Easy pass: recent trends in competition and carrier contracts have blurred the distinction between captive/career and independent agents.

Career of captive agents usually sell only the products of one insurance company, while independent agents handle the products of many insurers. A few major companies, such as Northwestern Mutual, Axa Financial, State Farm and New York Life, have maintained their career agent forces. But a number of others, including Allstate, have either jetti-soned their captive/career systems or augmented them with an independent agent channel.

With these changes has come some blurring of traditional agent roles. Those who work with these producers say many career and exclusive agents--exclusives are those agents granted the sole rights to sell a company's products within a given market of territory--have been able to skirt their carrier's contractual restrictions by establishing their own independent agencies fronted by a family member of associate. Also, some have been broadening their business by working with independents in a brokering arrangement. And at least one major carrier has permitted its career agents to write commercial insurance as independents.

"Everybody has crossed the line, everybody is working with everybody else," said William "Twig" Branch, president of the Iroquois Group, a network of 1,400 independent agents in 30 states.

Iroquois is attracting a number of former captive/career agents who have grown frustrated in their dealings with their companies, Branch said. Some of these agents just walk away from the carriers and become independent agents, while others negotiate independent agency contracts with their direct writers, he said.

Whenever a monolithic system such as a captive agent force is broken up, some people cheer the change and others long for the status quo, Branch said. "What you're seeing is that a lot of very aggressive agents, really good agents, just love this transition," he said. "This is the best thing that ever happened to them because they are aggressive, entrepreneurial. And from the independent side, to us, they are wonderful."

But with these break-ups, there always are people who can't adjust, "because they are coming from a very paternalistic, very hierarchical structure," he said. Branch thinks this reaction is behind many agents' lawsuits against their former carriers. "These are people who don't want to transition to the new world order," he said. "They understood the old one, and they had figured out how to work in that world order."

Stealth Agents

The transition to independent status can be tough for some, agreed Jamie Deapo, director of membership and sales for the Independent Insurance Agents & Brokers of New York. Others seem to make the change very easily, he said. "Surprisingly, many of them, even though they weren't allowed to, have operations separate from their own," Deapo said. "Captive agents have found very creative ways to create independent operations that keep them from walking away from the business they want to write."

Often, they will install their spouses in the independent operation, Branch said. "This is known in the industry as 'double breasting,' and it's very common," he said. "You'll see two agencies in the same location, and in the front will be the exclusive agent, then in a back room, an independent agent. And when the company agents can't handle a policy or think they can better serve their customer by putting him into the independent agency side, they'll have him go in the back room."

Clients usually don't realize that they have walked into another agency and think they are working with a customer service representative, said Branch, whose network helps small to mid-size suburban and rural independent agents build their businesses by giving them access to insurance companies.

Carriers used to thwart this practice by combing the lists of new licensees and looking for anyone with the same last name as an established agent. But these days, to avoid detection, agents will have their spouses use their maiden names of bring a "front" agent with a different name into the operation.

This practice would be grounds for terminating an agent's contract, said Rod Guilmette, editor of DirectExpress, a publication of the National Association of Professional Allstate Agents Inc.

In the case of Allstate, for example, an Allstate independent contractor--the company's designation for its exclusive agents--is strictly forbidden to engage in this practice, he said. Guilmette said that he does not know of any Allstate agents doing this.

Allstate does allow its independent contractors, however, to have an economic interest in an independent agency which could be run by a spouse, Guilmette said. But the insurer requires that these offices be entirely separate--with not even a doorway linking them. Also, the independent contractor cannot actively participate in the independent agency, the two cannot share staff and the Allstate agent cannot refer business to the independent agent.

Guilmette acknowledged that some Allstate independent contractors have opened independent agencies "down the hall" from the Allstate agency. In other cases, career or exclusive agents will forge a brokering agreement with independent agents, referring business that they can't write to the independents who then reward them, usually with a finder's fee, Deapo said. His organization represents members in nearly 2,000 locations across New York State, and of those members, he estimates that up to 5% were once captive or career agents. The agents' group also offers an associate membership to those who are captives or exclusives and want to remain so. Under this category, they receive information on legislation and can make use of the group's educational programs. "They can become an associate member and still be with State Farm or Nationwide or Allstate," he said.

Limra International's latest census report on the life industry put the number of affiliated career producers at about 179,000 in 2001, and the number of independent brokers and personal producing general agents at about 161,000 for the same year.

On the property/casualty side, independent insurance agencies in the United States dropped from about 42,000 in 2000 to some 40,000 in 2002, but the average agency continued to grow in size, employing 9.1 people for an increase of one employee per agency since 2000, said the Independent Insurance Agents & Brokers of America Inc. Also, 11% of independent agencies had insurance revenues of $2.5 million or more in 2002, compared with 8% in 2000, the IIABA said.

Carriers' increased use of independent agents rather than captive carrier agents as a distribution channel reflects the fact that most of the industry has demutualized, said Doug French, global director of insurance and actuarial advisory services at Ernst & Young. Also, by using independents, an insurer can go from having fixed distribution costs to more variable distribution costs--with an agent paid a commission only when he or she sells a product--which is creating less expense for carriers to maintain, he said.

Saving Grace

Although commissions for independents can run higher than those for career of captives, many carriers are finding it cheaper to work with independents because they do much of the data entry and policy management, Branch said. In addition, independent agencies, which used to be service focused, are becoming more sales focused because the competition systems are changing, he said.

"We're getting paid to sell and to grow, and that's very much the case at Iroquois," Branch said.

"As a consequence, we're using service centers and things like that and we can run on a little less money. We're a pretty good value for the companies that we're distributing insurance for."

However, the move to demutualize has left a major gap in the training of agents, French noted. Big mutuals such as Prudential and MetLife were significant sources of training for the industry, he noted. "The big mutuals built the life insurance agents, and some of them stayed, and some went on to become independent agents if they thought they could go out and do it on their own," he said. "The scary thing is, who is going to train agents, who is going to recruit agents, who is going to keep them up on industry issues so they can actually sell product and pay their mortgage?" Only companies like New York Life and Northwestern Mutual meet that need now, he added.

French thinks the jury is still out on the lasting merits of using independents vs. career agents.

For example, all market indicators show that New York Life and Northwestern Mutual are performing well "because they're a clear differentiator now, they've got their career agents," he said. "But it will be interesting to see how that plays out. If that really turns into a strategic differentiator and an advantage, that's going to spell some trouble for the test of the industry."

But Branch thinks in this arena, the independent agency system is already the victor. "There were two systems running the universe--the captive system and the independent system--and the independents won," he said. The fact that so many companies have made the transition to independents is an acknowledgement that the captive/career system "is not the world-beater system that it was when it first came out," he said.

If there's a downside to this change for existing independents, it's that they are facing more competition in the marketplace from former captive/career agents. Ultimately, though, this will benefit policyholders, said Kathy Weinheimer, senior vice president of Industry Relations for the Independent Insurance Agents & Brokers of New York. "Freedom of choice is the big key for consumers," she said." When there are different agents out there with varieties of companies they can place business with, that just creates more competition among the agents and that's a good thing for consumers," she said.