As we reflect on all that occurred during the turbulent and chaotic year that was 2020, one thing stands out: It was a year of innovation. Virtually every business that survived, and most that thrived, innovated in some fashion, whether it was their business models, efficiency improvements or communications.
These innovations, while necessary to survive pandemic-related economic challenges, are all the more remarkable because the coming decade will represent an even bigger innovation challenge to independent agencies — perhaps more than at any other time in industry history.
Due to the unprecedented volume of owner retirements, consolidations and even startup activity, the composition of the industry is changing rapidly. Agency business models are evolving. Forcing this change are customer demand, new ways of marketing, carrier challenges, talent shortages, a rapidly evolving economy and rapidly evolving technology.
Evolving Technology Investments
The biggest technology challenge to confront agencies this past year was spurred by the need to isolate workforces and virtualize. Many agencies were forced to make unplanned investments in computers, software for managing a distributed workforce and, in many cases, upgraded cyber protection. For more than a few agencies, these unplanned investments were financially painful.
It is also possible — even likely — that the useful life of these investments will be measured in months rather than years. This faster evolution of technology tools is likely to represent a new paradigm for agents who want to maintain their competitiveness. Agents have traditionally been conservative when making capital investments, typically expecting many years of service and utility from them. But those who want to stay on the cutting edge will need to adjust their mindset and acknowledge that instead of 10 years of service from a new investment, they may only see three.
This trend clearly affects an agency’s return on investment, and it will be wise for agents to consider the impact on their bottom line. Agencies will need to grow larger and faster or accept lower margins. One piece of good news is that the technology that agencies need to invest in, whether websites, software or communications technologies, increasingly can be purchased on a per-use basis, or on a software as service basis (SAAS). This trend makes typical capital items, which are fixed costs to the balance sheet, variable expenses to the income statement.
One area where agencies will need to invest significant sums are web portals, websites and web-based communication. With customers demanding self-service capabilities with 24/7/365 communications access, agents can no longer consider a website as just an electronic brochure. Websites must be connected to the agency management system and need to allow customers to serve themselves directly in a variety of ways.
See also: Does Remote Work Halt Innovation?
To meet these demands, today’s websites are necessarily more robust and need to be rebuilt more frequently than in the past. Where an agency might have gotten five years of effective use out of a website, in some cases even longer, the future will demand website redevelopment projects every two or three years.
Changing Business Models
As agencies grow ever larger due to consolidation and aggregation, the insurance distribution marketplace must grow more competitive. Agents will be forced to offer products, services and access that they may have avoided up until now, or face losing business at the margins to larger, more relevant competitors.
Again, the choice will be between lower revenue, lower profits due to loss of business or potentially lower margins due to increased investment. This will force agency principals to focus on cost control, efficiency and sound business practices more than ever before. While technology-driven efficiency will lower costs as producers and service employees manage ever larger books of business, agencies will need to acquire new human capital in the form of data scientists, sophisticated business managers and data-driven marketers.
Many observers expect the number of independent agencies to decrease from roughly 35,000 today to between 20,000 and 25,000 within 10 years. This trend is expected due to the factors discussed here, but also, in some cases, because of an agency’s failure to maintain itself as a going concern.
Those agencies that meet the challenges and make this transition will be similar in some respects to today’s agencies. They will be serving clients who value the relationships they have and the expertise they bring. But the survivors will need to innovate to be nimbler and more cost-efficient than ever before. They will need to make more frequent investment in changing technology and in staff and become better businesspeople than ever before.