Editor's Note: Four different insurance distribution models are discussed in this two-part series. Part 1 (CU Journal, June 16) explored in-house agency models as well as acquisition of an existing agency. Part 2 continues with two additional models.
If you think building an in-house insurance agency from the ground up or acquiring an existing agency is daunting, you're not alone — our research supports that conclusion from a variety of perspectives. Indeed, the challenges are significant. Now let's look at two more options.
Option 3: Partnering or entering a joint venture with a third party. In this model, the two parties to the joint venture (typically) each own 50% of the insurance distributorship. Management and sales talent is already established, and both partners have monetary incentives for success. And unlike some models, an appropriate joint venture can provide scaling flexibility to adapt to ever-changing distribution demands of the market.
But some of the harder-to-quantify variables can take their toll. For example, by its very structure, this model means a two-way lack of control over the other partner's strategic vision and planning. It can also mean lack of control over member satisfaction since ideologies can very easily be opposed. Conflicts of interest are possible, too. And in the event of a split (without extremely clear definitions in the contract) messy battles over who owns customer lists and territories, how operations should be divided, and other logistical challenges can carry on — very unprofitably — for years.
Option 4: Outsourcing to a third party. Here, with a low cost of entry, often with no investment of time or money, the credit union acts as a conduit for the outsourced partner to access or respond to insurance requests and leads. In return, the credit union typically receives a percentage of the insurance premiums on each policy sold. The partner provides all of the management and sales talent, handles all aspects of licensing, training and carrier appointments, and incentivizes the relationship for both parties. In some instances, this model may even co-exist with one of the other three models: It can interact with members through media and channels the agency can't afford or reach members in states or regions otherwise unavailable for insurance sales.
Implicit in outsourcing is that some factors — most notably the strategic direction of your outsourcing partner and responsibility for customer satisfaction — are not in your direct control. In other cases, outsourcing may have limited channel availability, which could vary by state. Both of these concerns underscore the need for careful consideration and selection of an outsourcing partner with proven long-term success.
The Current Landscape
Given these four options, what does the current credit union landscape look like? Which of the insurance distribution models is leading the way? In 2013, among credit unions with at least $1 billion in assets, here's what we found:
- 62% outsourced their insurance distribution
- 28% owned an agency (which was either purchased or built)
- 10% chose the joint venture model
This insurance distribution landscape remained the same from 2012 to 2013. Interestingly, in the agency ownership group, we found that a sizable percentage (at least 27%) also outsourced with a third-party partner. Why are so many credit unions using the outsourced model outright? And why are some combining it with their own agencies?
It's because building or buying an agency necessarily depends on many critical factors which must be aligned: Asset size, membership size, number of locations, geographic area, growth potential, staff expertise, operational capacity and many more. Given the right set of circumstances, an owned agency model can work.
However, from multiple research sources, a clear message emerges: For most credit unions, the risk in startup capital, the lack of insurance leadership expertise, the lack of effective marketing capacity/investment, the complexity of insurance regulations and the drift from the core credit union mission don't result in an attractive opportunity to expand the business.
And even if a larger credit union can overcome these pain points, the historically long break-evens in agency models (that can take seven, eight or more years to achieve) are a real deterrent. Is it all that surprising that agency ownership only works for a relative few, especially if that first dollar of profit is several years away?
Regardless of the distribution model, we know that insurance products increase the number of products per household, which tends to increase member retention. Insurance sales may even compound this, because retention in personal lines is often nine years or longer (on average) while other financial products, specifically auto loans and HELOCs, have much shorter lifespans. Given this, it appears most credit unions realize the amount of work, dedicated capital and overall risk involved in owning an agency doesn't justify the potential outcome — especially when immediate results are available through outsourcing.
Too Much Squeeze, Too Little Juice
In other words, for most credit unions considering agency ownership, there's too much squeeze for too little juice.
When we look at consumer trends and research, we see a similar picture. According to the McKinsey Auto Insurance Customer Insights study conducted in late 2012, more than 80% of today's consumers begin researching insurance products in direct channels, but most choose to buy in another channel, either over the phone or face to face. This omni-channel consumer expectation creates growing challenges for agency models. Can an agency respond effectively?
Further, the incredible noise in the marketplace — billions of dollars in advertising will pour into the market from big national players in 2014 alone — creates another ongoing obstacle for relatively small agencies that likely lack marketing expertise or sufficient budget.
These are real concerns. If your credit union is considering various insurance distribution models, we encourage an eyes-wide-open approach: extremely careful research, due diligence and expert outside counsel and consultation. With thorough big-picture evaluations combined with details of your specific marketplace, your credit union can successfully navigate insurance distribution options and make the best decision for its business, and ultimately, its members.
Stephen Arnold is a vice president at TruStage, a brand of CUNA Mutual Group. Contact him at
