A direct trend: as more carriers turn to direct sales, agents are finding ways to keep themselves in the mix.

Key Points

* Insurance companies are increasingly using multiple sales channels, particularly direct sales, to drive distribution.

* Independent agents have to compete with the big carriers' big advertising budgets and Internet savvy to remain viable.

* Many large carriers are providing lower prices by cutting agents and brokers from the distribution channel.

HEAD TO HEAD: George Yates, president of independent personal lines agency Dayton, Ritz & Osborne, says some independent agencies are competing price-wise with the big carriers by using the Internet to their advantage.

George Yates is used to dealing with high-net-worth clients. As president of independent personal lines agency Dayton, Ritz & Osborne of East Hampton and Bridgehampton, Long Island, Yates custom designs auto and homeowners insurance products for the wealthy.

And so it came as a bit of a surprise when he discovered that a faithful client one who dallies in hedge funds bought his car insurance over the Internet. While it was the client's intention to get the best price, the move to direct sales online left him with insufficient auto coverage: too much physical damage coverage and not enough liability.

"I think some people prefer to buy their products strictly on basis of price. They'll find the price they want to Pay through a lot of research, including Internet research," Yates said."What they don't realize is what they're buying in terms of a product."

It's a scenario that's becoming all too familiar as direct sales increases its hold on the American insurance consumer.

"Our research suggests there is a growing trend for consumers to research and purchase auto insurance on the Web," said Claire Wilkinson. vice president of global issues for the Insurance Information Institute. "In fact, the total number of online auto insurance quotes submitted by consumers increased by 24% in 2005 versus the previous year, while insurance policy purchases jumped by 29% in the same period, according to a survey by comScore Networks, an Internet analytics firm."

Direct writers--those insurance companies using captive agents or selling directly to consumers through the mail, Internet or through telephone solicitations--account for two-thirds of the personal lines market, while agency writers (including brokers and independent agencies) account for the remainder, Wilkinson said. Direct insurers are the largest online insurer segment, with a 61% market share of online quotes; this segment saw a 23% increase in quotes submitted in 2005, she said. Quotes submitted at aggregator sites, which offer quotes from several insurers, increased by 11%.

Direct writers are further blurring distribution lines by additionally using independent agents, banks, employers and professional, business and other associations to sell directly to the consumer, she added. "Direct selling of auto insurance is a growing trend, but it's important to recognize a broader overall trend that insurers increasingly use multiple distribution channels to sell their products," she said.

Since insurance companies make more money selling auto physical damage coverage than they do selling liability, one result of online direct sales has been inadequate liability coverage for many clients, Yates said. "And the customer just thinks they're buying the price."

As for his hedge-fund customer, "Once we finally got everything straightened out in terms of coverage--we eliminated physical damage on his vehicles--we put this thing together the way he wanted it, and he actually saved money and got the coverage he needed," Yates said.

The liability issue is one of the limits of using the Internet for distribution, agreed Brian S. Cohen, a former senior vice president of sales and marketing and chief marketing officer for Farmers Insurance. As president and chief executive of Clear Technology, a software solutions firm in Denver, he now has a bird's eye view of the insurance selling market.

"The biggest users of the Internet are not the young; it's the over-55 set," Cohen said. "A lot of people are shopping [online] before they speak to their agent, and if their agent isn't in the ballpark, they'll go elsewhere." That's putting more pressure on insurers to retain clients. "That's as big an issue for large insurance companies as growing new clients," Cohen said.

Building Relationships

Yates, who is a member of the Independent Insurance Agents and Brokers of New York, is seeing independent agencies competing pricewise with the big carriers by using the Internet to their advantage; many are acquiring software that enables them to provide multiple quotes for their clients and prospects. It keeps the agent in the loop.

"We as independent agents don't want people who want a price. We want thoughtful analysis of their coverage and to build a relationship and be a trusted adviser," he said. "We as independents do a pretty good job of maintaining and slightly growing our market share in personal lines. I think what we do a poor job of is getting our name out there."

"Our strengths are being part of the community," he said. "We don't get people through the Internet as well as we should. There are things we are trying to do as agents."

Selling versus Marketing

"One of the things that independent agents excel at is selling, servicing and retention, but what they're not good at is marketing," echoed Peter van Aartrijk Jr., chief executive officer and managing director of the van Aartrijk Group LLC of Springfield, Va., an insurance marketing and advertising firm. "I've said this for a long time because the two are very different, and they get confused all the time."

Direct response companies like Geico and Progressive "are very good at marketing and advertising" van Aartrijk said. "They're spending record amounts of money on advertising. Car insurance alone is breaking all these records in terms of advertising spending, and Geico is leading the way. E-surance is another one."

"Our problem as agents is how do we drive ourselves to the top of the search engine? "Yates said. Online direct sales insurers can offer the customer a cheap price, "but the question is what else are you paying for? Certainly that ad dollar is built into the price of the product."

Also because agent-based carriers have figured out a way to price products effectively, "They don't spend the money on advertising that a Geico does," Cohen said.

According to the Feb. 27, 2006, Adweek, ad spending by the insurance industry rose a whopping 31.3% in 2005, surpassing 15 other industries tracked by Nielsen Monitor-Plus. Comparatively, ad spending by the insurance industry rose 6.3% in 2004 and 5.1% in 2003. Geico, the auto insurance arm of Berkshire Hathaway, increased its spending by 51.3% in 2005, to $470.1 million, while Progressive increased its ad spending by 45.3%, to $354 million. Overall ad spending for the insurance industry in 2005 was $2.9 billion.

"Progressive is trying to play in both spaces, aggressively on the direct sales side, but they still have a very robust agency-based distribution channel," Cohen said.

The Progressive Group of Insurance Cos. splits its auto insurance sales into two separate business groups that sell two different brands. Progressive ranks third among the nation's top private-passenger auto insurers in direct premiums written, according to A.M. Best Co. state/line information for 2005.

Drive Insurance from Progressive is sold by more than 30,000 independent agencies throughout the United States, making it the largest seller of auto insurance through independent agents and brokers, said company spokesman Michael E. O'Connor. Its direct sales counterpart, Progressive Direct, is sold directly to consumers over the phone and on the Internet at progressivedirect.com, he added.

The company feels continued growth in its Direct business is dependent on price and customer retention, the success of advertising and marketing efforts, and the ease of doing business with the company. "We believe the effectiveness of the Progressive Direct advertising campaign contributed to the greater quoting activity," the company stated in its 2005 report, "Management Discussion and Analysis of Financial Condition and Results of Operations." "The use of the Internet, for complete or partial quoting, continues to grow and is the most significant source of new business activity in the Direct channel," according to the report.

"New business applications for Drive auto decreased about 5% in 2005, reflecting soft market conditions," the company stated. In 2005, marketing efforts for Drive auto drove in some 2 million new visitors to its independent Web site, driveinsurance.com. Both the Drive and Direct channels are growing. According to Progressive's statistics, the average compounded growth rate for Drive from 2002 to 2005 is 11% and for Direct, 18%.

Becoming a Commodity

The move toward direct sales is nothing new, said Mark O'Brien, owner of O'Brien Communications Group LLC, an insurance marketing communications firm in Westbrook, Conn. Disintermediation--basically, cutting out the middle man, in this case the agency or brokerage--has been part of the personal lines segment for some time. Yet for insurance companies, personal lines marketing has much to do with the extent to which an insurance product may or may not be "commoditized," he said.

"The reason companies like Progressive or Geico can sell auto insurance directly is that personal auto insurance has effectively become a commodity," O'Brien said. "Because by and large, it's standard and in most states and instances, it's absolutely mandated: you don't have auto insurance, you don't drive. You simply have to get it. What's true is most people are most likely to buy on price."

"You could see how the sellers of really commoditized insurance could consider taking agents out of the loop," he added. "If Progressive's rates go up, you're not going to perceive anything like brand loyalty where you're going to call an agent up and get counsel; you're going to go on the Web and get Geico and get another quote."

In addition to being a simple Internet presence for the carrier, insurance Web sites often include a portal for a distribution chain so agents writing business for them can log in and get new product and program service updates from the carrier. "It simplifies communication and changes the game a little bit; insurers, in effect, are inviting that distribution channel in," O'Brien said. "We're even seeing it with some of our clients on the vendor side who want to create such portals for their customers."

In 2005 Progressive enhanced its agents-only Web site, ForAgentsOnly.com, and improved its interface with agency management and comparative rating systems "making it even easier for independent agents to quote and sell" Drive products. Progressive also tested and developed new co-branded marketing tools for agents' use in 2006.

"We launched the Drive Brand Expressway earlier this year," O'Connor said. "The site offers Drive agents a variety of opportunities to market their agencies locally with the Drive brand. It is their portal for ordering co-branded materials including Yellow Pages, direct mail, co-branded radio and billboards and more. We are generally pleased with agency participation in the programs offered through the site"

Yet Cohen feels the personal lines industry overall has done "a poor job" of differentiating between direct sales and agency sales: "Companies have not done a good job of establishing the value of buying a policy with them, and so that's forced products to be competitively priced. What that's done is when price is the key, you have to find the cheapest way to distribute your product. One could argue the most direct way is direct distribution--cutting out the middle man."

It goes back to those mega-ad dollars from the large carriers: The public is being fed with a steady diet of online insurance sales, particularly in auto insurance, and it's all about price, he said. "It's beginning to create a self-fulfilling prophesy: As auto insurance is starting to go into a soft market, now there's pressure on insurance companies to lower their prices."

Wise independent agents are branching out beyond the standard auto or homeowners policy, said van Aartrijk, a former vice president of communications for the Independent Insurance Agents and Brokers of America. He also is on the faculty of the IIABA's Virtual University and is a member of its Agents Council for Technology.

"It's also about positioning the independent agent as not selling things--policies--but providing a more complete risk management service, which they've been doing but they haven't packaged it before," van Aartrijk said.

"It's about self-insuring, avoiding risk, having coverage tied together more appropriately, making sure you have the right limits on the high end and not too much exposure on the low end," he said. "It's the agent asking, 'Where are you going? What's changed in your life?' Life insurance and disability are incredibly important products."

There is a swing to the direct side, Cohen said. But,"I don't think the pendulum is going to swing dramatically. I think there's still a very powerful bond that agent-based distribution has with its customer base on two things: One, people do value a local trusted person, and that will always be there. And two, inertia. If prices are not going up and people get their bill every six months and it's pretty much the same as it was before, they're pretty much not going to switch if they're happy."

"My point is that if there is a shift to direct sales, you should see a lot of shifting into direct from the largest carriers," Cohen said.

Most people today--about 90%-are buying personal lines through an agent, van Aartrijk said. Still, captive and independent agency companies are nervous about the future. "You have a whole generation of new buyers coming in starting their search for products and services online now," he explained. "People with kids coming up to driving age and who are seeing changes in their premiums are maybe starting also to search online."

"It's all really about search, what's driving this," van Aartrijk said. "My firm is spending a lot of time in this area working to see where that's headed."

Driven by Consumers

As for the future of direct sales versus agency sales, the consumer will continue to drive the methods of personal-lines insurance distribution, Yates said.

"Independent agents and insurance distributors in general are going to be where consumers want them to be," Yates said. "There will be some of us that are more traditional in the way we get our clients, and there will be others of us who will use technology in more inventive ways, and it will be more important in the way the client wants to get to you."

"The other thing that is coming down the pike is customer self-service and the prospect of service. It's selling, but it's also giving them tools to price things out," van Aartrijk said. "Carriers are providing that via their independent agents."

Insurance companies are starting to provide agents with more consumer education materials and other tools to help them stay viable, van Aartrijk said. "I'm hopeful that independent agency companies and agents together can breathe a little more fun into this business."

Learn More

Progressive Group A.M. Best Company # 19731

Distribution: Independent agents and direct over the phone and via the Internet

For ratings and other financial strength information about this company, visit www.ambest.com.

Agents versus Direct

Drive Insurance from Progressive is sold by independent agencies
throughout the United States. Progressive Direct is sold directly to
consumers over the phone and on the Internet at progressivedirect.com.

                           Net Written     NWP Growth   Average Growth
                               Premium   2002 to 2005        Each Year
                   Year   ($ millions)   ($ millions)     2002 to 2005

drive INSURANCE    2002       5,832.70
FROM PROGRESSIVE   2003       7,239.60
                   2004       7,933.60
                   2005       8,005.60
                                             2,172.90              11%

PROGRESSIVE[R]     2002       2,529.80
DIRECT             2003       3,263.20
                   2004       3,802.20
                   2005       4,177.30
                                             1,647.50              18%

Source: Proqressive Corp.

The Internet as a
Competitive Tool

Insurance marketing and advertising
firm van Aartrijk Group LLC of
Springfield, Va., surveyed some
75,000 agents in 2006, asking how
often they update their Web sites.
Their responses show "the lack of
real online marketing savvy"
among independent agents, the
company said.

How Often Do You
Update Your Web Site?

Continuously   31%
Monthly        13%
Annually       18%
Rarely         35%
Never           3%

"The total
number of
online auto
insurance quotes
submitted by
consumers in-
creased by 24% in
2005 versus the
previous year."

--Claire Wilkinson,
Insurance Information Institute

Auto Insurance
Buying Patterns
Consumers used these methods
to buy their current auto insurance
policy in 2005.

Other                           2%
Comparative Internet Site       4%
Carrier Internet Site          11%
Telephoned Insurance Carrier   20%
Agent                          63%

Note: Table made from pie chart.

Note: Based on an August 2005 survey.

Source: Insurance Information Institute,
Celent Communications

Top 5 U.S. Writers--2005
All Private-Passenger Auto
Group market shares (%) are
based on direct premiums written.

State Farm Group               17.7
Allstate Insurance Group       11.2
Progressive Insurance Group     7.5
Berkshire Hathaway Insurance    6.3
Farmers Insurance Group         5.0

Note: Table made from bar graph.

Source: A.M. Best's State/Line Reports

Top 5 U.S. Writers--2005
Homeowners Multiple Peril
Group market shares (%) are
based on direct premiums written.

State Farm Group           22.2
Allstate Insurance Group   12.5
Farmers Insurance Group     7.0
Nationwide Group            4.8
St. Paul Travelers Group    4.3

Note: Table made from bar graph.

Source: A.M. Best's State/Line Reports