Why the Shotgun Approach Is Nearing Obsoletion

On the one hand, the shotgun approach to selling insurance has an incredibly bright future with the automated quoting systems available to the public (see Policygenius’ Series D round of $100 million, pitchbook.com). IT makes this approach less expensive and scalable.

These automated systems are just too inexpensive, and humans are too expensive. The automated systems will win.

Carriers that are still dependent — either partially or entirely — on humans are feeling intense pressure to improve their results. They have identified several important processes by which they can reduce their expense ratios. While much of the public focus is on how insurance will be sold to the public cheaply and directly and how a couple of innovative carriers have spent big money on behavioral economics, less focus has been applied to the agent-carrier relationship.

The smartest carriers with the best execution have already built full underwriting systems employing machine learning and can effectively pre-fill applications. When carriers pre-fill an application they have also pre-rated it (unless they’ve screwed something up). The expense savings and improved underwriting is probably worth between two and five percentage points. That may not sound like a lot, but it is a huge savings in the insurance carrier world. For a few carriers on the fence, three percentage points is quite possibly the difference between remaining viable and being sold.

Pre-filling and pre-underwriting may almost certainly over time have a two-fold savings.

The first and most obvious savings involves the automation, accuracy, time savings, etc.

The second is that carriers will not need to pay agents to complete applications or upfront underwrite. The savings, all else being equal, will therefore likely be on the higher end of the 2% to 5% range. All things won’t remain the same, however, because competition will require carriers to cut rates and offer better coverages with some of those savings.

This means carriers arriving late to the party will lose and they will lose terribly. Not only will their rates and coverages be less competitive, their growth will be cut as they lose clients, and the clients they keep may be the wrong clients. Adverse selection will likely occur.

The market is already clearly showing how some carriers in some lines are accelerating their growth and profits simultaneously. While on the other hand, some carriers’ premiums and loss ratios are deteriorating simultaneously.

If you are a distributor, would it make sense to know which carriers are likely to be the winners and which are likely to be the losers?

Shotgun Approach

Along the lines of additional expense savings, the shotgun approach will fail relative to the winning carriers. They already possess software to track submissions, the quality of those submissions, whether the broker in its entirety provides quality submissions, and whether the broker submitting prospects that regularly meet their appetite and underwriting guidelines. The not so current carriers lack this software.

The time savings, to the carriers who have the software is huge. They can decide then to accommodate a high cost, low return model by continuing to deal with shotgunners blocking markets or they can work with human distributors who focus on quality at a much lower cost and far higher ROI. By saving time, the carriers can also invest in more growth, better relationships, or simply pass on savings to insureds through lower premiums.

The logic is pretty much rock solid, but most agents will ignore it. The model of shotgunning inadequate submissions is very expensive to agencies and carriers, and it is often indicative of incompetent agents and poor risks. If the account is a quality account handled by a competent agent, a quality submission will be made to no more than three known markets that are a good fit and where alignment will exist for all parties. As I stated at the beginning of this article, high cost low quality strategies will not work because the machines will win that war.

Quality Counter

For human agents, the only way to counter is with quality, quality, quality. Whether it be quality submissions and quotes, quality clients, or quality technical knowledge — likely all three. Quality is inherent to the winning model dependent on human sales and touches. It is very easy to scale selling the wrong coverages or inadequate coverages to the masses who treat all insurance as a commodity. If human agents are to win, humans need to play in the part of the market where quality actually matters.

To that extent, coverage knowledge and sales ability all have to improve dramatically. The coverages being sold regularly, based on my E&O audits and teaching of coverage classes, are just too inadequate for the modern world. A large part of the commercial insurance world will benefit from an entirely different perspective of treating insurance as a supply chain factor. Coming from this angle, one applies a much more holistic approach.

For consumers who can’t see past the insurance premium invoice, holistic approaches won’t work. Many producers, carriers, insurtechs and others can’t see very far into the future either, so these parties are all made for each other.

Those folks’ futures will be limited, at least for the human agents and carriers dependent on humans in a low-quality environment. Not only will computers sell the wrong coverages more cheaply, quality human organizations that combine quality analytics with old-fashioned discipline will likely be less expensive, too.

For example, my consulting work shows that just old-fashioned discipline, especially while using my analytics can save 20% on processing costs.

A few other old-fashioned factors I strongly recommend usually increase sales by about 10%. Combine that with the really fancy analytic systems using behavioral economics and sales increase at a far lower cost to carriers and distributors, perhaps by as much as an initial 40% cost savings and an additional 10% initial growth. In some lines, there exists interesting new risk management technology that can substantially reduce the probability of liability claims and the severity of claims. This reduces agencies’ E&O exposure and carriers’ loss ratios.

Therefore, if a carrier reduces its commission rates from 13% to 9% as some carriers are planning on doing, an agency operating in a high expense, shotgun environment will lose quickly because their commissions will decrease by 30%. They won’t survive.

However, an agent who has achieved significant efficiency can operate profitably at 9%. Better yet, their compensation likely won’t even decrease to 9% because their carriers and clients are likely to pay more for their services. Their profit margins are likely to increase and as their competitors fall by the wayside, their growth will accelerate. How many will succeed, I do not know. But I doubt any of the high cost, low quality shotgun independent agents will survive. The odds are obvious.

For anyone reading this article and thinking this forecast is theoretical, it is not. My firm has already thoroughly tested it in live, real-world agencies with every point advocated and their success far exceeded industry norms.

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

Topics Carriers Agencies