The independent-agency model still works.

Although direct-channel growth in personal auto has come at theexpense of the independent-agency channel, 12 of 18 personal-linesinsurers that have outperformed their peers in both growth andprofitability over the past decade use the independent-agencydistribution channel either in whole or in part, according to arecent Conning report.

“The flexibility of the independent-agency channel is wellsuited to the rapid growth of these companies,” Conning says in itsreport, “Growth and Profit Leaders in Personal LinesInsurance.”

The Conning statements come after a Nomura report and a McKinsey & Co. study argued that the value added byindependent agents is diminishing. The McKinsey report determinedthat “agents have neither the scale nor the operational efficiencyto profitably sell a commodity.”

And the Conning report does state that the strongest growth forpersonal lines has, in fact, been seen in the direct channel. ButConning notes that the most common channel for companies in its“growth and profit leader group” was the independent-agencychannel, adding that the channel allows small- and mid-sizedinsurers “to accommodate growth without requiring the largefixed-cost base of a direct-response organization.”

Challenging another common assumption, Conning says size is notthe determining factor for profitability and growth in personallines. “The most striking result of analyzing the companiescomposing our list of growth and profit leaders is the skew in thedistribution of firms by size,” Conning notes. The report showsthat 14 of its 18 growth and profit leaders had totalpersonal-lines premium volume of less than $500 million.

“Only four of the successful companies appear among the rankingsof the top 25 writers in either auto or homeowners,” Conningadds.

Of course, Conning notes that, mathematically, it is moredifficult for the largest companies to grow at the rapid pace of asuccessful small insurer, which in part explains the outsizedpresence of smaller insurers. “For State Farm to grow at the samepace as the slowest-growing firm from our list would require theaddition of $1.3 billion in new premium in a single year—the totalpremium volume of the 19^th-largest personal-autoinsurer,” Conning explains.

But the firm contends that its list indicates that companiesneed not be big in order to excel. With the wave of consolidationin personal auto, Conning notes, “there is a tendency to concludethat increasing size and scope are becoming requirements forsuccess.”

While that is not the case, Conning finds that carriers do findsuccess by specializing in a particular product or customer,calling such a focus the “most common feature” among its 18 growthand profit leaders. “The idea behind the niche approach is thatinsurers finding a better way to meet the needs of a particularsegment, in a segment that has growth potential, stand to improvetheir odds for success.”

Conning also says a specialty or niche focus can lead to morecustomer loyalty, which helps improve retention, and, through abetter understanding of customers, insurers can take a moretargeted approach to customer acquisition, leading to a higherconversion rate.

Additionally, says Conning, “[T]he specialist can exercise anadvantage in pricing—with a better picture of expected claimactivity—leading to a loss-ratio advantage.”