Any company that relies on agents or brokers to bring in business knows how important it is to keep them happy. This goal is critical in the insurance industry, where carriers depend on networks of agents to sell policies and deliver customers. The $600 billion North American property and casualty market is mature, fiercely competitive, and highly fragmented. Given that policies, pricing, and agent compensation within the industry are fairly standardized, why would an agent choose one carrier over another? According to recent McKinsey research, agents value two things above all: ease of doing business and personalized service. The challenge for insurers is to offer both while increasing the efficiency and cost effectiveness of their operations.

To achieve this level of excellence, carriers must create a new operating model that uses technology to streamline processes and speed up decision making, rethinks the front- and back-office functions to minimize costs, and directs resources to areas where they can have the biggest impact. Although no carrier has fully implemented this new model yet, some are setting themselves apart from the competition with the quality of their operations and technology—either by being very easy to work with or by providing exceptional service.

Consider Progressive, for instance. The auto insurer, long known for its roving claims vans and concierge service, also distinguishes itself in a less visible way. The company's Web site, ForAgentsOnly.com, allows agents to conduct almost all their business online, from getting quotes and submitting applications to processing payments and making changes to existing policies. Even though Progressive's commissions are relatively low, agents provide a steady stream of customers because the company is easy to work with. This approach is paying off: in the past ten years Progressive's revenues have grown to almost $14 billion, from $3 billion, and it is widely considered one of the industry's most successful players.

Travelers Personal Lines, a division of St. Paul Travelers, is another carrier that has used an operating edge to strengthen its industry position. Travelers has designed a service model that combines a local presence and high-quality service to agents, with low-cost, easy-to-use technology solutions such as self-service Web portals. The carrier's high-touch approach includes workshops to help agents increase their productivity: participants receive detailed reports showing their most and least profitable customer segments, for example. Travelers also uses database marketing and professional copywriters to provide high-quality communications that agents can send to their customers. Since agents pay for this direct-mail program, they have a vested interest in driving real results. The program has helped agents increase their customer retention rate by 4 to 5 percent.

As Progressive and Travelers demonstrate, a better operating model not only increases agent satisfaction but can also boost revenues, lower costs, and improve market share (Exhibit 1). The need for carriers to differentiate themselves through better operations will only grow. Insurance agents are consolidating into a smaller number of large players with increasing clout and higher expectations, and carriers that can't keep up will lose out. By creating a new, more cost-effective operating model that combines ease of doing business and customized service, forward-looking carriers can build a more solid future.

Property and casualty insurers offer a wide range of policies that protect owners of autos, homes, and businesses against losses, theft, damage, and personal injury. Because the market is so broad—the needs of a dentist in Omaha are quite different from those of a building contractor in New York City, for instance—not all carriers provide coverage for all situations. Moreover, many insurance companies don't sell directly to the customer; third-party agents and brokers are their primary sales channel. Most carriers contract with a base of anywhere from 1,000 to 15,000 independent agents throughout a region or across the country. Just as carriers depend on agents to gain access to customers, agents count on carriers to provide a range of different policies—auto, personal, small commercial, and so forth—for different markets.

Independent insurance agencies range in size from one- or two-person shops to huge national networks with revenues in the billions of dollars. Consolidation is changing the landscape of independent agencies, however, with larger companies acquiring small and midsize firms. Since agents control the customer relationships and the placement of premium dollars, they wield a growing amount of power. Moreover, as agencies grow in size and bargaining clout, their needs become more sophisticated and they seek carriers that are responsive and flexible, minimize paperwork, make fewer errors, and offer online processing and support. While policy pricing is also important, it is becoming less differentiated and more transparent, thus making agent capabilities and customer service more important.

Carriers that are hard to work with or that provide subpar service won't immediately feel the negative impact on their business. Instead, dissatisfied agents will slowly begin to shift their customers to competing insurers. Over time this erosion will have a major impact on the volume of policies and revenues. Moreover, by the time a carrier realizes what has happened, it's usually too late—the damage has been done to its bottom line and its reputation.

To become more attractive to agents while increasing efficiency and cost effectiveness, carriers must rethink and redesign their operations in a way that balances high touch with low costs (Exhibit 2).

Ease of doing business

The carriers deemed easiest to work with have distinctive Web sites that allow agents to get quotes, submit applications, make inquiries, and change policies online. Insurers should continue to improve the speed and efficiency of these sites. By capturing critical customer information, carriers can match their products more closely with the needs of customers and provide agents with better support.

Insurers should also aim to process applications and service requests more quickly. Some carriers are beginning to apply to their operations the process-improvement techniques popularized by manufacturers. Straight-through processing, for instance, links steps for new applications, renewals, service inquiries, and claims, so that all processing is quick and streamlined.

Automated decision making—the norm in personal insurance and currently being adopted by the more complex small commercial lines—can also speed up the application process. Banks faced a similar transition 15 years ago, with the move to automated loan and credit decisions. As banks learned, however, automated decision making requires that risk guidelines be standardized, an initiative that forward-looking carriers are starting to take on. Emerging business-rule-engine technologies allow carriers to translate the expert judgment of underwriters into algorithms that can be modified without rewriting core systems. Leading personal-insurance carriers such as Allstate and Progressive use automated decision making to process up to 95 percent of their applications. Agents indicate that Hartford Financial Services, Travelers, and Zurich Financial Services are among the small-business insurance carriers that now use straight-through processing to handle 60 to 80 percent of the applications submitted online through the carriers' Web sites. By using these technologies, carriers can reduce the time it takes to process an application from as much as two weeks to just hours or even minutes.

Finally, inflexible and error-prone billing systems are a major problem for most agencies. Insurers can address this issue by improving their billing systems, by creating back offices that can accommodate different payment options (such as credit cards, agent billing, checking-account debits, or direct customer billing), and by offering online self-service capabilities to resolve billing issues.

Local, personalized service

When it comes to serving insurance agencies, a one-size-fits-all model doesn't work. No carrier can effectively meet the needs of a large national broker in the same way it serves an independent two-person agency. Large, high-value agencies may require dedicated service teams, on-site representatives, and guaranteed service levels. Likewise, high-value, high-growth midsize agencies may need local underwriting support and attention. Smaller agents, typically more expensive to serve, may benefit from centralized call centers and high-quality self-service technology tools. A carrier must design its operating model to provide different levels of service to different agencies, depending on their volume, profitability, and growth potential.

As our research shows, insurance agencies value service—one reason small, regional carriers can survive without the scale and cost advantages of the national players. The goal for large carriers is to capitalize on their scale without sacrificing the local, personal touch. For most agencies, personalized service means local underwriting or marketing support. Underwriters can help an agency grow, resolve issues and inquiries, assist in quarterly or annual planning, and build close—often social—relationships. Yet national carriers have been moving away from this model, fearing it would cause their costs to skyrocket.

Carriers can create a greater local presence while still controlling costs with a "thin-branch" operating model, which offers tailored local support—two to four people working in a market—along with centralized services in such areas as rating, administrative support, transaction processing, underwriting analysis, and information collection. This model, when done right, allows local underwriters to work productively out of their home or car while spending most of their time on-site with agents. By reducing overhead, carriers can strategically place underwriters in local markets with an attractive agency base. Insurers that successfully execute this approach will create true competitive differentiation by exploiting the scale, efficiency, and transaction-processing benefits of a large national carrier without sacrificing the local presence and relationship-building capability of a regional carrier.

Balancing high touch with low costs

To achieve this degree of operational excellence, carriers must continue to move clerical and underwriting-support activities from dispersed field offices into centralized processing centers, along with other commodity transactions such as processing changes and renewals. To maintain or improve quality, however, carriers must set up appropriate service-level agreements for these centralized functions.

Carriers can drastically reduce their operating footprint by centralizing as many functions as possible in shared service centers. Some carriers have already moved 70 to 80 percent of the administrative and clerical work out of their underwriting and claims operations. Moreover, shared service centers are a natural first step toward the outsourcing and offshoring of business processes, which can generate additional cost savings and service-level improvements.

Although outsourcing vendors are hungry for a piece of the pie, there is still more talk than action in the insurance industry. Carriers are beginning to test the waters by offshoring back-office processes such as finance, accounting, human resources, and billing. Once the industry gets comfortable with this model, core insurance functions such as claim transactions and information collection are likely to follow. UK-based Aviva—now the world's fifth-largest insurance group—is already offshoring components of its policy servicing and claims operations to vendors in India and Sri Lanka, for expected savings of $246 million over three years. Aviva's North American counterparts likely are not far behind.

To move forward, carriers must define the aspects of their operations that could truly set them apart in the eyes of agents. The next step is to embark on a multiyear transformation to improve the efficiency of both the front and back offices. Ambitious carriers that rethink their operating models can boost their revenues, increase market share, and create significant cost advantages—all while better meeting the needs of their agents.