Silt in the Distribution Channel

Our industry suffers from major inefficiencies.  Some are imposed from the outside, like fifty state regulation and reporting for example. Others are self inflicted. One of the largest, and judging by results of efforts over the past 20 years to solve it, most intractable self-imposed inefficiencies, is the duplication of cost and effort which characterizes the relationship between independent agents/brokers and carriers.  Simply put, those carriers that rely on independent agents or brokers as their major distribution channel are involved in a complex set of duplicative and labyrinthine relationships.

Here are some facts to consider:

·                    the “average” independent agency sells products on behalf of 6 – 10 carriers.  Each carrier system has different data requirements and proprietary interfaces.

·                    the carrier deals with hundreds or even thousands of independent agencies.

·                    agencies may:

o       vary in size from a “one man operation” in a small rural community to a sophisticated business generating tens of millions of dollars in annual premiums

o       write varying books of business

o       provide varying levels of service to their customers

o       operate on an agency bill, direct bill or hybrid cash flow model

o       run their back office on one of several different flavors of agency management system (AMS, meant in the generic sense and not to be confused with the AMS vendor of the same name)

·                    both agent and carrier keep data that represents the insured and their covered risks.  Data edit, validation and storage requirements between systems differs and is represented by different file formats.

·                    there are data standards both paper and electronic, which allow for data exchange (this is a large part of what ACORD does), but the standards don’t cover all transactions for all lines of business and anyway the standard is often the lowest common denominator between agent and carrier, with many carriers requiring a “supplement” to gather all the data they need for rating and underwriting.

So, from a technician’s viewpoint this is a classic unresolved many-to-many relationship with major data and function duplication.  More importantly, from a CEO’s viewpoint it is a multi-billion dollar drag on the industry. Carriers pay in the order of 15 – 20% of written premium to an agent for placing and servicing business.  Some significant portion of that money is spent doing tasks, and entering and storing data which will be repeated at the carrier, and possibly again at the agency.

From a simplified process viewpoint the capture and confirmation of a piece of new business can look like this:

·                    prospective customer (insured) places inquiry to agency about coverage.  Agency gathers some risk facts (amount of data can vary from minimal for a “quick quote” to a full application; the full application will be required eventually) and stores them in their back office AMS.

o                agency presents data to a number of appropriate carriers for a quote.  This usually involves either agent or carrier entering quote data into carrier system(s).

·                    agent may or may not discuss quote with representatives of multiple carriers.

·                    agent discusses resulting quotes with insured and recommends a carrier based on the combination of coverage and price (at least those investigated by Elliott Spitzer).

·                    agent may now submit either a full quote request or an application for insurance.  This requires additional data entry on the AMS, the carrier system or, often, both.

·                    the carrier reviews the application, orders and reviews various underwriting reports such as driver, credit and claim history, and either accepts or declines.  If carrier A declines the risk the agent now has to repeat the process with carrier B.

·                    when the carrier accepts the risk the agent may issue a “binder”, or proof of insurance to the insured.

·                    the carrier issues the new business policy, creating lots of paper (sometimes electronic but not always) and a final premium.

·                    the agent updates their records to reflect the final coverages and premium

·                    agent receives either one or two copies of the policy (insuring agreement) depending on whether a copy is mailed directly to the insured by the carrier.  In either case there are now at least three copies of the policy in existence – carrier, agent and insured (four or more if there are lien holders or other interested parties).

Please consider the following points about the “process” as described:

·                    this is a SIMPLIFIED version of events; all kinds of tactical whirligigs based on phone calls, faxes and sticky notes have been excluded in consideration of those readers of a sensitive disposition (welcome to the dark and arcane world of the “Underwriting Tech”).

·                    it only covers new business.  Endorsement and renewal processing are just as convoluted and inefficient in their own peculiar ways.  And don’t even ask about billing.

·                    By way of contrast, compare the “model” outlined above, which may take several days or even weeks to complete, with 1-800-GEICO, where “15 minutes can save you 15% or more”.  Those of you from the agency/company interface world know that this is somewhat of an unfair example, based as it is on a personal lines model, but it’s my blog and I’m looking for dramatic effect here.

So, this whole agent/carrier distribution channel sounds ripe for rationalization and automation doesn’t it?  You bet, and the fact is that smart people have been working on the problem for twenty years.  This is what the “Agency Interface” group in your IT department does for a living.  So what have they achieved?  Well, the results, like the problem, vary across lines of business, functions and markets.  Suffice it to say that the problem is still in search of other than tactical, point solutions.  So, let’s go and get something for this headache we have given ourselves thinking about this mess, and return to the “solutions” part of the story as a subsequent and exciting installment.

Y’all come back now.

Comments

[Niraj Juneja]

A good documentation of the current process and a simplified process.

But this is no discovery for the carriers they already know about this. Any thoughts on why we are where we are as an industry.

Check out my analysis at:
http://www.gandalf-lab.com/blog/2007/01/why-is-pc-insurance-business.html

[Bill Garvey]

You had me worried for a minute, George. I thought you were going to suggest the dissolution of the independent agency channel due to its myriad of inefficiencies. I'm glad you didn't despite how effective GEICO and its mono-line might be. Call me a dinosaur, but I beleive independent agencies are here to stay. Travel agents...doomed.

I also have a wild notion that too much automation of the "complex set of duplicative and labyrinthine relationships" may erode what is essentially the value of the bond between agents and insurers, that is, the many points of human contact, however inefficient, cement the rapport that may (although hard to measure) bring further business to an insurer whose distribution channel is the independent agent.

Yes, "Agency Interface" folks are busy, and have made great strides. I am a heretic as an IT guy to point out the very impersonal words "Agency Interface" may one day haunt our industry... IF we can't figure out how to replace one of those words with "Relationship."

Bill Garvey