Doing more with more: multiline captive agents and independent producers compete to answer the modern customer's demand for one-stop financial shopping.

Key Points

* Proponents of the multiline captive agency system champion its effectiveness in providing for virtually every need of the insurance customer.

* The contract that Farmers Insurance Group has with its agents permits them to offer another insurer's product to customers if Farmers does not offer it or will not write it. State Farm's captive agents, however, are permitted to sell only State Farm products.

* One critic of the captive agency system says that agent contracts need to have more of a bilateral approach, where both parties have some input into the mutual goals.

In recent years, the number of major insurers that have continued to sell their products through a captive agent distribution system has dwindled. In 1999 alone, Boston-based John Hancock Financial Services Inc. converted its career-agent force into a general agency system, called Signator, and Allstate Corp. announced that it was shifting from captive agents to independent contractors and gave its 6,200 captive agents six months to determine their futures.

Despite these developments, proponents of the multiline captive agency system say this model is far from outdated. On the contrary, they champion its effectiveness in providing for virtually every insurance need.

As Brian Cohen, chief marketing officer and senior vice president of Los Angeles-based Farmers Insurance Group, sees it, the multiline captive model is the most advantageous business model for insurers. "Everything is being 'commoditized'--all products, not just financial services," Cohen said. "There's more choice and more information available to consumers than ever before; we've gone to overload. The typical consumer with so much information, so much choice, so many different products to pick, is at the point where he just wants to throw up his arms and say, 'Can someone just do it for me?'"

The biggest advantage of the multiline captive model is the case of doing business it offers consumers who like the prospect of one-stop financial shopping instead of having to seek out and maintain separate advisers for automobile, homeowners and life insurance, as well as retirement planning and savings, Cohen said.

In Farmers' case, its nearly 15,000 agents are members of the communities where they work, he said. "People know where to find them--accessibility is critical," Cohen said. "Also, Farmers and competitors like State Farm and Allstate have the value of a long-standing brand that people know and also trust."

Cohen said his company has been attracting the best quality agent candidates in its history and has had no problems recruiting new agents. Other advantages of this model include flexibility in a changing market; when one area hardens, the multiline agent can focus on another, thus gaining longer staying power, he said. And the model works equally well in any environment-rural, big city, small town or suburb, he said.

"All this is why I think over the long haul, not only will the captive agent survive, but the multiline captive agent is going to thrive" Cohen said.

Selling Others' Product

Farmers' contract with its agents permits them to offer another insurer's product to customers if Farmers does not offer it or will not write it. Cindy Vance, a Farmers captive agent, said this has happened to her with customers' health insurance needs and occasionally on the commercial side.

Her agency, Cindy Vance Insurance and Financial Services Inc. in Sussex, Wis., offers automobile, homeowners, commercial, life and Financial services products. "It's a nice segue because first we help customers protect their assets, and then we help them build their assets," she said.

Once she has worked with a customer on one product line and has gotten "the easier policy taken care of, then we can move to the more difficult policies, because they already know you and trust you," she said.

In financial services, Farmers has agreements with other companies in the mutual fund area, among them American Funds, Washington Mutual Funds, Franklin Templeton and Scudder Kemper. "We act as the broker-dealer for agents to offer those products," Cohen said.

State Farm, the nation's leading property/casualty insurer, has a similar agent model. Along with auto and homeowners policies, State Farm's nearly 17,000 agents--the largest such force in the United States--also sell life insurance, bank products and mutual funds. However, they have exclusive agreements with the insurer, meaning they basically can sell only State Farm products.

"We truly believe that there is more power behind a customer having a single relationship with an agent who has access to multiple products" said Dave Gibson, staff manager in the agency sales integration area, in the agency department of State Farm, based in Bloomington, Ill. "That agent gets to know you better, develop a relationship with you and based on that, they can recommend the best products for a customer."

The company is able to provide its agents with more than 100 products representing a wide range of property, casualty and financial services, he said. In that mix is the company's commercial business, with State Farm ranking sixth among U.S. writers of commercial multiperil and eighth in commercial auto, based on 2003 direct written premium, according to A.M. Best Co. state/line data. State Farm also ranked 14th in total life in force in 2003, according to Best data. Total life includes ordinary life, group life, credit life and industrial life.

In unique situations when State Farm can't provide a certain type of insurance or meet a certain financial need, the customer would have to go elsewhere, Gibson said. "But it would be good for State Farm agents to identify those needs, and they may know of other people in the community who offer those types of products," he said.

Generalists with Specifics

Each State Farm agent has the licensing capability to sell all types of company products, but specialization among agents within an agency is valued. "You might have a specialist who understands the ins and outs of life insurance, but the whole needs discussion would be analyzed by the agent and they might get into deeper discussions with specialists in their office," Gibson said. "That's what we're finding as our business model continues to adapt--having some specialists within the office makes a whole lot of sense.

"Another strength that supports the agent's office is a whole network within State Farm to answer additional questions, to get any additional details that the agent might need," he said. Moreover, depending on the product line, agents also have different contacts within the company--for example, underwriters who work on a single product line and are experts on it, Gibson said.

State Farm trains its agents to evaluate all of their customers' insurance and financial needs. "If you call a State Farm agent, they can find out what type of fire insurance needs you may have, auto insurance, life insurance, financial products ranging from mutual funds or banking products," he said.

Starting mostly with part-time agents, State Farm opened for business in 1922. A full-time agency force developed as the business grew bigger and more complex. "Over the last five to 10 years, we've really increased our offering in the financial services side of the business," Gibson said.

An Independent Path

Despite the multiline distribution approach some of the nation's largest insurers offer through their captive agent force, Dick Poppa, president and chief executive officer of the Independent Insurance Agents & Brokers of New York, contends independents are much better positioned, particularly in commercial lines. Poppa notes that independents write about 80% of the commercial market, compared to about 20% written by captives. There is a great variety of independent agent companies that are writing commercial lines, and so an independent agent is going to have a greater opportunity to get what he or she wants for a particular client, Poppa said.

"It's hard to believe that any single company is going to be able to offer the variety and depth of products that a group of clients is going to need," he said. "A captive agent, even though their company might write multiple lines of coverage, is still limited to what that company has chosen to write, whereas an independent agent is going to be able to offer whatever is needed for that circumstance."

In addition to that advantage, independent agents also can build their own businesses because they own them, said Poppa, whose organization represents about 1,900 independent agencies and their branches in New York state. "They are their own boss, so to speak; they own the renewal rights to their businesses, and they build a significant asset in their agencies," he said.

While some are very comfortable in the captive agency environment, they are nevertheless dependent upon one insurer either as an independent contractor or as an employee. As a result, they are much more limited in what they can do with their businesses, Poppa said.

"For the last several years, independent agents have continued to grab market share away from captive agents, both in personal lines and in commercial lines," he said. "So my sense is that the general public is really very comfortable in dealing with someone who can offer a variety of options."

Cohen points out that while an independent agent can indeed obtain quotes from a number of different companies, the brand that the independent agent is selling is his brand. "Traditionally on the independent agent side, they have certain quotas they have to make if they want to keep their appointments, so it's not like they become this true free market where they can offer thousands of choices," he said.

Gibson pointed out that State Farm has all of its product lines working together and coming through a single, focused distribution channel, its exclusive agency system. "The difference between how other companies using independent agents will do business is the agents are having to pull it together, where State Farm is trying to do that more and more so the agent doesn't have to do that type of work," he said.

Jim Fish, a former Allstate captive agent, said he did not totally disagree with Cohen's comments on the opportunities available for captive agents. When an agent starts work with one of the captive carriers, he said, generally he or she is paid some kind of supplementary income for a time and often the carrier even provides some seed accounts--orphan accounts that other agents have turned back over to the company because of termination or sale of their business. "It's basically to help those agents get started," Fish said.

One problem he finds with captive carriers is that their contracts are unilateral and agents are put in "a take it or leave it position," he said. If the agent's company is not competitive, then the agent really has no place to write business. "The contracts need to have more of a bilateral approach, where both parties have some input into the mutual goals," Fish said.

Learn More

Farmers Insurance Group A.M.Best Company # 00032 Distribution: Captive agents

State Farm Group A.M.Best Company # 00088 Distribution: Captive agents

For ratings and other financial strength information about these companies, visit www.ambest.com.

RELATED ARTICLE: Former Allstate agent shows others path to independence.

Jim Fish, an Allstate agent for 28 years, understands what it's like to work as a captive agent. In that capacity, Fish advertised extensively, but wound up sending or losing more than half his prospects to independent agents or other captive carriers, he said.

Fish also is a past president of the National Association of Professional Allstate Agents, an organization that is not recognized by Allstate. After he lost his contract with Allstate, for what he says was his criticism of the way the insurer was dealing with its agency force, Fish decided to reach out to captive agents with limited markets. He contracted with an independent agency, Financial Keyosk, that is licensed in 49 states and launched Jim Fish Agencies LLC, based in Gulfport, Miss., in July 2004.

"My initial role was primarily to solicit referrals from captive agents for the risks they could not write with their carriers," Fish said. "Recruiting new agencies was a secondary priority. Since the roll out, however, I have had many agents inquire about opening an independent agency of their own. What they are looking for is an independent agent contract that allows them to write both personal and commercial lines in their marketplace. This is especially true of the captive agents."

Fish thinks many captive agents are expected to wear too many hats. Their carriers not only expect results in their property/casualty production but in the financial services areas as well, he said. "As a result, most agents with captive carriers--unless their IQs border on the genius level--can't possibly fully understand the products they are required to sell,' Fish said. "They're given quotas to sell these products and they can be terminated for failing to reach their quotas. It didn't used to be that way 10 years ago."

On the plus side, captive carriers do provide a good training ground for new agents, and a freshly minted college graduate can learn a lot by becoming a captive agent, Fish noted.

Fish's new business provides captive agents with a prospect referral service and access to an online quote service, as well as help in establishing their own independent agencies. Agents also can choose to send their clients directly to the Jim Fish Agencies Web site.

"I'm trying to give them an alternative, something that they would have to fall back on if they do get terminated," Fish said, adding that carriers can be arbitrary in their reasons for letting captive agents go. "Right now with the captive carriers, if you get terminated, you don't have an opportunity to 'roll' your book to another carrier. If you have an option to sell your book of business, you have to do so in a very short period of time. That's a difficult process and I can attest to that."

In his own experience with Allstate, the company gave him a standard 90-day notice of termination. Unlike independent agents, captive agents do not own their books of business--the carrier does. Still, Fish had 90 days to find a buyer and consummate the sale of his economic interest in the book of business. This limited amount of time encourages low-ball offers from other agents, he said. "That period of time needs to be extended from 90 days to 180 days so that they can get a better price for their book of business," Fish said.

"Not all the captive carriers are as aggressive as others in their treatment of agents, but I still think they have a long way to go to make the playing field even with the independents," he said.

In 2000, Allstate converted its 6,200 captive agents to independent contractors, who would remain captives in the sense that they would continue to sell Allstate products exclusively. In the process, these agents would lose company payment of business expenses and benefits. They had several options, including selling their interests in their books of business and leaving the company, lf they decided to stay, they would receive an enhanced commission structure and would have equity interests in those books, Allstate said.

About 2,400 agents chose to leave the company rather than sign on as exclusive agents. About 3,800 existing agents remained with Allstate and bought economic interest in the books of business of their departing colleagues, the company said.