, the P&C industry’s underwriting expense ratio excluding commission expense was 18.0%. The commission expense was 10.2%. Rent/Equipment was 1.8%, and All Other expense was 4.8%. (I don’t know whether predictive modeling costs are in Equipment or All Other.)

The same report for 2023 (published in 2024) states that underwriting expense excluding commission expense was 14.2%. This is a huge decrease. Commission expense increased to 10.8%. Rent/Equipment expense decreased to 1.6%, and All Other expense decreased to 3.4%.

Carriers have become, other than commission expense, much more efficient. But has predictive modeling improved loss ratios? Per the McKinsey report, much of the focus on predictive modeling would be personal auto. The five-year private passenger auto liability loss ratio was 68.2% in the year ending 2023. The five-year average ending in 2012 was 65.2%! It’s a good thing carriers saved so much money so they could afford the higher loss ratio.

Predictive Predictions

Two key points McKinsey made have not come to fruition. Predictive modeling is not making the industry’s largest line more profitable from a loss ratio perspective. This is likely due to multiple factors including how the industry rarely manages to make an underwriting profit because of price competition. What may have occurred is that predictive modeling has worked to minimize rate increases.

More likely what has happened–and the evidence is strong for this–is that a handful of carriers have built predictive modeling software that works so well they don’t really need underwriters or agents. But most carriers have failed to do the same. The results I analyze in detail, carrier by carrier, show the ones who have the systems are eating the others’ lunches.

Second, carriers still believe in paying all agents the same regardless of the agent’s true financial contribution. In fact, it is obvious they are paying some distributors even more now, and yet many of those distributors’ value proposition has deteriorated. They’re just large enough to demand more money, and the carriers may pay because they haven’t developed quality systems which otherwise would have met McKinsey’s forecast.

Slow Mo

Another aspect is just how slowly this industry moves. The world may be moving faster and faster, but not this industry. Part of the reason might be how carrier boards of directors are designed and chosen, especially at the mutual carriers. The pace of change may be accelerating now because so many mutuals got caught with their pants down when interest rates increased almost simultaneously with the realization that they should never have been offering property reinsurance–much less property reinsurance with little geographic diversification. But maybe this acceleration is best described as we are now simply moving at a faster turtle’s pace.

And while 10 years later, McKinsey’s fifth bullet point hasn’t really been fully realized, undoubtedly, the winning strategy for traditional agents and brokers is still to be a professional who knows their customers and provides solid, educated advice. I do recommend changing the compensation model so the client pays you rather than the carrier. Note though: if the distributor is a roll-up acquirer, the traditional model is too expensive, which creates an even more lucrative opportunity for the traditional agent with patience.

Burand is the founder and owner of Burand & Associates LLC based in Pueblo, Colo. Phone: 719-485-3868. E-mail: chris@burand-associates.com.

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