Do you remember when you were a kid and you’d get your report card? It created such buzz and anticipation with your classmates. The nervous energy was palpable as you prepped for opening the report card and thinking of how you were going to explain your school’s progress report to your parents.
In this article, we are going to do some old school grading of the current state of the independent agency system. Instead of looking at reading, writing, and arithmetic, we will evaluate how independent agents are performing in five key areas: market share, carrier relationships, adopting technology, attracting talent, and perpetuating ownership. Let’s dive in and see how the IA system stacks up.
1. IA Market Share – A
Of the three distinct methods of distribution (independent, captive, and direct) in the insurance industry, the IA model controls approximately 62% of the market. IAs have been the dominant source of distribution for decades, particularly in commercial lines where IAs hold 83% market share. Even in personal lines, IAs currently have 39% market share in comparison to 35% for captives and 25% for direct.
Since the 2012 McKinsey Study – “The End of an Era for the Local Insurance Agent,” IAs have grown market share by 5%. While direct to consumer insurers have increased as well, IAs have experienced a similar growth trajectory over the past decade. AM Best market share data shows IAs have enjoyed a 5% increase in the P&C market while directs have grown by 8%.
The market share gains for both channels appear to be coming from the captive agent/carrier distribution channel, as that model has decreased by 14% since 2012. This decline has caused traditionally captive carriers like Nationwide to completely change their distribution model and has created constant chatter in the insurance industry as to which captive carrier is next. It is to be determined, but it would not be surprising to eventually see State Farm standing alone in the captive carrier distribution model.
2. Carrier Relationships – B+
Through hard market cycles, significant losses, increased competition, efforts to commoditize the insurance product, and changing consumer buying behaviors, the agent-carrier relationship has persevered. While continually tested, agents and carriers have proven time and time again that the “bend but don’t break” philosophy is fitting for their relationship. Manny IA-centric carriers have maintained a loyal relationship with a broad agent distribution force and remained committed to the founding principles with which agents and carriers originally partnered.
Like anything, the relationship has changed over time. Underwriting is often formulaic, carriers are less willing to accept risks outside of the computer equations, franchise value is a thing of the past, and many carriers have abandoned the territory rep model of visiting with local agencies. But despite all of those relational changes, agents and IA-centric carriers’ success is synergistic and healthy.
3. Adopting Technology – B
The onslaught of new technology solutions available and marketed to IAs can be overwhelming. It seems like every month, there’s a new “game changing” must-have technology tool funded by Private Equity (PE) and sold by a revolving door of salespeople imploring IAs to adopt their technology or risk going out of business.
The reality is, this could not be further from the truth. It is true that agents who want to compete in a modern marketplace must have an active relationship with technology, but they should be very cautious in adopting new technologies.
Buying the latest vaporware technology without a defined need or implementation plan can lead to staff burnout, wasted expense, and lost income opportunities by pulling you away from your primary focus of retaining and selling new business.
While the insurance industry and IA system are not regarded as technological innovators, generally speaking, agency owners are utilizing modern technology tools in their businesses. They rank the administrative burdens of technology, meaning managing multiple carrier interfaces, agency IDs and passwords, and the cost of technology, as more of a challenge than keeping up with the pace of tech changes. Technology will always be a critical component of every business in 2025 and beyond, but there is no reason to think that a lack of adoption by independent agents will lead to their demise.
4. Attracting Talent – B-
This has been and always will be a perpetual challenge with the IA system. In fact, almost every industry struggles to fill job demands. Getting people interested in working in insurance is difficult; getting them to go the next step and build a career in an insurance agency is even more challenging.
According to the U.S. Bureau of Labor Statistics, employment of insurance agents stands at 547,000 and is projected to grow 6% from 2023 to 2033, faster than the average for all occupations. About 47,100 job openings for insurance agents are projected each year, on average, over the decade. Many of those openings are expected to result from the need to replace workers who move to different occupations or retire.
To fill the 47,100 openings, many agencies are investing in internships to develop their own talent. In addition, they are using job boards to fill open positions, leveraging application tracking systems, hiring recruiters, and proactively posting for positions anticipating growth.
While this will always be a need, as relationship-driven people, insurance agents will be able to compete in this space by continuing to recruit entrepreneurial, self-motivated workers who want to pursue the dream of potentially owning their own business. Pay and benefits may not be as lucrative as a corporate job at the outset, but the opportunity for unlimited earnings and controlling their own destiny will ensure the IA system prevails.
5. Perpetuation, Agent/Broker M&A – F
In this area, we are failing, and it is threatening the fundamentals of the IA business model. A lethal combination of agency owners being unable to effectively plan for internal perpetuation, the Baby Boomer generation owners retiring, and the influx of Private Equity (PE) investment has resulted in transformational change and consolidation.
This change is jeopardizing the foundation and viability of the small, family-owned, generational agency. According to Optis Partners, in the past 12 years, the IA system has experienced 7,990 M&A transactions. Since 2013, the number of annual M&A transactions has increased by almost 200%. The buyer profile of publicly reported M&A transactions is 80% PE-backed brokers.
Retail agencies are not competitive with the enticing guaranteed cash up-front offers presented by PE buyers. This change is resulting in the big getting demonstrably bigger. For instance, according to the Best Practices Study, the #10 largest broker in the US in 2002 was $425.3M in annual revenue, whereas in 2022 the #10 largest broker is now $2,148B. As these consolidated platforms integrate, the size, scale, and sophistication will likely become a competitive advantage over small and mid-size agencies.
One impact of consolidation we are seeing play out is traditional IA carrier partners are being forced to pay more in commission and overrides to large-consolidated brokers, likely at the expense of the profitable, locally owned retail agency. In addition, traditional IA carrier partners are requiring volume commitments that many small agencies cannot meet, therefore requiring them to either forgo having adequate markets or giving up commission to use a market access platform to place business.
Conclusion
Overall, the IA system is averaging a B grade. By most measures, it is healthy and strong. Even the one failing grade, Perpetuation/M&A transactions, has a silver lining as it has increased insurance agency valuations to record levels.
Agency owners should feel confident and secure in the future growth of their profession and business. If your agency fits this report card or you would like to set up some time to speak to the IA Valuations team, please reach out to contact@iavaluations.com.
By: Jeff Smith, JD, CIC, CAE, CEO of IA Valuations and Ohio Insurance Agents Association
About IA Valuations and Agency Link – Founded in 2017, the IA Valuations team has performed over 270 valuations to independent insurance agencies across the U.S. Our advisors have 25+ years of experience guiding agency owners on maximizing their agency value, planning, and legal needs for ownership transition. In addition, IA Valuations has provided perpetuation planning, financial modeling and business planning for independent insurance agencies. Finally, IA Valuations has advised dozens of agency owners on selling their agencies through our Agency Link process. Agency Link is a platform that connects buyers and sellers together to further the growth and strength of the IA system. To learn more about IA Valuations, please visit IAValuations.com or contact@iavaluations.com.
The information provided in these documents is general in nature and shall not be construed as personal legal, tax or financial advice for your situation. Please contact@iavaluations.com to discuss your personal situation.
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