The Evolution of Affinity and Insurance Distribution Models


Want to Know Where Insurance Distribution and Affinity Are Going? Look to the Past.

At PIMA, our semiannual conferences connect thought leaders and decision makers and program administrators from top insurance companies and agencies. The 2023 Winter Insights event was no exception.

At this energizing and educational conference for executive leaders in the affinity market, keynote Adrian Jones, partner at HSCM Ventures, took us on a journey of not only affinity insurance and general insurance distribution trends, but also the history of affinity distribution. Jones conducted a terrific deep dive into how ancient insurance distribution models (meaning those from more than 2,000 years ago) inform and affect affinity insurance creation and distribution today.

Insurance Distribution: Always Evolving From Historical Roots

The insurance distribution space continues to be one of the most evolving aspects of the affinity insurance marketplace. However, neither insurance model could be considered a modern invention. Both insurance distribution and affinity insurance are older than many firms, agencies, brokers, and advisors might assume.

Here’s the bright spot, though: Those models from decades, centuries, and millennia ago are helping everyone in the industry create a brighter future. Below are some of the more surprising and important ways that the past is informing the present in insurance distribution:

1. The seeds of affinity insurance were planted early.

One of the earliest examples of affinity insurance dates to the year 136 in the Roman Empire. The Society of Diana and Antinous was an early form of both a social club and a burial club: Everyone who paid into the organization received a proper funeral. This wasn’t just a group of passive participants who paid monthly dues (which they did — in both cash and wine). They also met for quarterly dinners as part of the social club.

At the same time, embedded insurance was a common part of marine loans. The abbreviated explanation of the insurance was that if the ship was lost, the loan was forgiven. When Pope Gregory IX banned such loans as usurious in 1236, affinity groups in the form of merchant guilds began formalizing modern insurance via “chambers of assurance.” Later, medieval guilds also provided members benefits such as early forms of disability and old-age insurance, though rarely in contractual form.

2. The need for agent-based distribution models arose in the 1800s.

As exciting as it is to hear about the ways our predecessors were innovatively using affinity insurance, it’s just as fascinating to see how agent distribution came to be. The first insurance agency and insurance company founded by profit-seeking investors (rather than affinity groups seeking coverage) can both be traced to the late 18th century. Slowly, insurance began to be more practical, especially in the U.S., where the population was rapidly expanding into the frontier enabled by new technology, such as railroads and the telegraph. But how could insurance companies sell their products to increasingly far-flung locales with increasingly complex insurance needs? Agents were the answer.

Agents solved two problems: specialist expertise and geographic spread with a local presence. The problem of geographic concentration became acute after the Great Fire of 1835 in Manhattan. The fire bankrupted 23 out of 26 New York insurers, whereas the more diversified insurers in Hartford experienced advantages.

With distribution via professional agents, insurers could sell their products in Chicago, out West, and practically anywhere. Agents doubled as surveyors and loss adjusters, providing critical expertise in local markets around the country. Agents provided an extra benefit to insurers because they were only an expense to the extent that they sold policies.

Not coincidentally, insurance companies and agencies started becoming very popular together during the industrialization and westward expansion of the U.S. Small agents and adjusters such as Johnson and Higgins grew to become behemoths like Marsh & McLennan. They proved that agent-based insurance distribution wasn’t a fad. It was one of the most important evolutionary steps in the insurance industry.

3. Agencies started consolidating to gain the benefits of scale.

Many insurance distributors have done very well for the last decade or more, with strong organic growth, profit margin expansion, and low interest rates enabling cheap debt. Yet, agencies are increasingly consolidating — merging or buying each other — to take advantage of the benefits of scale in distribution. According to proponents of consolidation, larger agencies have more choices of carriers with which to work, opportunities to leverage technology, and capacity to deliver specialist expertise. In turn, this gives them the clout and ability to attract and retain talent.

Private equity investors, in particular, have driven agency mergers and acquisitions. The implications are only starting to be felt. Bigger and more sophisticated agencies say they can deliver more technology and business to preferred carriers. Still, some carriers remain wary, and observers are increasingly questioning whether agency models are sustainable in a higher interest rate environment. Regarding affinity, affinity distribution deals often involve multiple parties and national scale, so consolidation could benefit affinity markets as brokers compete to assemble such deals.

4. Affinity insurance and insurance distribution are positively affected by technology.

Back in ancient Rome, medieval Europe, and the Industrial Revolution, no one had access to computers, data, or artificial intelligence. Now, they do, and these tools are making it essential to take advantage of all possible technologies to get and give the most value from affinity insurance. With AI and analytics specifically, insurance agents and agencies have opportunities they’ve never had before.

Not only can agencies harness and own great stores of data, but they can also bring their data to carriers and make suggestions: “Here’s how we can serve these very particular customer groups better.” Over time, this relay of information and insights between all stakeholders will give those in affinity insurance more leverage, so they can continue a path of transition, adaptation, and growth. Additionally, better data and computer linkages can help distributors and carriers reduce the frictional costs of insurance distribution — all the phone calls, emails, and attempts to get quotes that slow both agents and carriers.

Lightning-Fast Insurance Distribution Models Benjamin Franklin Might Appreciate

During his keynote, Jones mentioned that the first insurance company in the United States, known as the Philadelphia Contributionship, was founded by Benjamin Franklin in 1752. The company was created through a fire protection society to offer property owners additional protection in case their buildings caught fire. Each property that was part of this affinity insurance policy had a visible mark that identified it as being backed by insurance, a so-called “fire mark.”

Would Franklin be amazed at how insurance has changed and blossomed over the years? Jones didn’t say, but Franklin tended to appreciate future-forward thinking. And we’ve been seeing a lot of that not only in the 2010s and 2020s, but also since the days when ancient Rome wasn’t so ancient.

Want to stay on the leading edge of industry trends? Attend a PIMA conference and learn from industry thought leaders like Adrian Jones.

Published on May, 30, 2023.

PIMA® (Professional Insurance Marketing Association®) is a member-driven trade association focused exclusively on the affinity market.

This article has been written by the PIMA staff, who is solely responsible for its content, as a summary of presentations at the PIMA Winter Insights conference. Adrian Jones’s remarks are subject to the disclaimers contained on page two of his presentation, available here.