Uncaptive Agency: The Future of Insurance, Ep. 18

Personalized comparative rating really changed the independent agency industry 15 years ago, and the need for smart technical solutions is greater than ever. Tarmika is an industry leading commercial comparative multi-rating insurance software, and this week we are honored to have its CEO as our guest.  

One of the angles that set Tarmika apart from the myriad technical solutions for insurance in the market is that they make every decision in terms of what is best and most helpful for the agency. The next frontier may be to also find a way to do what’s best for insurance carriers, helping reduce friction and costs in all sides of the industry.

Join me as I discuss the technological revolution in the insurance industry with Raghav Tanna, CEO of Tarmika.

Watch

Read

Tony Caldwell:

Hey, everybody, this is Tony Caldwell. Welcome to another episode of Uncaptive Agency where we're talking about the future of insurance distribution. It's early 2021 and we're looking forward to the next three to five years attempting to ask bright people from around the industry where they think insurance distribution is headed. And today, I'm super excited to have as my guest, Raghav Tanna or Tanna, who is the CEO of Tarmika. Tarmika is one of the early entrants in the commercial comparative multi-rating business. And I understand that you go by Rags, which I'm going to just use, because it's easy. And so Rags, welcome.

Raghav Tanna:

Thank you.

Tony Caldwell:

Delighted to have you with us. I think it's important for our listeners to know that not only are you a technology CEO, but you came from the independent agency business. Give us just a thumbnail on your insurance industry background.

Raghav Tanna:

Yeah, so it's funny. I've been in insurance since I was a baby, essentially, my dad started his independent agency out of our basement when I was about seven years old. So, in early 2000, and since then, it's kind of just been ingrained in my mind. So, my first job out of college, my first internship was an insurance at Travelers. And then I switched to the independent agency of route when I was about 24. Worked with my dad for a few years before coming up with this concept. And it's been ingrained in me since I was a little kid, though.

Tony Caldwell:

So, one of our mutual friends, Mike Sterlacci, said that you were frustrated at how small it was, I guess, to do submissions for small commercial, and just thought there has to be a better way and that's what led to the founding of Tarmika. Is that right?

Raghav Tanna:

Yeah. It was one account in particular. I submitted to seven or eight companies. And after I got through the whole process of entering the data, all of them had declined the account. And it was a decent-sized risk, so it wasn't small by any means, but I figured there had to be a better way. I went out looking for a solution and couldn't find anything that was API forward and tech forward. And decided, "Hey, this is my chance. This might as well be the next platform we build on insurance."

Tony Caldwell:

And so now, you're working in about 20 or 25 states with over 30 insurance companies as I understand it. Tell us just a little bit about what Tarmika does and where you're where you're pointing to in the future?

Raghav Tanna:

We're actually up to 35 states. We have agencies in 35 states. We have 28 insurance carriers on the platform. And our focus right now was... our focus moving forward is to essentially cover all products in small commercial, whether that's a BOP, commercial package, Workers' Comp, commercial auto, we're trying to cover every level of what an agency goes through on a day-to-day basis on their quote flow. And I think over the course of the next six to 12 months, you'll start to see a transition from a lot of these carriers that didn't previously interface with companies like ours, starting to build API technology to integrate with our system or other systems out there.

Because the way personal lines went in the agency world, I don't think commercial is ever going to go to direct to consumer, at least to the extent personal has, but the way personal went with comparative rating platforms or efficiency tools is kind of the same vision that people are starting to see for the commercial line space. Small quick risk going into a single platform and being sent to multiple carriers and then the agency does their due diligence as an advisor, and makes the final decision.

Tony Caldwell:

Okay, so are you currently able to quote all lines of commercial on the small side or are there pieces that you're still working on?

Raghav Tanna:

There's pieces we're still working on. So right now, we have our first commercial package just went live. We have Workers' Comp, we have BOP, we have commercial auto, we have cyber. We have one carrier on management lines. There's still some missing, yeah, an umbrella missing. We need to roll out commercial auto further, package further, but there's still elements of it missing.

Tony Caldwell:

But you know what's exciting, I think, is that even though you've got some missing pieces, you're in most states and really starting to roll and you've really only been in business for a couple of years. So I'm gathering that what's important is to build the engine and then you just start bolting on the parts. Is that kind of how that's working?

Raghav Tanna:

Yeah, I think one of the mistakes a lot of tech companies make upfront is they try to solve it with a tech forward solutions and say, "Okay. We're going to throw at it." And if you think about insurance, you have to go with the agency first experience. And that's really what we focused on is what do agencies want to do? How do they want to do business? And that's how we made all of our decisions. If you can build that tech engine, which anyone can do, you can focus on the parts that are really important to this industry, which are how agencies do their day-to-day business.

Tony Caldwell:

So, obviously there are other people in this space trying to solve the same set of problems based on the fact that personalized comparative rating really changed the independent agency industry. And if you think back 15 years or so ago, when it really came to the fore, a couple of things have happened since then. One is the independent agency market share in personal lines grew compared to direct rider, so it actually caused a lot of organic growth for the carriers and the agents involved. That was the good thing.

The negative side of that was that a lot of agents, we have also in the same time period had a lot of captive agents shifting to the independent agency space. And along with that, another trend that was happening was that direct-to-consumer companies really ramped up their aggressiveness in personal insurance. What that led to was a real focus on the part of both agents and consumers on price, which as professional insurance agents would all, I think, agree that's not optimal. Do you see the same kind of thing happening with commercial comparative rating?

Raghav Tanna:

No, and that's one of the reasons why we never use comparative rater for our platform. I think if you look at the trajectory of our system, the way Mike Sterlacci's agency uses it, the way other agencies use it, they enter in the data into our system to allow it to flow to the carriers that they want to work with and then they don't look at firms. They look at the carriers that they actually have a good relationship with. That core carrier, that agency, that carrier that they really need to grow with and the one that has the best coverages.

And that's what makes agents so valuable is you can't get the best coverage by going online to a GEICO and figuring out what you need for auto insurance. You definitely can't get the right coverage for your business going online, not understanding what you need for your specific business. And just entering in a bunch of information saying, "Okay, I'll take whatever coverages they handed me." An agency knows all that. So at the end of the day, our system is designed to get data into carrier systems, not to compare rates and price. One of the coolest things about our system is that only 18% of the time is the lowest premium clicked on. It's pretty uncommon.

Tony Caldwell:

Well, are you able to... actually, I mean, can agents use technology like yours to compare price more readily than they could, obviously, then if they did a bunch of different individual quotes by hand?

Raghav Tanna:

100%, yeah, absolutely.

Tony Caldwell:

Yeah. So, the idea is it's really going to speed up the agent workflow and create a lot of efficiency inside agencies.

Raghav Tanna:

That's the goal. I mean, you have CSRs. They're spending hours quoting every single day and you want them to spend maybe 10 minutes quoting and the rest of time, making sure they're doing functions of the business that increase revenue, increase retention, things that really matter to an agency. You're already going to win this account. You don't want to spend four hours quoting.

Tony Caldwell:

I know from your agency background and certainly, I would think from what you're doing, you've been doing time motion studies to look at the savings. The typical service cost in an agency in commercial insurance is around 25% of revenue.

Raghav Tanna:

Yep.

Tony Caldwell:

And obviously, there's service involved in that, but a fair amount of quoting, especially on the small commercial end. What do you think that systems like yours are going to do to cost in the agency?

Raghav Tanna:

So, we had done a study on this and it was mainly my own experience on the agency side. So, my background is that I only wrote commercial on the agency side. I wrote 3 million in small commercial business over the course of three years. And out of that premium on the renewals, we had the CSR only use Tarmika to renew and remarket business. The amount of time it took for them to manage my dad's book of business compared to my book of business, one went the route of, "Hey, let's go to every carrier and remarket it." And ours went the route of, "Let's go to Tarmika and remarket it." It saves about, and his agency is smaller, saves 6% of costs, which is significant. Quoting isn't everything you do as a CSR, but 6% of costs for an agency that let's say is doing 10 million revenue, that's significant. That's a lot.

Tony Caldwell:

No, it is. And insurance carriers are focused on cost control and one of the concerns that agents have is that that may result in changes to agency compensation over the next few years. So, cost control for agents in turn becomes important. And if you read the studies that compare A to C profitability, probably 20% is a good EBITDA number to use. So, what I heard you just now say is that you can raise EBITDA by 25% in a typical agency focused on small commercial?

Raghav Tanna:

So, you can raise EBITDA in a typical agency, but going to your agency compensation point, if you think about what the agency now has access to and what they're capable of, reducing agency compensation will negatively impact that carrier because not all carriers will go down like that. I mean, carriers that continue to pay agencies appropriately will end up winning at the end of the day. So, I think it gives more power to the agency now to be able to make their own determinations on, "Hey, we're placing all this business with carrier 1. If you limit our commission structure, we're going to move it to carrier 2 and it's really easy for us to do because we now have the system.

Tony Caldwell:

There's no question. And so, that you've really added a wrinkle of complexity to the conversation. There's no question that agents are going to move always over time where they get paid the most or at least they should as good business people. So, if carriers, due to that incentive to pay more to make sure they don't lose in the marketplace, one of the things they've got to do is really focus on controlling their costs into other areas. And so, how does a system like yours help a carrier control their cost?

Raghav Tanna:

And that's one of the things that we've been kind of toying with for the last two years is we needed to provide just as much value to a carrier as we do to an agency. So, what we started building was this data dashboard, this data analytics tool that allows a carrier to log in and see how they're performing on business that's submitted to them. What is their hit ratio? What's their bind ratio? How are they competing as anonymized competitors? What are they doing in Dallas, Texas, versus Houston, Texas versus Austin, Texas and they can narrow it down by state, by region, by agency.

Tony Caldwell:

Good, that's interesting. One of the things that I am a firm believer in is that COVID finally created the environment for a lot of changes. Throughout history, there have been technologies that are really cool technologies, but the environment wasn't right for their adoption. And Zoom is a great example. That Zoom or Skype or some of these others, there were people that were using them, but typically, most people didn't know how to use the technology didn't have a reason to know how to use it, so they didn't.

All of a sudden, COVID-19 created an environment in which digital face-to-face technology was critically important. And I think that it's created an opportunity for agents, because now geography is no longer important in developing relationships with potential clients or maintaining it with current clients. My guess is that we're going to see startup agencies in particular, moving increasingly to digital platforms to build their agencies on and eliminating geography as a constraint. I mean, they've got some regulatory issues and you got to buy a license for 50 or 60 bucks in every state that you operate in. But I think that's going to happen. And how does technology like Tarmika, how does that play into this borderless future?

Raghav Tanna:

Right. So, you're absolutely right. You start seeing it every day, right? Agencies are becoming more digital. They're more likely to adapt to new technology. And even just for us, it's easier for us now to contact agencies to contact carriers. Because in the past when we were traveling and flying to sell to these agencies and carriers, now we're doing everything like this. Everything's online. It becomes extremely easy. But our system was designed to be able to write business in any state that a carrier can. So, just because we have agencies in 35 states, it doesn't mean we can't write in all 50.

So that's the best part is now these agencies that say, "Hey, I'm in Ohio, but I want to write in Michigan, Wisconsin, Montana," wherever they want to write business, they can log into our system as long as they're licensed to write in that state, that carrier is capable of writing in that state, they can do it through our system. And that's the best part is you're opening up your entire agency to find new areas of your business to grow and to expand. So, I think you'll see that not just in startup agencies, but even these large agencies that were really focused on a niche market in one area expand out and go into other states, other areas, and our system hopefully makes that possible for them.

Tony Caldwell:

Yeah. The reason I say new agents, and I certainly don't dismiss the idea that existing insurance agencies aren't going to adapt and move and remove geographical boundaries, I think they will. But progress and change and cutting edge development tends to take place with fairly new businesses. And so, and there's a lot of other reasons why a startup agency and there's been several thousand new startup agencies every year for the last decade eliminating all the costs associated with rent and associated expenses is one reason why they may want to go digital first. Also, it's just much easier for them because they don't have an existing infrastructure, of any kind, really, whether it's people or a place to be considered of or take advantage of.

I remember a few years ago talking to the President of Travelers personal insurance and they're challenging Travelers at that point in time. And I'm sure they're still struggling with it is that they had 30,000 people in 300 legacy systems. And how do you adapt your business model with that kind of complexity? So, the new agency entrant just has a less friction in adopting technology, it seems to me.

Raghav Tanna:

It's the same as the carriers. You're absolutely right. I think it's funny, because a lot of newcomers into this space that don't understand the carrier and agency dynamic will go in and say, "All right. We're going to come in and disrupt the market. We're going to change the way carriers operate, change the way agencies operate." You can't do that. It has to be a... there's a process involved. Carriers are built on certain systems that don't allow them to do certain things. And that transitionary period isn't going to happen overnight. It might take three, five, 10 years, in some cases.

Same with agencies. Agencies that have been around for 60 years, they went from paper to paperless to their new system, and it takes time and effort to make all those changes. And every time you do something like that, you cut back on the amount of business you write. So, it's not the focus of a business owner to make those updates.

Tony Caldwell:

Right. So, I am curious, I mean, from your customer base, the people who are adopting your technology, how many of them are fairly new entrants to the agency system versus existing, probably larger agencies? How's that look?

Raghav Tanna:

Yeah. A majority of our customers are larger. We do focus on larger agencies, large clusters and large groups, but we have started to see an influx of newcomers to the space. And those agencies do a lot of quoting. They're motivated to write business. They're grinding. They're quoting quite a bit. I don't know what their buying rates are, but they're doing a great job getting data into the system. Our larger agencies are focused on efficiencies and saving money and analyzing data with insights, stuff like that, but our focus always was large groups, large agencies. But as you start to focus on one area of the business, the model changes a bit and you start seeing a completely different side that you really weren't anticipating.

Tony Caldwell:

Okay. I mean, that probably the biggest challenge the industry faces right now is talent. I just came off a call with a bunch of agents on an Agent's Council. And that was clearly the number one thing and it has been for the last several years. Over half the employees in the independent agency system are age eligible for retirement over the next five to six years, so training them becomes hugely important.

You mentioned at the beginning of our conversation that agents in small commercial still need to know their stuff. I mean, they still need to understand coverages. I mean, they still need to be people who can advise clients on the coverages they need, and that your system and probably your competitors' systems don't eliminate that need. But do they make it easier, faster, cheaper for agencies to develop talent?

Raghav Tanna:

So, training becomes insanely easy. Instead of training them on 12 carrier systems, you're training them on one. That's one element of this that really makes sense. The problem is that agencies including my dad's agency, struggle with training people on what coverages are important for what type of business. That's years and years and years of constantly writing business and learning new things. That's going to take time no matter what.

But not having to train a CSR or a producer or a user on multiple systems, that's one of the things that's going to save agencies a lot of time. You're going to learn coverages through experience. You can't learn technology through experience. I mean you can, but it's much easier just to have one place to go, understand that really, really well. And then you'll be able to focus again on the things that matter.

Tony Caldwell:

So, and I understand your answer, but I'd like you to think three, five years out in front of you. Artificial intelligence is making enormous inroads in all kinds of things that used to require experience, judgment and wisdom because you can now program that stuff. So, do you see that day coming when systems like yours become, well, I'd say smart systems where they're actually based on a conversation with the agent, because I think that entry becomes less about typing and more about talking probably into the future. Based on a conversation with the agent, based on a conversation with the client or just understanding more detail around industry and all that sort of thing. Does artificial intelligence begin to more actively prompt the agent to write or suggest certain coverages automatically in your system and others?

Raghav Tanna:

It does, it does. So if you think about the way our system was built, we have the idea of allowing them to automate coverages and we have that built in where you automate coverages based on business class, right? So, if you start looking at landscapers and contractors versus restaurants versus wholesalers versus whatever else, there are certain coverages that are applicable to each one of those industries individually. Our system has had enough quote flow and data flow through the system where it understands what's important for those businesses. And it does automate coverages to a certain extent.

But over time, it's going to continue to expand upon that, so you're absolutely right. That wisdom that was required 10 years ago and 10 years, five years probably won't be required anymore. You still have to place the business in the right spot, you still have to know what company fits your client best, but you won't have to know, "Okay, these coverages should apply to every single contractor out there. These coverages should apply to every single restaurant out there because the system does it for you." So, absolutely, you're right.

Tony Caldwell:

You mentioned earlier that you're saving about 6% of costs right now. And I'm sure this is early days for your company. It's also early days for people that are trying to automate underwriting workflows, all that kind of thing. If you think out five years from now, the implication is as you get better at that is that even though the industry needs new talent, it probably needs less new talent, because you need less people if your systems are smarter, and you're more efficient.

Raghav Tanna:

You need less people, you definitely need less talent, and you can bring people from outside the industry much easier than you could in the past.

Tony Caldwell:

Yeah. Do you have a thought about there's 35,000 insurance agencies in the U.S. I've forgotten now the number of people employed, but let's just say it's a million people. What does that go... if it's a million people, how many fewer people do we need five years from now, do you think?

Raghav Tanna:

I don't know if it's fewer or different. I don't think you need fewer people. I think you need different people. Agencies have to stop or start operating like full-fledged small businesses or large businesses with your technological people, with your data science people. I think we get rid of certain positions, but we incorporate a whole bunch more. So I actually think the insurance industry will shrink agency wise. I think there'll be less agencies in five years, a lot of acquisitions, a lot of other stuff happening. I think the people that we need will continue to go up though constantly. And it will be in different departments.

Tony Caldwell:

Yeah. So, who... what kind of people no longer exist in the business in five years?

Raghav Tanna:

I think the people that no longer exist in the business in five years will be your kind of your run-of-the-mill remarketers. If you have people that are just focused on existing business remarketing those accounts. I think that will go away, but a lot of agencies don't have that anymore. They have CSRs that are focused on a whole bunch of things. CSRs are still necessary. I think you need technological folks. We need tech people in the insurance agencies and then you need data scientists in the industry.

Tony Caldwell:

So, data scientists, that's an interesting thing for an agency to contemplate. I remember about four or five years ago, I was having a conversation with a data scientist for Metropolitan Insurance Company. He was their only data scientist and they were already desperate for many more now. And so, it seems like keeping up with that demand is going to be really tough to do. And I actually invested in a business that was fractionalizing doing data scientists, so they've now sold out to another company. So that's actually a trend that's taking place is that fractionalization of work is accelerating along with all these changes. So, an agency with $2 million of revenue or a million dollars in revenue, can't afford their own data scientists, but they can afford what they need. So, what are they going to use that guy for or that lady?

Raghav Tanna:

And that's another thing. It's tough. You have a million dollars in revenue, it is tough to say, "Okay, I'm going to go hire a data scientist now." But when you look at retention rates, when you look at the amount of time you're spending on remarkets, when you look at how much new business comes in the door versus how much you're buying. If you can start to rationalize some of that information and standardize it across your agency, you're going to make more money. That data scientist will be worth its weight in gold.

You don't have to use a data scientist, you can use one of these companies out there. A big one right now is ORIS Analytics. They're analyzing all of this stuff. So, if you look at what they're doing and you can just understand their insights, you can take their insights and utilize them in your own agency without hiring anybody. I'm sure that's an option for a lot of people or take that data scientist and split it, like you said, among 5, 10 agencies. Each one of them can utilize those insights to write more business, to clean up their retention, better remarkets, quicker COIs, stuff like that. You have to understand what your agency spends time on and what they don't.

Tony Caldwell:

There's some questions about agency force I want to get to if we have time, but because there's real interesting implications for who wins in the marketplace in terms of size of agency. But you mentioned you talked about remarketing and earlier you just mentioned in passing retention rates as an advantage of using comparative systems like Tarmika. What are you seeing now for improvement in retention? So, if you go into an agency, typically, what's the retention in small commercial and what is it moving to because they're able to remarket every year much less expensively?

Raghav Tanna:

Yeah. So, there's going to be certain clients that want to remarket every year. I think the retention rate on average in small commercial, at least from what we've heard, and this is a small, small sample size, but it's generally around 80%, 80 to 85%. And you really want that number to be in the 90s. I think the ones that you're losing may not be clients that you always want, because the ones that are leaving want you to remarket every year and that's really tough for an agency to do.

If you could automate remarketing through a system like ours, right? So, you say in your AMS system, let's say this account goes up by 10%, you automate the remarket, so it automatically pushes data from the AMS into Tarmika and then it returns a quote back to you and you can go ahead and send that to the client, without anyone touching anything. It just happens. That will increase retention for those clients that you're losing because of price.

At the same time, though, you can also say, "Okay, we don't want to remarket all these accounts every single year." So, if someone is emailing us consistently year over year over a year and it's costing us, let's say, do your data analytics, it's costing us X amount and on this client, we're only making Y amount, you can decide, "Hey, we don't want that client anymore." It doesn't make sense as an agency. We're losing $4 on this client per week, because this is how much they talk to us. You can figure all that out through the proper data metrics. So, I think that's kind of where I think things are going is we're going to be focused more on the data, the programmatically automating solutions, and agencies will be better for it.

Tony Caldwell:

Okay. Well, so you really haven't measured it yet. But to, I guess, put some numbers to your point, the average agent's retention, according to the two major benchmarking surveys is about 85%.

Raghav Tanna:

Yeah.

Tony Caldwell:

Okay, so 85%. So, if you can drive that to 90, that's a 5% annual increase in revenue and if the agent... if you look at an insurance as a whole, it really can't grow much faster than the rate of growth in the GDP. I mean, obviously, we have things that affect rates, like weather that are outside of GDP, but on balance, that's really what you're looking at. So if you look over the last 20, 30 years, the industry is going to grow 2% to 3% a year. So, if the average agent is just in that river growing 3% a year, they've got to... to grow 3% a year, they're going to get that automatically.

To grow faster than that, they've either got to have some sort of a sales program or they've got to change retention. So, if they're adding 10%, we'll say that's their new business rate, 10%, that means they're netting seven and if you increase from 90, from 85 to 90, now you're 12. And you do that over a 10-year period, that's an amazing amount of revenue and bottom line, an agency value.

So, I'm always surprised at agencies that don't focus on retention first. It seems to me like focusing on keeping somebody you've already spent the money to get is a lot smarter play than trying to go get a new one. But to your point systems, like your system and others that are analyzing all this in the background and telling you, "Hey, you have to remarket, Rags, this year, because if you don't, you've got a 78% chance of losing that guy." And the remarketing itself is automated. Well, first of all, it removes the excuse and it means that agents that don't use systems like yours, probably don't stay in business. They probably get bought up or go out.

Raghav Tanna:

They get bought up, they go out, but to your point, what's the cost of acquisition on a new client versus the cost of acquisition on the client you already have? You might as well focus on the retention and the remarkets or the clients we have and built a relationship with. Insurance is always going to be, especially small commercial and large commercial, it's going to be relationship driven. So, for OAA, what's the cost of acquisition for retaining a client? It's way lower than the cost of you going out and finding a new client.

Tony Caldwell:

Yeah. No, it's absolutely true. But again, it's salespeople, okay, don't have this natural drive to keep something they've already caught, but they're going to have to get better at it if they want to prosper in the future. I think that's really a very clear message. So, back to 2026 and looking at 2026, what other, I mean, not necessarily with your product, but you're somebody that you're fairly young.

You came into the business in a traditional agency. You learned a lot. You moved into tech. You're really in touch with insurance companies and agents. You're working, obviously with some forward thinking agents, because those are the first adopters of products like yours. What do you see? What do you pick up? What do you sense? What are your predictions about how the industry looks five years out?

Raghav Tanna:

Yes. If you look at the spaces that have been ahead of the U.S. in the last... in insurance, specifically, you look at Europe and you look at Australia a little bit, what you see is that there's always one hub of connection where there's one area where everything's connected and agencies work out of one system or insurers or insurance monies work out of one system. So I think in five years, what's going to happen is the insurance industry will work through a fully connected interchange or exchange of sorts. And essentially, you'll live in your AMS, let's say, and in your AMS, you will have the ability to remarket accounts. You'll be able to issue COIs easily. You'll be able to create new business as a CRM and in a lot of agencies, you start to see working sales force and other things, maybe at Salesforce.

But you work in one place where you can handle your new business, your remarkets, your renewals, your COIs, your billings and I think agency management systems have started down that path a little bit. And they're doing a great job, but right now, you can't connect everything. There's data missing. The architecture isn't fully open. And the structure isn't necessarily where it needs to be to be able to do everything you want to do in one place. In five years, it will be there. Carriers will be able to connect to it easily. Agencies will be able to do anything they want from their insurance. We'll be able to access their policy details all from one place. And essentially, the full process becomes automated for an agency.

Tony Caldwell:

Okay, so speed is the issue right now and it has for the last five years. It's been on the top of carrier lists and things to get done, because that's again, agents are looking for speed just anywhere they can get it. And it seems like there's a dichotomy developing in the insurance company force. You have 900 companies rather and you have really big ones. You've got big tech budgets and others, maybe that don't have tech budgets or quite so large.

And so, there seems to be haves and have nots developing in the carrier ranks, not necessarily related to size, but somewhat related to surplus and financial success, because they got to have surplus to afford this stuff. Do you think that technology actually ensures survival of all those carriers or does it force the consolidation? I mean, there's an argument to be made that when technology gets really cheap, it makes it easier to survive, I guess.

Raghav Tanna:

Answering that question will probably get me into trouble, but I'll answer it anyway. There has to be. There has to be consolidation. There has to be. You can't you can't expect a lot of these carriers to be able to build the infrastructure needed to integrate with all these systems. And as we have seen in the past with every other industry, as you keep pushing tech, the ones that don't adopt the tech usually end up outdated.

And I hate to say that because I think the world of a lot of agencies and carriers and may not adopt the tech. I mean, on the agencies that I used to work with a lot of small regional companies, I don't think we'll ever get to that point. Some are trying and the ones that are trying will probably succeed. But there has to be a consolidation of sorts at some point.

Tony Caldwell:

And that consolidation is going to be around tech than cost, really. I mean, carriers are beginning to really get focused on their own costs, because of this very issue. I mean, first of all, they have to be able to invest in tech and their ability to make underwriting profits has really been challenged just by weather and changes to weather over the last decade. And so, they've got to look internally to find ways to cut expenses to maintain any kind of viability into the future.

Raghav Tanna:

Yeah. I mean without switching the climate change, I think there's a whole slew of issues. There's more claims as of late than there ever have been, not just with weather, but EPLI claims, right? So, if you look at across the board, there's more claims. And the carriers that adopt the tech to be able to mitigate some of that and to be able to save themselves money long term will be really successful, but you can't expect every carrier to do that. And consolidation will be around costs, will be around tech, will be around whether agencies are willing to partner with those people, but it's going to change.

Tony Caldwell:

In making that transition for folks like your father, who are running an independent agency now, what are the things, from your perspective as someone who came out of our industry, but really is in the tech business now, how do the questions that agents ask carriers change or how did the criteria that agents use to determine which carriers they want to represent and which ones they want to let go? How does that change over the next three to five years?

Raghav Tanna:

Yeah. You have to start asking the carrier what their plans are to be more innovative. And what are your aspirations as a carrier, essentially? I think the conversation shifts when carriers want to appoint agencies and saying, how much business are you going to write? That's not going to matter as much anymore? It's more going to be about, "Well, what's your bind ratio? When you submit a piece of business to us, how often are you binding it? Do you understand how many quotes you're going to be doing in a month?"

Because they want the data. Carriers want the data. So, instead of saying, "Hey, we want a million dollars and new business," You could say, "I want 1000 quotes a month from you guys. A thousand quotes a year from you guys?" I think that whole conversation shifts.

And agencies have to start asking the carrier's not just, "Hey, what are you doing to get more innovative in the space? Are you partnering with digital distribution partners? Are you partnering with better claims?" And I think claims becomes extremely important, too. "How are you guys handling claims now?" That has to shift, because the days of saying "a claims adjuster will call you in 72 hours" have to go away.

Tony Caldwell:

No, and actually, the whole process of claims is rapidly changing. I mean, and then you take a picture of the damage on your car and you upload it to some company's systems and it's automatically done by AI and check is sent within thresholds. And so that, obviously, is going to become commonplace for survivors as carriers. And if they don't get to those kinds of things, they're still relying on human beings, their cost structure is going to be so out of whack, they can't make it.

So, the bottom line is, from your perspective, that agents really need to begin to ask different questions, but there was something else you said that I want to come back to. I think you were implying that the power in the relationship, if for lack of a better way to put it, may be changing between carriers and agents. In other words, agents have always stayed up at night wondering, "Are they going to be able to satisfy the carrier, so they can keep the contract, so they keep taking care of business growing?" I know, that's what's kept me up in my agency days.

And the carrier really had the power because, "Hey, if you're not doing all these things, we're going to cut you loose?" Are you saying that you think there's a shift coming in terms of the power role in the relationship where agents are making the decision much more so than the carrier?

Raghav Tanna:

Some agents, yeah. I think, well, I think there's also a consolidation of agencies. And the larger those agencies become, the more control they have. And it's not just large agencies have control, but you have to think about your typical agency, on average. And this is completely opinion based. But on average, I think agencies have three too many carriers. I think they take all these carriers in that they can't satisfy. And if you can get rid of those three, four, or five, however many extra you have, and focus on the ones you have strong relationships with and are writing business with, you take back control, because you're writing a business with them.

And now it's about, "Hey, you asked for 1 million commitment, I'm giving you way more than that, so we have to shift the power a little bit. We'll move this business or we'll rewrite some of this if we can't transfer it." That's not to say the carriers still don't have power, they do, they always will. But I think agencies need to understand that there's certain things they can do to allow themselves to be more in control of their own destiny.

Tony Caldwell:

So, 60 to 70% of the independent insurance agency force, if you will, the 35,000-agencies out there are under a million dollars in revenue. And they don't have that kind of power, at least today. So, 56% of them belong to some sort of market access or aggregation organization to try to create some of that leverage. You work with both independent agencies, but also with folks like that. Do you see... I mean, what do you think of that whole business model? Is it going to become more prevalent or less so, do you think, over the next three to five years?

Raghav Tanna:

I think it's going to, I mean, I would expect it to become more prevalent. You want to be part of a group that has a little bit more stake in the game. You want to be able to negotiate on your behalf. You want them to be able to help you. I mean, just look at, I mean, just speaking from experience, you probably know better than anyone, it matters. Having that kind of leverage matters. And I think agencies will either get acquired or join, if they're not of size, either get acquired or join an aggregate or market access of cluster, whatever it takes to be able to kind of determine their own future.

Tony Caldwell:

Yeah. It seems like as systems proliferate, it gets easier in some respects for carriers to appoint agencies. In fact, that's already happened over the last 10 or 12 years, you've seen the reduction in volume requirements that typically are required by carriers for contract. What used to be half a million dollars now, it's sometimes as low as $100,000 or $200,000. And that's a systems issue, because carriers recognize that agents, if they can eliminate the marketing and servicing costs, they can let agents do that, which has helped sort of the huge ramp up of a number of independent agencies from the bottom that have been created over the last decade.

That's all about market access. But market access is a problem that seems to be largely solved for independent agencies. I mean, if you want to start an independent agency or if you're a small million dollar agency, you can get plenty of carriers to represent somehow. That's not a problem anymore. It was 20 years ago. So, it seems to me though that what the smaller agencies. And I'm going to say if you're under say $5 million in revenue, just to pick a number, you've got to join with others to be able to afford these data scientists you've been talking about and all the sophistication. So, the need for those aggregators, it changes from market access to training, development, data analytics, all those kinds of issues. Do you see [crosstalk 00:42:14]?

Raghav Tanna:

Yeah. You're 100% right. It's interesting though, because when you look at some of these newer agencies, I think some of the stuff that people choose to spend money on could be better utilized elsewhere. And I think an established player would be able to tell them that. "Hey, I made those mistakes in the past, you probably don't need that. I think that you're right though, if you're under a certain number, you can't spend money on certain things. And having someone above you that can help you with some of those processes is important.

But at the same time, it also helps for them to come in and say, "Hey, you're brand new. Here are all the things that we've seen independent agencies do that might not work. Here's what does work." And maybe it's different for every agency, but there has to be some sort of playbook for them to follow to make sure that they're successful moving forward.

Tony Caldwell:

Right. Yeah, I think that, I think you're right. I mean, my observation is that when you look at the benchmarking studies, particularly the one done by the independent agents and MarchBerry's work as well, the disparity between the 25% most profitable agencies in average is so great. And then if you look at growth oriented, it's also different. And if you look at size, it's also, it's very different as well.

So, that smaller agencies that are not really focused on being great business people, that's what I would say, they're going to have a tougher and tougher time into the future, because the costs get tougher to deal with. And the level of knowledge and expertise necessary to be competitive changes. Not that you're not great insurance people, but all these other things we're talking about, keeping up with all that becomes a bigger and bigger challenge.

Raghav Tanna:

It does. And I mean, there's some new agencies and I'll call them new. They've grown quite a bit, but there's some new agencies that really get it, that it's a small business. You have to run it as a business and it's not all about writing insurance all the time and getting new business, but you actually have to build the structure to be able to operate and grow efficiently.

And there's an agency in Alabama that I talk to all the time, Bradley Flowers, and the way he operates is exactly that. He grows it as if it's a small business and he operates it as if it's a business instead of thinking, "Okay, my focus is I'm a salesman. I'm a producer. I'm just going to write insurance constantly." When you own your own agency is completely different. You can't focus on just you have to focus in writing business, but you also have to focus on the business components of it.

Tony Caldwell:

Okay, so with all that in mind, just curious what your projection is. I mean, we talked earlier about lots of agencies getting bought up. There's a huge flood of money coming into distribution that's buying up insurance agencies actually accelerating the rate at which the bigger getting bigger. But as you look at five years with this in mind, too that the average independent agency owner at least is very entrepreneurial, very independent, may not like getting told what to do, may not like being a part of a big bureaucratic organization.

We've talked about fractionalization and the power that brings and the fact that aggregators and others were there to help those folks who want to remain independent. Do you think that and the fact that there's no geographic limits anymore and that you can third party almost everything you pay for from the expense side of the agency, from accounting to service and everything else. There's an argument to be made, I think that agencies can actually be smaller in the future and successful than in the past. with that in mind, do you think that we're going to see new agencies continue to proliferate, say, five years from now the way they have the last five or does it really mean, you've got to be big to win?

Raghav Tanna:

I don't think you have to be big to win, but I think the smaller agencies will want to join something big with the intention of winning. I think I said this a couple months ago, on a podcast and I said that, in five years, I anticipate less than 25,000 agencies. And that's a big drop in five years. It's a massive drop and I recognize that. But I think a lot of the agencies that are small, under a million in revenue, if they're close to retirement and they don't have a plan, like you said hiring is tough, a lot of younger people don't want to get into the industry, so passing it off to your kids is tough, too.

I think they're going to sell, and it's not because they want to sell, but it's because they think our agency has the best chance for success under this large partner. So, yeah, I don't think you have to be big to win, but I think there's kind of the aura that you do. And there's a vision for some agencies that, "Hey, if I'm not X amount in five years, then I'm not successful." That's not true. But if you see it that way, eventually you're going to get bought.

Tony Caldwell:

Yeah. A few years ago, a senior level leader with Metropolitan, I was talking to him at an industry reception and he said, "When I retire, I'm going to become an independent agent." And I started laughing, almost immediately. But that kind of a future really looks tough to me, a place where you can go and retire in a place and expect for 15 or 20 years, nothing to change and you're just going to be able to clip coupons and money. This is a time of really profound change, which has very profound implications for running a business as we go through the next few years. And so you've helped eliminate or illuminate, rather, some of those things, I really appreciate that. Any last thoughts you have?

Raghav Tanna:

I honestly, I appreciate the time. I think the last thing I'll say is no matter what happens in commercial, agencies and carriers will continue to operate in the capacity they are. I just think that the model will change slightly. Agencies are still important carriers. They're still important to insurance, still want the same things. It's just going to change. The way you operate has to change and it's changed when we went paperless. That was a big change. It's going to continue to happen. It's just going to happen in a faster clip now that technology is available and more readily available at that.

Tony Caldwell:

Okay. Thank you so much for being with me, and I hope you get home safely through the snow.

Raghav Tanna:

Thank you, Tony. It was great time.

Tony Caldwell:

Bye. Thank you, Rags. I'm talking to independent agency owners about this all the time. If you'd like to have a more personalized conversation, click on the button or the link in the description and we'll make that happen. You can also reach out to me at tonycaldwell.net/contact.