Independents vs Captives
Independent Insurance Agents = ChoiceInsurance policies, insurance billing and the overall insurance industry can be confusing and intimidating. Please read a little further and I will help you understand the channels to purchase your personal insurance. The Channels or “distribution systems” are the methods used by insurance companies to sell or distribute their products to the consumer.
As a consumer, you can purchase your insurance protection from three primary sources. Captive insurance agents, direct sellers and finally, independent insurance agents.
Some insurance companies have developed a preferred distribution system that involves captive insurance agents. Years ago as the insurance companies were formed they decided to closely control how their insurance products are sold. They established captive insurance agents that are directly contracted with their company. Examples of well know reputable companies that sell through captive agents are Farmers, Farm Bureau, Nationwide and State Farm.
Insurance companies consider most of their captive insurance agents as self-employed businesses, however, these captive agents are only allowed to sell the products of this one insurance company. Now once in a while, the parent insurance company will buy another carrier so their agents have a second source of product. For example, this acquired company may specialize in substandard auto risks. Generally the parent company requires their agents to give them the first offer to write all new policies. If the business is not to the company’s liking, teenage drivers for instance, then they allow their agents to insure the teenager with their other company.
In essence, insurance companies that sell through captive agents narrow their product offering to compliment a niche market. This allows them to be competitive within their chosen source of business. If a client meets all of the insurance companies preferred criteria, then that company may offer a strong insurance policy for a competitive price. However, many people and businesses are outside the company’s business model. By design, the captive agents are extremely restricted in their customer base and product offering. Bottom line, captive agents may be competitive in their niche market and uncompetitive in a broader array of insurance.
Companies like E-surance and Geico choose to sell directly to the consumer. The Internet has made it possible for insurance companies to sell products directly to the customer. Direct sellers have chosen to eliminate the front line insurance professional. Their challenge is to provide service while attempting to reduce costs. They spend huge amount of money on advertising to bring customers to them. For example you may have seen advertisements using lizards or cave men to capture your attention, the potential consumer. Direct sellers need to hire employees to assist with coverage and processing costs. These expenses all impact the pricing structure of their insurance product.
Progressive Insurance is interesting because they sell coverage direct to the consumer and through independent agents. While I’m not privy to the exact financials, the independent agents sell the vast majority of all Progressive’s policies.
Some direct writers provide an expedient level of service. As an insurance professional the challenge I see facing the direct sellers is they don’t know you the customer. Direct writers provide a product but they don’t make the effort to know if it’s the best insurance policy to protect you. They don’t know if you have assets to protect, or what types of coverage you really should purchase. Their theory is insurance is a contract. The consumer needs to be fully aware of the restrictions and limitations of the coverage you purchase.
The final distribution system depends on independent insurance agents. Now before you read further, let me admit my bias. Professionally and personally, I feel this is the best way to buy insurance. Let me explain why I make such a bold statement.
Independent insurance agents shop for you! Independent agents are contracted with a number of insurance companies. These companies have chosen to distribute and sell their insurance policies through independent agents. They have found independent agents are the preferred method to bring insurance products to you the consumer. The insurance companies do not own the insurance agency. They strictly compensate an independent agency after a policy is sold and placed with them. The company realizes independent agents have a number of other insurance companies they represent. Therefore their insurance coverage, claims service and pricing have to be extremely competitive to earn your business.
Generally, insurance companies that only distribute policies through independent agents do less advertising than direct sellers. (This is a problem because they may not be as successfully branded as a direct writing national insurance carrier.) The independent agent distribution system relies on agents to market and sell their product. Bottom line, they choose to pay agents a back end commission in lieu of heavy advertising expenses. Since I believe in full disclosure, I’ll share with you how this works. Agents receive a commission range of 8-15% of your premium dollar. For example, if you pay $1000 for auto insurance the company subtracts a State of Michigan MCCA fee of @ $125. They pay the agency commission of 8-15% of the remaining $875 premium cost. If the agent does not sell or service your business, then no expenses are incurred. This helps the insurance company control costs. Independent agents earn their income or they go out of business.
Progressive Insurance is the exception. They have decided to act as a direct seller and also sell through independent insurance agents. They use two different pricing structures for their policies. Sometimes Progressive direct premiums are a little less other times Progressive Independent agents save you money.
Aside from being extremely price competitive, independent agents have a broader array of products. That means if you own a home, rental home, jet ski, farm, autos and a classic car, you have one resource to protect you. As I mentioned earlier, insurance gets complicated.
Insurance tends to be a relationship business. However you choose to purchase insurance, please find an educated and dedicated insurance professional that looks out for your protection while controlling your costs. You’ll know when you choose the right agency to protect you. This exceptional insurance agent will constantly strive to protect you, your family, and your business.
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