How Independent P&C Insurance Agencies Are Thriving in Today's Competitive Marketplace

Transcription

1 How Independent P&C Insurance Agencies Are Thriving in Today's Competitive Marketplace Photocopying or electronic distribution of this document or any of its contents without prior written consent of the publisher violates U.S. copyright law, and is punishable by statutory damages of up to US$150,000 per infringement, plus attorneys' fees (17 USC 504 et seq.). Without advance permission, illegal copying includes regular photocopying, faxing, excerpting, forwarding electronically, and sharing of online access.

2 TABLE OF CONTENTS EXECUTIVE SUMMARY... 4 METHODOLOGY... 5 AGENCIES ARE OPTIMISTIC ABOUT THE FUTURE... 6 AUTO INSURANCE HAS BECOME COMMODITIZED, BUT... 8 AGENCIES GROWING SHARE, EXCEPT FOR AUTO INSURANCE... 9 FAST GROWERS MORE SPECIALIZED, DIGITIZED CONCLUSION ABOUT AITE GROUP AUTHOR INFORMATION CONTACT LIST OF FIGURES FIGURE 1: LARGE AND MIDSIZE AGENCIES ARE VERY OPTIMISTIC ABOUT THEIR FUTURE SUCCESS... 6 FIGURE 2: 94% OF AGENCIES OF ALL SIZES EXPECT FUTURE GROWTH... 7 FIGURE 3: SMALL AGENCIES DEPEND MORE ON SALES OF PERSONAL LINES INSURANCE PRODUCTS... 7 FIGURE 4: MIDSIZE AND LARGE AGENCIES DEPEND MORE ON SALES OF COMMERCIAL LINES INSURANCE 8 FIGURE 5: AUTO INSURANCE SHOPPERS ARE USING MORE CHANNELS IN THEIR SHOPPING JOURNEY... 9 FIGURE 6: AGENCIES INDICATE MINIMAL IMPACT FROM AUTO INSURANCE COMMODITIZATION FIGURE 7: AGENCIES HAVE IMPROVED THEIR CUSTOMER SERVICE FIGURE 8: AGENCIES EXPRESS SOME CONCERN REGARDING THEIR FUTURE ROLE WITH RISK SELECTION 13 FIGURE 9: SALES OF COMMERCIAL PROPERTY AND PACKAGE PRODUCTS HAVE BEEN PARTICULARLY STRONG FIGURE 10: SALES OF HOMEOWNERS INSURANCE PRODUCTS HAVE ALSO BEEN PARTICULARLY STRONG 14 FIGURE 11: AGENCIES HAVE DIVERSIFIED INTO NEW COVERAGE TYPES FIGURE 12: P&C INSURERS ARE INTEGRATING THEIR MARKETING EFFORTS WITH AGENCIES FIGURE 13: AGENCIES PLAN TO RESPOND IF INSURERS EXPAND THEIR DIRECT MARKETING EFFORTS FIGURE 14: THE FASTEST-GROWING AGENCIES MORE OFTEN TARGET PARTICULAR BUSINESS TYPES FIGURE 15: THE FASTEST-GROWING AGENCIES MORE OFTEN TARGET PARTICULAR ETHNIC MARKETS FIGURE 16: THE FASTEST-GROWING AGENCIES SELL PRODUCTS THAT HAVE INCREASING DEMAND FIGURE 17: FASTER-GROWING AGENCIES ARE MORE LIKELY TO HAVE SOLD PROPERTY AND CYBER RISK TYPES OF INSURANCE FIGURE 18: FAST-GROWING AGENCIES USE VIDEO ON THEIR WEBSITES TO MARKET AND EDUCATE FIGURE 19: FAST-GROWING AGENCIES MORE OFTEN INCLUDE INTERACTIVE TOOLS AND GAMES ON THEIR WEBSITES FIGURE 20: FASTER-GROWING AGENCIES MORE OFTEN ADAPT CUSTOMERS' PREFERRED COMMUNICATION CHANNELS FIGURE 21: FAST-GROWING AGENCIES HAVE INVESTED MORE IN CUSTOMER SELF-SERVICE TECHNOLOGIES

3 LIST OF TABLES TABLE A: PERSONAL AUTO INSURANCE US$174 BILLION IN 2012 DIRECT PREMIUMS TABLE B: HOMEOWNERS INSURANCE US$78 BILLION IN 2012 DIRECT PREMIUMS TABLE C: COMMERCIAL INSURANCE US$252 BILLION IN 2012 DIRECT PREMIUMS

4 EXECUTIVE SUMMARY Aite Group surveyed 194 independent U.S. property & casualty (P&C) insurance agencies (agencies) in August and September 2014 to understand where and how they are growing their businesses and also understand their future business, operations, and technology plans. Agencies have not lost their entrepreneurial spirit. They continue to evolve their business models and business practices to maximize the value that they add to their customers both their P&C insurance company customers and their consumer and business customers. Agencies of all sizes remain optimistic about their prospects, and the largest agencies are the most optimistic. Ninety-four percent of agencies of all sizes expect moderate to aggressive growth in their businesses over the next three to five years (Figure 2). Their optimism is grounded in the experience of the past 10 years, during which agencies have grown their share of all major lines of P&C insurance, except for the highly commoditized personal auto insurance product line. With the uptick in the economy, agencies have benefited significantly from increased sales of commercial package, commercial property, and homeowners insurance products. Homeowners insurance has emerged as a strategic product line to help counter the commoditization in personal auto insurance and maximize the agent's value in explaining a hard-to-understand but very valuable product to consumers. To maximize growth, the largest and fastest-growing agencies have specialized in marketing to particular industries and business types and have diversified into new product areas like cyberliability and identity-theft insurance. The fastest-growing agencies are also more likely to use advanced customer service technologies and to include extensive video and interactive tools on their websites. Small and slower-growing agencies are less likely to specialize in marketing to particular business types or ethnic markets, to offer advanced customer self-service capabilities, and to have websites with video and other interactive tools. Small agencies are also significantly more likely to rely on personal lines insurance sales for the majority of their sales and less likely to have grown or expect to grow by acquiring other agencies. 4

5 METHODOLOGY Between August and September 2014, Aite Group, with the sponsorship of Vertafore, completed an online survey of principals or producers from 194 independent U.S. P&C insurance agencies. Aite Group conducted the research independently with no influence from Vertafore on the findings. The online survey asked a series of questions about the agencies' growth experience over the past two years as well as their current and planned business models, products, technologies, and marketing capabilities. Aite Group only included U.S. agencies for which P&C insurance-related revenue constitutes more than 50% of their business. Within this analysis, Aite Group further segmented the agencies by revenue size and revenue growth. Twenty-nine percent of agencies have US$1 million or less in revenue (small agencies), 57% have between US$1 million and US$10 million in revenue (midsize agencies), and another 14% have greater than US$10 (large agencies). Additionally, 38 of the agencies surveyed, or 20%, reported 6% or more growth in revenue in both commercial and personal lines over the past 24 months (fast-growing agencies), whereas 156 did not (slow-growing agencies). The data have a margin of error of 6.8 points at the 95% level of confidence. Tests of statistical significance were conducted at the 95% level of confidence, except where otherwise noted. The use of the word "significant" in the report indicates that the difference discussed is statistically significant. 5

6 AGENCIES ARE OPTIMISTIC ABOUT THE FUTURE Agencies of all sizes remain optimistic about their prospects, and the largest agencies are the most optimistic. Aside from personal auto insurance, agencies have continued to grow their share of every other P&C product area over the past 10 years particularly homeowners insurance and commercial insurance lines. Large and midsize agencies distribute a higher percentage of commercial lines products than small agencies and continue to increase the sophistication of their technology. Large agencies continue to increase their scale by acquiring other agencies, hiring additional producers, and investing in customer self-service technologies. Small agencies expect to grow, but they are somewhat less optimistic and somewhat more dependent on personal auto insurance sales. When asked how they feel about the future success of their agency, 70% of large agencies and 59% of midsize agencies said "very optimistic." Forty-six percent of small agencies said "somewhat optimistic" (Figure 1). Figure 1: Large and Midsize Agencies Are Very Optimistic About Their Future Success Q. How do you feel about the future success of your agency? 23% 7% 30% 19% Very pessimistic Somewhat pessimistic 46% 59% 70% An even blend of optimism and pessimism Somewhat optimistic 25% Very optimistic Less than US$1 million in revenue (n=56) Between US$1 million and US$10 million in revenue (n=111) More than US$10 million in revenue (n=27) Source: Aite Group survey of 194 independent U.S. P&C insurance agencies, August to September 2014 Ninety-four percent of agencies of all sizes expect moderate to aggressive growth over the next three to five years, with significantly more large agencies expecting to aggressively grow (Figure 2). 6

7 Figure 2: Ninety-Four Percent of Agencies of All Sizes Expect Future Growth Q. Which of these describes your business plans over the next 3 to 5 years? 94% 5% 9% 52% 54% 58% 42% 38% 39% 26% 67% We plan to reduce the size of the agency We are working to maintain current sales levels We are working toward moderate growth We are working to aggressively grow Average (N=194) Less than US$1 million in revenue (n=56) Between US$1 million and US$10 million in revenue (n=111) More than US$10 million in revenue (n=27) Source: Aite Group survey of 194 independent U.S. P&C insurance agencies, August to September 2014 For agencies of all sizes, personal lines insurance products, including personal auto insurance, usually constitute at least 40% of their overall sales. Small agencies are significantly more likely than midsize agencies and large agencies to have personal lines products constitute the majority or near entirety of their business (Figure 3). Figure 3: Small Agencies Depend More on Sales of Personal Lines Insurance Products 67% Q. Of your agency's P&C business, what percentage of sales is from personal lines? Please have percentages total 100%. 14% 19% 44% 14% 13% 11% 9% 8% Average (N = 194) 30% 27% 29% Less than US$1 (n=56) 7% 7% 18% 54% Between US$1 million and US$10 (n=111) 37% 30% 22% More than US$10 (n=27) 81% to 100% 61% to 80% 41% to 60% 21% to 40% 0% to 20% 7

8 For midsize and large agencies, commercial lines insurance products usually constitute at least 41% of their sales. For small agencies, these products are significantly more likely to constitute 20% or less of their sales (Figure 4). Figure 4: Midsize and Large Agencies Depend More on Sales of Commercial Lines Insurance Q. Of your agency's P&C business, what percentage of sales is from commercial lines? Please have percentages total 100%. 30% 32% 32% Less than US$1 million in revenue (n=56) 6% 9% 50% 22% 13% Between US$1 million and US$10 (n=111) 15% 33% 26% 19% 7% More than US$10 million in revenue (n=27) 81% to 100% 61% to 80% 41% to 60% 21% to 40% 0% to 20% AUTO INSURANCE HAS B ECOME COMMODITIZE D, B UT Personal auto insurance, the largest P&C product line at 34% of industry premiums (Table A, Table B, and Table C), receives most of the industry attention regarding the future of P&C insurance distribution. Geico now spends over US$1 billion per year advertising and educating consumers to buy cheaper auto insurance in 15 minutes or less by using its website and/or its call center. Esurance advertises that it can allow consumers to save even more in half the time. Progressive spends another US$600 million per year advertising that its website provides the lowest auto insurance prices for consumers, even if those prices are from other insurance companies. Over the past 15 years, these companies have significantly commoditized the personal auto insurance line of business and trained consumers to shop for the lowest price and purchase these products in a self-directed way through multiple channels. The 2012 McKinsey & Company Study "Agents of the Future: The Evolution of Property & Casualty Insurance Distribution" analyzed the extent to which the personal auto insurance product line has become commoditized. The study found that only 13% of consumers now rely solely on insurance agents during their information gathering, quoting, and purchasing journey for auto insurance (Figure 5). But, strikingly, even for the highly commoditized personal auto insurance line of business, only 28% of shoppers avoid insurance agents altogether. Even for personal auto insurance, consumers still mostly rely on insurance agents for guidance in highvalue areas like coverage selection. In other product areas that are more complex and more 8

9 emotional, like homeowners insurance for insuring people's homes and commercial lines insurance for insuring people's businesses, the overall reliance on agents is significantly higher. Figure 5: Auto Insurance Shoppers Are Using More Channels in Their Shopping Journey Source: McKinsey & Company Auto Insurance Customer Insights Research AGENCIES GROWING SHARE, EXCEPT FO R AUTO INSURANCE Because of the high-profile nature of personal auto insurance, it remains common to extrapolate distribution trends from this product line to other product lines, but this creates a misleading picture. While it is true that direct-response companies have significantly grown their share of this line of business over the past 10 years, these companies (which do not use agencies of any kind exclusive or independent) have barely grown their overall share of the other 66% of industry premiums (Table A, Table B, and Table C). While independent agency writers (both national and regional) have lost share to direct-response companies for personal auto insurance, independent agency writers have gained share within the other major categories homeowners and commercial insurance. Regional independent agency writers, the insurance companies that specialize in serving particular local markets and distributing through local, independent agencies, have continued to meaningfully grow their share of sales for all types of products auto insurance, homeowners insurance, and commercial insurance (Table A, Table B, and Table C). 9

10 Table A: Personal Auto Insurance US$174 Billion in 2012 Direct Premiums Type of distribution National independent agency writers 12.0% 6.2% Regional independent agency writer 23.5% 25.3% Captive agency writers 54.6% 50.2% Direct-response writers 9.9% 18.3% Source: A.M. Best Table B: Homeowners Insurance US$77 Billion in 2012 Direct Premiums Type of distribution National independent agency writers 17.4% 15.1% Regional independent agency writer 21.2% 26.4% Captive agency writers 57.2% 52.9% Direct-response writers 4.3% 5.7% Source: A.M. Best Table C: Commercial Insurance US$252 Billion in 2012 Direct Premiums Type of distribution National independent agency writers 46.1% 45.3% Regional independent agency writer 32.7% 34.1% Captive agency writers 20.8% 19.7% Direct-response writers 0.4% 0.9% Source: A.M. Best A majority of agencies believe that commoditization and lower commissions from auto insurance and other product lines have not impacted them negatively. A significantly higher percentage of midsize agencies than small or large agencies believe that they have actually experienced a positive impact from commoditization (Figure 6). 10

11 Figure 6: Agencies Indicate Minimal Impact From Auto Insurance Commoditization Q. What impact has the commoditization of and lower commissions from auto insurance and certain other product lines had on your agency's revenue? Positive impact Not much impact Some negative impact Heavy negative impact 13% 22% 25% 22% 24% 41% 41% 39% 41% More than US$10 (n=27) Between US$1 million and US$10 million in revenue (n=111) Less than US$1 (n=56) Within commoditized product lines like personal auto insurance, agencies have grown by providing more value to existing customers with better customer service and more effective cross-selling. Adding more value for customers has also resulted in better customer retention (Figure 7). Acquiring other agencies has contributed more significantly to large agencies' growth in personal lines product sales than it has to that of small or midsize agencies a trend that is likely to continue given the increasing importance of scale for investing in technologies and other new capabilities that can meet new, evolving customer and market requirements. Larger agencies also indicated an increase in demand for particular coverage types significantly more often than small agencies. 11

12 Figure 7: Agencies Have Improved Their Customer Service Q. What has driven your agency's growth in personal lines over the past 24 months? (Check all that apply) (Among agencies that have seen growth in personal lines in the past 2 years) Effective cross-selling to existing customers Customer retention has improved Better service to existing customers Increased marketing efforts Effectiveness of marketing efforts Pricing has increased Acquisition of another agency or agencies Increase in demand for particular coverage types Adding more producers More use of electronic/digital tools for lead generation Partnerships with other agencies 64% 42% 54% 59% 35% 54% 55% 46% 56% 50% 28% 41% 50% 32% 33% 41% 38% 51% 50% 20% 10% 45% 25% 15% 32% 28% 13% 23% 28% 21% 18% 20% 13% More than US$10 (n=22) Between US$1 million and US$10 million in revenue (n=81) Less than US$1 million in revenue (n=39) Thirty percent to 45% of agencies view insurance companies' predictive analytics for risk selection as either a moderate or serious threat to their value proposition (Figure 8). Agencies have always played a major role in screening and selecting risks for insurance companies. Aite Group's ongoing research in this area indicates that, particularly for commercial lines and specialty products, insurance companies want to use predictive analytics to make their agency partners more productive, not replace them. But replacement has occurred in personal auto insurance and could occur in other personal lines products and other product areas like smallbusiness packaged products. As will be seen later, large agencies in particular plan to combat this, if it occurs, by investing in their own predictive analytics capabilities. 12

13 Figure 8: Agencies Express Some Concern Regarding Their Future Role With Risk Selection Q. How much of a threat to your company do you think insurance companies' use of predictive analytics and other new technologies that could allow insurance companies to be more self-sufficient with risk selection and rely less on insurance agents is? 13% 12% 32% 18% 19% 19% Serious threat Moderate threat 38% 41% 33% Small threat 18% 30% 30% Not a threat Less than US$1 million in revenue (n=56) Between US$1 million and US$10 million in revenue (n=111) More than US$10 (n=27) At the same time as the uptick in the economy, agencies have seen a significant increase in sales of commercial package, commercial property, and homeowners insurance products (Figure 9 and Figure 10). Homeowners insurance has emerged as a strategic product line to help counter the commoditization in auto insurance and maximize an agent's value in explaining a hard-tounderstand but very valuable product to consumers. A good example of this is explaining to consumers why replacement cost coverage for homes has continued to increase in cost even while the market value of their homes has often decreased. 13

14 Figure 9: Sales of Commercial Property and Package Products Have Been Particularly Strong Q. How have your agency's sales of the following coverages changed over the past 24 months? [Increased only] Commercial property, structures Commercial property, multi-peril Commercial auto Commercial property, contents Business owners package Farmers multi-peril 11% 20% 53% 38% 50% 34% 59% 45% 43% 56% 47% 34% 48% 52% 34% 33% 67% 74% More than US$10 (n=27) Between US$1 million and US$10 million in revenue (n=111) Less than US$1 (n=56) Figure 10: Sales of Homeowners Insurance Products Have Also Been Particularly Strong Q. How have your agency's sales of the following coverages changed over the past 24 months? [Homeowners only] 63% 53% 58% 67% 20% 35% 29% 22% 7% 6% 7% 11% 5% 7% 7% Not offered Decreased Stayed flat Increased Less than US$1 (n=56) Between US$1 million and US$10 (n=111) More than US$10 (n=27) Average (N=194) Changes in the economy have also provided growth opportunities for agencies in new product areas like cyberliability, identity-theft protection insurance, and worksite insurance products. Cyberliability has become one of the fastest-growing risk areas for businesses, and identity theft has become a major concern for consumers and one that they often want to understand as well as insure and otherwise protect themselves against. The trend of employers covering fewer risks within their health insurance plans while providing more product choices to employees has created opportunities for insurance agencies and other advisors to provide employee benefit- 14

15 related advice at the worksite to increase sales of high-value, poorly understood products like critical illness insurance. To respond to the commoditization of auto insurance and other product lines, agencies overall have chosen to diversify into the above and other product lines as their most common strategy (Figure 11). Large agencies are significantly more likely than either midsize or small agencies to have responded by expanding their capabilities to market and sell to particular business or industry types, and large and midsize agencies are significantly more likely than small agencies to have responded by expanding into particular ethnic markets. A significantly higher percentage of smaller agencies compared to midsize and large agencies have done nothing at all to respond to commoditization. Small agencies' lack of scale may inhibit them from building the necessary sophistication in new product areas. A lack of bargaining leverage with insurance companies also makes it more difficult for small agencies to transition to more lucrative commission approaches that are based on the quality, not just the volume, of the business generated. Figure 11: Agencies Have Diversified Into New Coverage Types Q. With the commoditization of and lower commissions from auto insurance and certain other product lines, how has your agency changed (or how do you expect your agency to change) to be able to maximize revenue growth? (Check all that apply) Diversify into other coverage and product types Expand capabilities for marketing and selling to a particular business or industry type or types Expand or offer new types of risk management or loss control services to customers Transition to more value-based commission approaches (based on the profitability of the business rather than on premiums) Have not made and do not expect changes Stop selling certain coverage and product types and focus on others Expand capabilities for marketing and selling to a particular ethnic market or markets 52% 42% 38% 59% 25% 14% 37% 24% 20% 41% 23% 18% 15% 19% 39% 15% 22% 25% 30% 26% 7% More than US$10 (n=27) Between US$1 million and US$10 (n=111) Less than US$1 (n=56) Insurance companies increasingly partner with agencies to market new value-added products, such as teen driver programs for personal auto insurance and risk management programs for commercial accounts, and to market them in more localized, personalized ways (Figure 12). Aite Group has noticed a recent trend of P&C insurance companies providing their agencies and producers, including independent agencies and producers, with personalized marketing content and campaign management tools through solution providers like Direxxis, Distribion, and Brand Muscle. These insurance companies want to make it as easy as possible for agencies to localize 15

16 and personalize their marketing campaigns through both traditional and digital channels, while also supporting the integrity of their own brands. Figure 12: P&C Insurers Are Integrating Their Marketing Efforts With Agencies Q. Which, if any, of the following types of marketing and promotional activities does your agency engage in? (Check all that apply) Developed an expertise and specialization in a particular industry or business type 30% 43% 78% Partnered with insurance companies to access a full range of value-added marketing services (such as marketing lists with attractive prospects and services like subsidized, easy access to customized marketing collateral, and overall marketing campaigns) 37% 29% 63% Partnered with insurance companies that apply predictive analytics to customer or prospect lists and provide the targeted prospects to your insurance agency 32% 25% 56% More than US$10 (n=27) Have profiled your best customers and then marketed to new customers with similar profiles 44% 33% 25% Between US$1 million and US$10 million in revenue (n=111) Developed an expertise and specialization in a particular ethnic market 5% 37% 26% Less than US$1 (n=56) Promoted ethnic market expertise/specialization on agency's website 9% 26% 31% 4% None 5% 27% If insurance companies try to compete against agencies by marketing directly in a larger number of product and coverage types and reducing agencies' role in risk selection, agencies will respond. Large agencies are significantly more likely than small agencies to respond by building their own improved marketing and predictive analytics capabilities. Large agencies are also significantly more likely to respond by seeking to become an insurance company's leading agency in particular geographies for those product or coverage types (Figure 13). 16

17 Figure 13: Agencies Plan to Respond if Insurers Expand Their Direct Marketing Efforts Q. How will your agency respond if insurance companies market directly to customers and prospects in your territories and minimize your role in marketing and risk selection for a larger number of product and coverage types? (Check all that apply) 59% Place less business with those insurance companies 44% 64% Expand or diversify into other products, coverages, or geographies 41% 34% More than US$10 million in revenue (n=27) 39% Seek to achieve more scale and bargaining leverage with those insurance companies by acquiring other agencies, partnering with other agencies, or relying on the scale and bargaining leverage of important services providers 23% 44% 40% Between US$1 million and US$10 million in revenue (n=111) Seek to become that insurance company's leading agency for those product and coverage types in the relevant geographies to be able to use the company's predictive models to become more effective, efficient, and productive 21% 36% 52% Less than US$1 million in revenue (n=56) Build your own predictive models and maximize your own marketing capabilities to compete against those insurance companies that are competing against your agency with their direct capabilities 13% 28% 41% 17

18 FAST GROWERS MORE SPECIALIZED, DIGITIZED Fast-growing agencies are significantly different from slow-growing agencies in three general areas: specialization, product line, and technology. In terms of specialization, fast-growing agencies have more often developed an expertise in particular industries or business types and promoted their agencies to particular ethnic markets (Figure 14 and Figure 15). Figure 14: The Fastest-Growing Agencies More Often Target Particular Business Types Q. Which, if any, of the following types of marketing and promotional activities does your agency engage in? [Developed an expertise and specialization in a particular industry or business type only] 63% 40% Revenue growth of 6% or more in both commercial and personal lines (n=38) Revenue growth less than 6% in both commercial and personal lines (n=156) Figure 15: The Fastest-Growing Agencies More Often Target Particular Ethnic Markets Q. Which, if any, of the following types of marketing and promotional activities does your agency engage in? [Promoted ethnic market expertise/specialization on agency's website only] 37% 21% Revenue growth of 6% or more in both commercial and personal lines (n=38) Revenue growth less than 6% in both commercial and personal lines (n=156) 18

19 Fast-growing agencies not only specialize more, they are also more likely to market and sell products in growing markets, including both new markets, such as cyberliability and identity theft, and traditional markets, such as flood insurance and commercial property insurance (Figure 16 and Figure 17). Figure 16: The Fastest-Growing Agencies Sell Products That Have Increasing Demand Q. What has driven your agency's growth in commercial lines over the past 24 months? (Check all that apply) (Among agencies that have seen growth in personal lines in the past 2 years) Effective cross-selling to existing customers Increase in demand for particular coverage types Better service to existing customers Effectiveness of marketing efforts Customer retention has improved Pricing has increased Adding more producers Increased marketing efforts Partnerships with other agencies More use of electronic/digital tools for lead generation Acquisition of another agency or agencies 23% 29% 21% 29% 22% 24% 17% 38% 45% 34% 34% 38% 34% 34% 45% 44% 42% 41% 32% 39% 55% 55% Revenue growth of 6% or more in both commercial and personal lines (n=38) Revenue growth less than 6% in both commercial and personal lines (n=103) 19

20 Figure 17: Faster-Growing Agencies Are More Likely To Have Sold Property and Cyberrisk Types of Insurance Q. How have your agency's sales of the following coverages changed over the past 24 months? [Increased only] Flood insurance Identity-theft insurance* Directors and officers liability* Cyberliability* Personal articles (jewelry, silverware, art, other valuables) insurance* Errors and omissions Boat insurance* Boiler and machinery 58% 37% 55% 35% 50% 30% 50% 28% 50% 28% 47% 28% 42% 28% 34% 17% Revenue growth of 6% or more in both commercial and personal lines (n=28) Revenue growth less than 6% in both commercial and personal lines (n=101) *Percentages are significantly different at the 90% level of confidence Faster-growing agencies are also more sophisticated with their use of technology. Within their marketing efforts, the fast-growing agencies often use their websites as a hub for communicating and interacting with their customers and prospects. Search-result listings, campaigns, and online advertisements are often linked to high-value content on agents' websites. Fast-growing agencies are also significantly more likely to use video content throughout their websites as well as interactive games and calculators (Figure 18 and Figure 19). Figure 18: Fast-Growing Agencies Use Video on Their Websites to Market and Educate Q. How does your agency's website deliver content regarding? [Video only] (Among agencies that currently have an agency-specific website) Customer testimonials 18% 52% Types or levels of coverage needed General description of mainline coverage types offered 10% 17% 48% 44% Revenue growth of 6% or more in both commercial and personal lines (n=25) Types of customers that are best served by the agency Detailed descriptions of coverage types that your agency specializes in 14% 13% 40% 40% Revenue growth less than 6% in both commercial and personal lines (n=101) Descriptions of niche markets for which your agency has expertise 11% 40% Detailed descriptions of mainline coverage types offered 13% 36% Source: Aite Group survey of 194 U.S. independent, P&C insurance agencies, August to September

21 Figure 19: Fast-Growing Agencies More Often Include Interactive Tools and Games on Their Websites Q. How does your agency's website deliver content regarding? [Interactive tools such as calculators, games, etc. only] (Among agencies that currently have an agency-specific website) General description of mainline coverage types offered 8% 36% General descriptions of coverage types that your agency specializes in Detailed descriptions of coverage types that your agency specializes in 11% 10% 32% 32% Revenue growth of 6% or more in both commercial and personal lines (n=25) Descriptions of niche markets for which your agency has expertise Customer testimonials 8% 8% 32% 24% Revenue growth less than 6% in both commercial and personal lines (n=101) Detailed descriptions of mainline coverage types offered 8% 24% The fastest-growing agencies are more likely than slower-growing agencies to use more interactive social media alternatives like Twitter and blogs (Figure 20). Figure 20: Faster-Growing Agencies More Often Adapt Customers' Preferred Communication Channels Q. Through which channels can customers contact your agency for realtime quotes, information about insurance coverage types, etc.? (Check all that apply) to assigned service representative Phone to general box Through Facebook Agency website accessible on a personal computer or tablet computer Through Twitter Through LinkedIn Comments on blog posts Mobile website accessible on a smartphone (an iphone or an Android) 92% 88% 89% 84% 74% 74% 68% 53% 55% 49% 53% 28% 50% 41% 37% 12% 26% 26% Revenue growth of 6% or more in both commercial and personal lines (n=38) Revenue growth less than 6% in both commercial and personal lines (n=156) 21

22 Fast-growing agencies have also invested more significantly in customer self-service capabilities (Figure 21), which now often include direct integration with insurers' self-service websites. Figure 21: Fast-Growing Agencies Have Invested More in Customer Self-Service Technologies Q. What is your agency's use of the following tools? [Advanced customer self-servicing capabilities (Web, chat, video conference, mobile, phone), currently using only] 47% 28% Revenue growth of 6% or more in both commercial and personal lines (n=18) Revenue growth less than 6% in both commercial and personal lines (n=43) 22

23 CONCLUSION Independent P&C insurance agencies have always found a way to adapt and grow their businesses. Aite Group's online survey of 194 agencies found the following: Agencies are optimistic about the future. Seventy percent of large agencies and 59% of midsize agencies are very optimistic about their growth prospects for their agency, while 46% of small agencies are moderately optimistic. Ninety-four percent of agencies of all sizes expect moderate to aggressive growth within their business plans for the next three to five years. Agencies in general have grown their share of all major lines of P&C insurance except personal auto. Over the past 10 years, agencies and the insurance companies that sell through agencies have significantly grown their share of commercial insurance lines and the homeowners line of business. Smaller agencies rely more on personal auto insurance and are less optimistic. As Geico and other direct-response insurance companies have commoditized the personal auto insurance market, small agencies have felt the most negative impact on their businesses. Larger and faster-growing agencies are more specialized and more reliant on commercial lines products. They have specialized in marketing to particular business types and ethnic markets, successfully grown across a large range of commercial insurance products, benefited from the uptick in the economy, and diversified into new product areas like cyberliability and identity-theft insurance. Larger and faster-growing agencies are technologically more advanced. The fastestgrowing agencies are more likely to use advanced customer service technologies, to include extensive video and interactive tools on their websites, and to interact with their customers and prospects using Twitter and blogs. Agencies of all sizes express at least moderate concern about insurers reducing their role in risk selection. If insurance companies expand their use of direct marketing and risk selection in additional products, coverages, or geographic areas, large agencies, in particular, plan to respond by improving their own marketing and risk selection tools and capabilities. 23

24 ABOUT AITE GROUP Aite Group is an independent research and advisory firm focused on business, technology, and regulatory issues and their impact on the financial services industry. With expertise in banking, payments, securities & investments, and insurance, Aite Group's analysts deliver comprehensive, actionable advice to key market participants in financial services. Headquartered in Boston with a presence in Chicago, New York, San Francisco, London, and Milan, Aite Group works with its clients as a partner, advisor, and catalyst, challenging their basic assumptions and ensuring they remain at the forefront of industry trends. AUTHOR INFORMATION Todd Eyler teyler@aitegroup.com CONTACT For more information on research and consulting services, please contact: Aite Group Sales sales@aitegroup.com For all press and conference inquiries, please contact: Aite Group PR +44.(0) pr@aitegroup.com For all other inquiries, please contact: info@aitegroup.com 24