who is the redheaded stepchild of allstate's Distribution system?

company is caught flat-footed by a mass
exodus of successful agency owners.
So will the captive Allstate agents who
leave and set up shop as independents
continue to write Allstate in volume
Not likely. Remember, most of it is being
written now because for captives, Allstate
is the only game in town. Also, not every
cluster group or aggregator holds an Allstate
contract. But if a diligent analyst or
financial reporter were to do some legwork
and contact the independents who
sell Allstate, they would likely find that
many of them sell few Allstate policies.
Moreover, they might admit that they
stay appointed with Allstate because of
brand recognition, not because of competitive
rates or loyalty. Sure, the brand
gets the prospects in the door, but once
the negotiations begin and the agent
points out that Allstate has among the
highest rates in the agency’s portfolio,
the focal point becomes price. Then as
the agent assures the prospect that all of
the companies represented by the agency
are every bit as good as Allstate, the
prospect is gently nudged into buying a
policy with a competing carrier.
So by treating its captive agency force
like the red-headed stepchild of its multipronged
distribution model— a model
that includes Encompass, Esurance, and
other channels—Allstate is chasing away
the very agents that benefit Allstate the
most. Replacing them with independents,
especially those who are former
captive Allstate agents, is a poor business
decision. They will most likely just mention
the Allstate brand on the phone in
their sales pitch, but ultimately sell their
prospect something else. Just being mentioned
on the phone does little to fill the
coffers in Northbrook.
Captive agents transitioning to the
independent world become even more
problematic for Allstate as many of them
are taking the lower termination payment
offered by the company in lieu of
selling their agency to another insurance
agent. This allows them to solicit their
former policyholders after only one year
instead of the longer three to four-year
non-compete required by most buyers
and lenders. Allstate is betting on their
policyholders’ loyalty to the brand – but
most agents feel that they can leverage
their longtime one-on-one relationships
to win back up to half of their former
policyholders AND offer them a lower
price to boot. If these ex-Allstaters are
able to come anywhere near that goal, it
will do nothing to help Allstate achieve
its stated objective of surpassing State
Farm by the end of the decade.
Postscript: A Volatile Dynamic
No article addressing the alienation of
Allstate’s captive agency force would be
complete without mentioning the foundational
changes in the structure of captive
agencies that is set to take place.
Allstate’s stated objective is to double
the average size of their agencies. They
intend to do this by, for all intents and
purposes, forcing smaller agencies to sell
their businesses to larger agents. The end
result will be fewer, but larger agencies.
This is an enormous change, and as with
any large-scale change to a business dynamic,
it could very well allow the law
of unintended consequences to rear its
ugly head. The most obvious objection
to this concept is that it is far easier to
grow a small agency than to grow a large
one. Since growth is the objective, the
idea of growing with fewer, larger agencies
seems to fly in the face of common
knowledge. Recent statistics could indicate
some serious problems with this
strategy. Since 2009, the size of the average
agency has increased by about 10%.
During that same time period, the number
of agencies has decreased by 14%.
But here’s the kicker: the number of new
auto insurance applications, a primary
indicator of growth, decreased by 13%.
Although we cannot make a direct correlation
between the 14% decrease in the
number of agencies and the 13% drop
in auto production, it is a fact that demands
consideration. And although the
current average Allstate agency is about
20% smaller than its counterpart at rival
State Farm, many would argue this has
nothing to do with large agencies doing a
better job, and everything to do with the
lack of a competitive product.
Some other potential landmines in
Allstate’s Roadmap for captive agents
include:
• Allstate’s focus is to target “Personal
Touch Loyalists,” or customers who value
having a relationship with their agent. It
could be argued that mandating larger
agencies could alienate many of the very
policyholders they wish to attract. Many
of the smaller agencies are in rural communities
and consist of policyholders who
have been with Allstate 10, 20 or 30 years.
These customers are accustomed to calling
and talking to their agent whenever
the need arises. How they will react to
the mega agency environment, with the
accompanying staff turnover and the increased
difficulty of speaking directly to
their actual agent, either in person or on
the phone, remains to be seen.
• The combination of potential commission
cuts and lack of agent job security
has caused the market value of captive
Allstate agencies to plummet. In the past,
agencies commonly sold for as much as
twice the amount the agent could have
received from Allstate as a termination
payment. Today, the same agency might
sell for a scant 20% more than the Allstate
termination payment. This gives
terminating agents all the more reason to
take Allstate’s termination payment, as
discussed above, so they can solicit their
former clients after only one year.
• All of the above changes have
brought morale among captive Allstate
agents to an all-time low. Most agents
this writer has spoken to have said that
they are cutting back on marketing and
other initiatives to grow their agencies
in fear of what their Allstate future truly
holds for them.
In closing, the disparity between captive
and independent agents, coupled
with the changes that Allstate has instituted
over the last few years, create an extraordinarily
volatile dynamic. By taking
actions that many feel are tantamount to
declaring war on its primary distribution
channel, the company is taking an
enormous risk. Based on the number
of variables discussed above, this writer
believes the likelihood of this going exactly
as planned is about the same as a
pool player knowing exactly where every
ball will stop after the break. And if they
have miscalculated, shareholders better
be ready for a bumpy ride. Ef
Winter 2011/2012 Exclusivefocus — 11