I read Jim Holm’s recent piece, Are Reduced Commissions the Wave of the Future?, with a mixture of confusion and dread. At first I was confused, because it read like paid advertising for Travelers, but with ad copy full of inherent contradictions like this one: “Even though they sell value, our member agents are typical in that they often place the insured with the company that provides the lowest quote.” It was followed by dread when I realized that independent agents might actually view this as advice.

The subtitle of Mr. Holm’s article was, “Is our industry on the verge of killing the independent agency goose-that-lays-the-golden-egg?” One sure way to kill the golden goose is for independent agents to always recommend the lowest priced product to the consumer.

At first I was tempted to forgive Mr. Holm his point of view because he was articulating a business model focused on personal auto insurance in rural Minnesota, whereas most of the insurance we write covers the entire household in large population centers. But no. I decided I fundamentally disagree with his premise for independent agents.

If I understand him correctly (and maybe I don’t), Mr. Holm believes that the way to forge a trust relationship with a consumer is to first recommend the lowest priced product regardless of the consumer’s individual needs, then build from there. Build to where? There is nowhere else to go but down when you’ve ignored a consumer’s specific circumstances and merely recommended the cheapest option. There’s no value in that, and any incipient trust will be shattered when the consumer realizes s/he’s bought the wrong product or gone with the wrong company.

Besides, Mr. Holms denudes the independent agent’s very value proposition by seemingly advocating a private passenger auto-centric business model. Personal auto insurance is increasingly commoditized and disintermediated, and is among the lowest profit margin lines for an agency. Insurance for the home and things in the home, however, has largely resisted disintermediation. That’s because they tend to be higher value assets which present more complex risks that demand greater expertise and objectivity. Focusing on the entire household rather than just what sits in the garage, driveway, or street plays right into the independent agent’s unique value to consumers.

We and our agencies are experiencing 10–20+ year household retention rather than the mere years offered by personal auto insurance. As a result, we’ve been able to increase the commissions we pay agencies for our signature package product without increasing its cost to the consumer. And it only takes an average of 7.5 minutes to quote.

That’s what I call a golden goose.

Tom Ealy is President of Encompass Insurance.

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