Changes in Agent Distribution Tuesday, September 29, 2015 Jeff Rieder, CPA, CPCU Partner, Head of Ward Group Ward Group Cincinnati, Ohio Jeff Rieder is partner and head of Ward Group, a management consulting and research firm specializing in the insurance industry. He has overall leadership and responsibility for the firm. Jeff has significant experience in the insurance industry, with expertise in the property/casualty and life segments. Throughout his 20-year career, he has been involved with more than 400 projects for numerous domestic and international insurance companies, covering a diverse range of technology, performance, and operational evaluations. In 2011, Jeff led the sale of Ward Group to Aon; he now leads Aon s global performance benchmarking practice for insurance and the U.S. insurance compensation practice. Prior to joining Ward Group in 1998, Jeff spent five years at Great American Insurance Company, working in the corporate finance departments. Jeff holds a Bachelor of Science in accounting and an International Business Certification from the University of Cincinnati. He is a certified public accountant and holds the Chartered Property Casualty Underwriter designation.
Three Session Ideas Tools or tips you learned from this session and can apply back at the office. 1. 2. 3.
Jeff Rieder Partner, Head of Ward Agenda Sales and Distribution Effectiveness Thoughts on 2014 and 2015 Performance Improvement in the Business Marketing Trends Supporting the Sales Function Independent Agency Trends Succeeding in the Future Closing Summary 2015 Connect Differently - Rieder Page 1 of 17
Industry Challenges and Initiatives Challenges Facing the Industry Keeping up with technology and managing the associated costs Finding growth in less hard market Keeping pace with the evolution of data analysis and predictive analytics Addressing the digital/direct needs of the customer Finding talent to meet growth objectives Top Initiatives Strategic planning around distribution strategy evaluating alternate distributions, strengthening key agency relationships, and renewed focus on terminating unprofitable agencies Enhancing the customer experience is a focus of carriers encompassing all touch points in the lifetime of the relationship Core system replacement and legacy retirement Predictive analytics projects continue in underwriting, but now span the rest of the company including claims, agency management, marketing, telematics, and embedding these skills throughout the company Focus on efficiency and aligning company structure to future strategy Management Perspective Senior leadership becoming less optimistic about the state of the industry. State of the Industry Compared to 2014 Moderately better About the same 15% 21% 28% 62% 62% 62% Commercial Lines Personal Lines Moderately worse 8% 23% 17% Overall Benchmark Significantly worse 0% 2% 1% 0% 20% 40% 60% 80% 100% Source: Ward Group 2015 Business Environment Survey 2015 Connect Differently - Rieder Page 2 of 17
Management Perspective Confidence in the market profitability is improving. Carrier confidence in the ability to grow revenue remains strong in personal lines but deteriorating in commercial lines. 4.0 Ability to Grow Revenue Ranked on a scale of 1 to 5 More Difficult 4.0 Ability to Generate Profit Ranked on a scale of 1 to 5 3.0 3.0 2.0 2010 2011 2012 2013 2014 2015 Overall Benchmark Personal Lines Commercial Lines Less Difficult 2.0 2010 2011 2012 2013 2014 2015 Source: Ward Group 2015 Business Environment Survey Key Performance Measures U.S. Worse 150% Combined Ratio Net Premium Written to Surplus Total Expenses 130% 110% 1990 2014 Average 90% 97.2% 104.3% 70% 73.9% 102.8% Better 50% 30% 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 39.9% 39.9% Combined ratio is prior to effect of policyholder dividends Expenses include Underwriting, Loss Adjusting and Investment Source: Ward s Results 2015 Connect Differently - Rieder Page 3 of 17
Independent Agents Under Pressure How are Independent Agents Competing in Personal Lines? 35% 30% 25% 30.1% Market Share 32.9% 31.6% Chart illustrates the direct premium market share of approximately 625 legal entities identified as either Independent Agency or Broker, Independent Agency by SNL Total Home and Auto market share for the group grew 1.5 points since 1996 20% 15% 10% 16.1% 17.8% 14.0% 15.5% 13.8% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Home and Auto Home/Farm Pers Auto Personal auto market share declined 1.7 points since it s peak in 2004 and 0.2 points since 1996 Home/Farm market share grew 1.7 points since 1996 Excludes AIU Insurance and companies with multiple distributions channels 2015 Connect Differently - Rieder Page 4 of 17
Most Important to Independent Agency Carriers Least Important 6 5 Ranking of What is Most Important Scale of 1 6 4.6 5.0 4 3 2 2.0 2.7 3.3 3.4 1 Most Important 0 Loss Ratio Premium Growth Policy Growth Policy Retention Premium per Agent/Broker Hit Ratio Profitability ranks as the most important issue The lower priority of premium per agent may suggest less emphasis on franchise value as in the past However, many independent agency companies lack the systems, process efficiencies and analytical capabilities of the direct and national companies to compete on price Source: Ward 2015 Agency Management and Compensation Study Contingent Commission Changes Business Practice Changes 2012 2013 2014/ 2015 Increased Volume Requirements 14% 15% 23% Decreased Volume Requirements 3% 3% 0% Increased Stop Loss Amount 3% 7% 19% Decreased Stop Loss Amount 0% 3% 4% Change Formula to Pay More 15% 2% 6% Change Formula to Pay Less 3% 8% 21% Added Growth Requirement 2% 5% 6% Removed Growth Requirement 5% 0% 0% Added Retention Requirement 2% 2% 2% Removed Retention Requirement 5% 0% 0% Added Guarantee Option 3% 3% 6% Removed Guarantee Option 0% 0% 0% Added Lines of Business to Plan 3% 3% 2% Removed Lines of Business From Plan 0% 2% 0% Other 15% 15% 31% No Changes Made to Plan 64% 69% 38% Source: Ward 2013 and 2015 Agency Management and Compensation Study Other Changes Include: Removed retention ratio penalties Life bonus changed to no longer register certain policies as policy counts. Added additional tiers for Payout to Loss Ratio Decreased permissible loss ratio Reduced loss carry forward Increased growth requirement and new policy written Uses combined ratio to calculate the payment, instead of an income minus expense formula. Added a bonus to reward for depth Increased loss capping charges Lowered the guarantee rate from 15% to 12%. Added new bonus for YOY profitability Added a max payout cap at the agent level Added Cap / Changed formulas Added stop loss option (two dollar amounts available) Changed 9 month guarantee option formula to pay more 2015 Connect Differently - Rieder Page 5 of 17
Internal Pay Practices Only 59% of companies pay a bonus to their field marketing staff. Of these companies, only 44% had a plan designed specifically for the sales function (versus same plan for the entire staff). Staff measurement criteria were based on the following metrics: Profitability 73% Premium growth 67% Policy growth 47% Agency appointments 29% Other 33% It is generally recommended to establish distinct pay plans for the sales staff with a much higher variable pay component relative to the rest of the employee population Marketing Trends 2015 Connect Differently - Rieder Page 6 of 17
Business Growth and Retention 22% New Policies as % of Total Policies 87% In Force Policy Retention Ratio 21% 20% 19% 18% 86% 85% 84% 17% 16% 15% 14% 83% 82% 81% 13% 2009 2010 2011 2012 2013 80% 2009 2010 2011 2012 2013 Commercial Lines Personal Lines Commercial Lines Personal Lines Personal lines policy retention improved since 2009; but dipped slightly in 2013 Improvement in commercial policy retention may be linked to softening market conditions Source: Ward CEO Benchmarking Everyone s Chasing Customers 2.5% Total Marketing Expense 43% Largest 9 Advertising and Market Share (Excluding AIG) 2.5% 2.0% 1.5% 1.0% 42% 41% 41.9% 41.9% 41.4% 41.4% 41.5% 2.0% 1.5% 1.0% 0.5% 0.5% 0.0% 2009 2010 2011 2012 2013 40% 2009 2010 2011 2012 2013 0.0% Total US Largest 9 Rest of Industry Market Share Advertising Spend The marketing expense ratio has decreased slightly the past two years Despite massive investments in advertising, the top 9 US carriers lost market share since 2010, however notable gains achieved by several major direct writers in personal lines 2015 Connect Differently - Rieder Page 7 of 17
And Trying to Expand the Agency Footprint Percentage of Agencies Terminated New Agency Appointments 10% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 5.6% 6.3% 6.1% 6.1% 5.9% 9% 8% 7% 6% 5% 4% 3% 2% 1% 8.4% 8.4% 8.0% 7.3% 7.6% 0% 2010 2011 2012 2013 2014 0% 2010 2011 2012 2013 2014 New agency appointments are down as both independent and captive writers have had difficulty recruiting new producers Regional expansion is picking up again since the 2008 2010 timeframe Terminations are still lower as companies would rather rehabilitate and may be less aggressive managing producers Source: Ward 2013 and 2015 Agency Management and Compensation Study Improvement in the Business 2015 Connect Differently - Rieder Page 8 of 17
Expenses Continue to Improve 44% Total Expenses as % of Net Premiums Written 42% 40% 39.9% 38% 36% 36.0% 34% 32% 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 Ward's 50 Total Industry 17 * Expenses include Underwriting, Loss Adjusting and Investment Expenses 2015 Spending Changes - By Function Information Technology Business Analytics Product Development Marketing Actuarial Claims Administration ERM Commercial UW/Processing Human Resources Other Sales Expense Personal UW/Processing Audit Commissions General Counsel Agency/Broker Mgmt Investment Mgmt Finance Billing and Collections Rent/Occupancy Spend Levels Compared to 2014 Significantly Less ( 15% or less) Moderately Less ( 3% to 15%) About the Same ( 3% to 3%) Moderately More (3% to 15%) Significantly More (15% or more) 0% 20% 40% 60% 80% 100% Source: Ward 2015 Business Environment Study 2015 Connect Differently - Rieder Page 9 of 17
Where is the Improvement Coming From? Accelerated Market Entry Select Product Exits Aggressive Repricing UBI/Telematics Digital Strategy Continued Distribution Consolidation More Aggressive Broker/Agent Management Increasing Development/ Investment In Alternative Channels Including Mobile/Social Further Improvements in STP Specialty Departments More use of the Production Underwriter Role Expansion of Shared Servicing Across Product and Business Lines Increased Client Self Service Improved Call Handling & CRM to Enhance Customer Experience Aggressive Process Improvement Improved Fraud Detection Litigation Mgmt and Suit Avoidance Early Settlement Strategies Increased Job Role Segmentation Heavier Focus on Quality Assurance and NPS Growing Vendor Management Sophistication Aggressive Span of Control Management Reduction in Functional Duplication Rationalization of Risk Management Resources Core System Replacement Product Development Customer Acquisition Underwriting Agent/ Policy Servicing Finance and Accounting Actuarial Risk Management Claims Admin & Legal Human Resources Legal Shared Services Information Technology General Support Supporting the Sales Function 2015 Connect Differently - Rieder Page 10 of 17
The Consumer Has Changed Consumer needs and preferences will increasingly affect carrier strategies: More knowledgeable Time constrained Empowered to make decisions Connected with the world Demanding Defining What is Important to Customers The evolution of the marketing and customer experience has changed over time. Initially focused on branding, marketing, product development and pricing Now evaluating and defining what is important along following key experiences: Quoting Policy Issuance Online Interaction/View Policy and Claim Information Digital/Mobile Strategy Loss Prevention Claims Process Billing Premium Audit It is critical for independent and captive agency companies to provide these capabilities to compete with direct writers 2015 Connect Differently - Rieder Page 11 of 17
Policyholder Self Service Capabilities P&C Percent of companies that have the following capabilities: Self Service Capabilities Online Mobile Bill Pay 97% 50% View Account Information 84% 71% View Policies 78% 64% Report Claims 78% 79% View Claim Status 56% 21% Receive Quotes 44% 21% Purchase Policies 25% 7% Non premium Bearing Policy Changes 22% 7% Premium Bearing Policy Changes 19% 7% % of Policyholders Utilizing Capabilities 25% 0.1% Companies responded only 9 of every 1,000 policyholders downloaded the mobile app. Source: Ward 2014 Contact Center Study Analytics Capabilities Perception of Analytics Capabilities to Peers Significantly less advanced 4% Less advanced 24% On par 47% More advanced 18% Significantly more advanced 8% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% The majority of respondents relied on ad-hoc reporting to analyze individual agency performance, geographic or product performance Less than 50% of companies had standardized reports or processes to determine penetration within geographic areas (46%), evaluate market potential within geographic areas (39%), measure product concentration (37%) or determine product potential (33%) Source: Ward 2015 Agency Management and Compensation Study 2015 Connect Differently - Rieder Page 12 of 17
Analytics Resources No dedicated resources Dedicated resource within shared analytics team Location of Analytics Resources 17% 44% Use External Data Sources to Support Sales Analytics No 31% Dedicated resource within sales/marketing department 48% 0% 10% 20% 30% 40% 50% 60% Yes 69% External Sources Used SNL (Annual Statement Filings) 57% Census Bureau 63% Bureau of Labor and Statistics 56% Market Stance 40% Other 34% Source: Ward 2015 Agency Management and Compensation Study What is Needed to Succeed in the Future 2015 Connect Differently - Rieder Page 13 of 17
Challenges of Each Model Companies with multi-channel capabilities may be in the best position to succeed Distribution channels significantly impact many operating practices Key considerations: Headcount and Operating expenses Advertising and Marketing Customer Acquisition and Agency Management Information Technology Underwriting and Automation Customer Service Implications (Claims, Billing and Inquiry) Staffing/Turnover 27 Succeeding with the Independent Agent Companies must focus on building long-term relationships with agents that are prepared to transform their business models: Identity clear goals and objectives Enable agents with capabilities to remain relevant and competitive the marketplace Provide fair and competitive compensation Help agents develop their people to win Help agents develop leads and identify quality business Design pro-active investment strategies with key agents Provide more standardized processes enabled with technology (i.e. ease of doing business) Succeeding with the independent agent may require parting ways with poor performers. Agency tiering and similar analytics help automate the process and provide objective guidance 28 2015 Connect Differently - Rieder Page 14 of 17
Agency Management Programs Vary Significantly Agency Tiering and Segmentation Practices Maintain an Agency Tiering/Segmentation Program 77% Maintain a Formal Scoring System to Determine Tier 56% (of those with program) Average Number of Levels in the Tiering Plan 4.4 Inform Agencies of Ranking Within the Plan 50% Base Commissions Vary by Tier 18% Contingent Commissions Vary by Tier 38% Additional Incentives or Compensation by Tier 56% 77% of all companies maintain an agency tiering program, a 16% increase over 2013 The average premium written for the top tier of agents is $5.2M Linking a defined tiering program to pay and/or other agency incentives is a very effective way to enable discussion with the agency Plans in excess of five tiers become more difficult to understand and administer Tier Specific to Newly Appointed Agencies 44% Source: Ward 2015 Agency Management and Compensation Study Achieving Sales & Distribution Effectiveness Understand Business Drivers End User Insights Agency Attributes Competitive Dynamics Value Proposition Business Strategies Organization Design Talent Management Distribution Management Performance and Rewards Align Sales & Distribution Agency Sales and Service Model Job Roles & Structure Deployment Planning Support Infrastructure Employee Selection Career Path Training & Development Leadership & Management Process Agency Selection Agency Assessment / Tiering Management Effectiveness Both Employee and Agency: Goal Setting Compensation & Recognition Performance Management Change Management and Communication Realize Business Impact Creating a sales and distribution structure that is effective in meeting customer needs in an efficient manner Ensuring the availability of the right talent and agencies in the right roles at the right time Maximizing the productivity of an engaged sales and distribution force to exceed business goals Companies can improve sales performance by aligning structure with strategy, getting the most out of their investments in sales and distribution resources, and creating a rewarding environment for sales people, distribution partners and shareholders. 2015 Connect Differently - Rieder Page 15 of 17
Closing Thoughts Top Takeaways and Summary Financial results are still favorable but losing steam Starting to see operational efficiencies within companies Data analytics driving more company-wide decisions but still underinvested Lines are blurring in distribution Customer experience is driving more strategy Agency Compensation and Management Plans are Changing Rapidly There is no rest for the weary Virtually every aspect of the business is challenged to operate smarter Companies better at addressing rapid pace of change and integrating technology Must of avoid the costs of just standing still/doing nothing 2015 Connect Differently - Rieder Page 16 of 17
Questions and Discussion Jeff Rieder Partner, Head of Ward jrieder@wardinc.com (513) 746 2400 2015 Connect Differently - Rieder Page 17 of 17