Agency Networks – The New Reality in Insurance Distribution

In today’s insurance landscape, competitive pressures, increased capital availability—even amid rising interest rates—and the evolving business environment, accelerated in part by the pandemic, have created a unique opportunity for independent insurance agents (IAs). These agents, striving to grow and maintain their independence, are increasingly turning to agency networks as a strategic move. For insurance carriers, understanding the significance of agency networks and the motivations behind agents joining them is critical for leveraging this distribution model effectively.

In this blog post, we’ll explore the role of agency networks, the benefits they offer, and the implications for carriers in navigating this growing trend.

The Endurance of Independent Agents

For over two decades, industry experts have speculated about the potential decline of independent agents, with direct and alternative distribution channels—like embedded insurance at points of sale—gaining traction. However, the reality is that independent agents remain the dominant channel, particularly in commercial lines. The notion that the role of the agent is diminishing is not only premature but also inaccurate.

Independent Insurance Agents & Brokers of America data underscores that independent agents continue to be a vital part of the insurance distribution network, especially as commercial risks become more complex and business arrangements evolve. The “death” of the independent agent has been greatly exaggerated.

Challenges Facing Independent Agents

While independent agents remain a cornerstone of insurance distribution, several forces are reshaping the landscape, adding pressure to their operations:

1. Private Equity Investment: The influx of private equity into the insurance industry has accelerated agency consolidation. Despite recent interest rate hikes slowing some mergers and acquisitions, the pipeline remains robust, and capital continues to flow into target agencies.
2. Changing Work Environment: The shift to virtual or hybrid work models requires agencies to adopt new capabilities to attract and retain talent and maintain operations—an area where many agencies currently struggle.
3. Talent Competition: Even with alternative staffing models like gig workers and virtual teams, independent agencies face significant challenges in securing and retaining the talent necessary to sustain their businesses. Moreover, with the average age of insurance producers and account managers exceeding 50, the industry faces a looming talent gap as the current workforce approaches retirement.
4. Digital Prospecting: As prospects and customers increasingly expect to engage with businesses online, agencies must establish a strong digital presence. This requires a significant investment in digital marketing capabilities, an area where many independent agents seek guidance and support.

These challenges have widened the performance gap between small to mid-sized independent agencies and larger brokerage firms. Larger players leverage their capital to enhance capabilities and outperform the competition, leaving smaller agencies struggling to keep pace.

Agency Networks: A Solution for Independent Agents

Agency networks have emerged as a powerful solution, helping independent agents bridge the gap created by these challenges. Networks offer a variety of benefits, from marketing support and training to technology access and enhanced compensation structures. By pooling premiums and resources, networks enable smaller agencies to compete more effectively with larger firms.

For exclusive agents (EAs), agency networks provide a compelling alternative, offering the choice of carriers while still delivering the business and operational support they need. This flexibility has attracted talent from the exclusive agency channel, further bolstering the value proposition of agency networks.

The popularity of agency networks is on the rise. As of 2022, there are nearly 40,000 independent agencies in the United States, up from 36,000 in 2020. With two-thirds of these agencies generating less than $500,000 in revenue, it’s no surprise that a supermajority of them are part of an agency network. Our survey of 500 independent agents across the U.S. reveals that over 70% participate in one of approximately 150 networks.

The Cost for Carriers

The rapid expansion of agency networks presents both opportunities and challenges for carriers. While networks provide substantial benefits to independent agents, they also come with costs for carriers, particularly in terms of distribution expenses. As networks gain power in the marketplace, carriers must carefully consider how to engage with them and manage the associated costs.

Motivations for Joining Agency Networks

A common misconception is that independent agents join networks primarily to increase revenue. In reality, the motivations are more nuanced, and understanding these motivations is crucial for carriers aiming to build strategic partnerships with networks.

Key Challenges and Goals for Independent Agencies

Independent agencies face several ongoing challenges that agency networks can help address:

1. Skill Development: Independent agents often struggle to balance the skills needed to manage their business with those required to drive growth. Additionally, many agencies lack the technical expertise needed to thrive in a digital marketplace.
2. Scale: Smaller agencies face difficulties in attracting and retaining talent, as well as achieving leverage with carriers. Agency networks can help level the playing field by providing access to larger pools of talent and better negotiating power with carriers.
3. Scope: While one of the key advantages of independent agencies is their broad product offering, smaller agencies may lack the capacity to fully understand and market a wide range of products. Networks can provide the support needed to enhance product knowledge and specialization.
4. Capital: Investing in the tools and capabilities needed to differentiate a business requires significant capital—often out of reach for smaller agencies. Networks offer a solution by pooling resources and providing access to necessary tools and technologies.

Top Reasons Independent Agents Join Networks

Our research identified three primary objectives driving independent agents to join agency networks:

1. Talent Acquisition and Development: More than 55% of independent agents cite finding skilled employees as a major challenge. Agency networks offer support in recruiting, training, and developing talent, helping agencies deliver better service and retain employees.
2. Enhanced Marketing Capabilities: In today’s digital-first environment, an online presence is essential. Networks help agencies build and execute effective digital marketing strategies, leveraging cost-effective solutions and advanced technology.
3. Increased Carrier Access: Independent agents value the ability to work with multiple carriers, offering a range of products and price points. Networks provide smaller agencies with access to a broader spectrum of carriers, enhancing their ability to meet client needs and secure placements.

Strategies for Carriers to Maximize Benefits from Agency Networks

While agency networks offer clear advantages for independent agents, they also present challenges for carriers, particularly in terms of increased distribution costs. To maximize the benefits of agency networks, carriers should consider the following strategies:

1. Develop Balanced Compensation Plans: Create compensation plans that align with both carrier and network objectives. This includes performance-based incentives that reward networks for achieving mutually beneficial outcomes.
2. Address Skill and Technology Gaps: Support independent agents by offering training and technology solutions that complement the capabilities provided by networks. This could include digital marketing training, self-service tools, and AI-driven solutions to streamline operations.
3. Complement Network Capabilities: Rather than duplicating the services provided by networks, carriers should focus on areas where they can add value. Understanding the strengths of key networks and identifying gaps where carriers can step in will be crucial.
4. Select Strategic Partners: Carriers should identify networks that align with their business goals and develop tailored engagement models to support these partnerships. By working closely with the right networks, carriers can enhance their distribution strategy and achieve sustainable growth.

Conclusion

Agency networks are becoming an increasingly important part of the insurance distribution landscape. They provide independent agents with the tools, resources, and support needed to thrive in a competitive environment. For carriers, the rise of agency networks presents both challenges and opportunities. By understanding the motivations behind agents joining networks and strategically engaging with these networks, carriers can turn this trend into a powerful lever for growth and innovation. At DOXA, we believe that the future of insurance distribution lies in collaboration, innovation, and the strategic use of agency networks to create a more resilient and dynamic industry.