"He says he's not dead!" (EMI Films/Python [Monty] Pictures)

The independent-agency model still works.

Although direct-channel growth in personal auto has come at the expense of the independent-agency channel, 12 of 18 personal-lines insurers that have outperformed their peers in both growth and profitability over the past decade use the independent-agency distribution channel either in whole or in part, according to a recent Conning report.

“The flexibility of the independent-agency channel is well suited to the rapid growth of these companies,” Conning says in its report, “Growth and Profit Leaders in Personal Lines Insurance.”

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

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

Challenging another common assumption, Conning says size is not the determining factor for profitability and growth in personal lines. “The most striking result of analyzing the companies composing our list of growth and profit leaders is the skew in the distribution of firms by size,” Conning notes. The report shows that 14 of its 18 growth and profit leaders had total personal-lines premium volume of less than $500 million.

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

Of course, Conning notes that, mathematically, it is more difficult for the largest companies to grow at the rapid pace of a successful small insurer, which in part explains the outsized presence of smaller insurers. “For State Farm to grow at the same pace as the slowest-growing firm from our list would require the addition of $1.3 billion in new premium in a single year—the total premium volume of the 19th-largest personal-auto insurer,” Conning explains.

But the firm contends that its list indicates that companies need not be big in order to excel. With the wave of consolidation in personal auto, Conning notes, “there is a tendency to conclude that increasing size and scope are becoming requirements for success.”

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

Conning also says a specialty or niche focus can lead to more customer loyalty, which helps improve retention, and, through a better understanding of customers, insurers can take a more targeted approach to customer acquisition, leading to a higher conversion rate.

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