OLD-GUARD AGENTS RESIST DROP IN COMMISSIONS: REBELS WITHOUT A CLAUSE BATTLE STATE FARM OVER CONTRACT CUTS

As pricing pressures rise and competition grows from direct marketers of insurance, State Farm Group is striving to cut costs and embrace technology — yet maintain a 17,000-strong army of agents.

But the nation’s biggest consumer insurer is meeting surprisingly fierce resistance from many of its troops, who are bridling over a proposed contract that cuts auto policy commissions by a fifth and homeowner’s commissions by a third.

While officials at Bloomington, Ill.-based State Farm say more than half the company’s agents have signed the new contract, many veteran — and high-producing — agents have refused. Some are even insisting on a buyout clause. After all, they say, the company a few years ago abandoned its tradition of allowing agents to pass on their business to their children easily.

“State Farm has lost the loyalty of its agents and destroyed the culture that it took over 70 years to build,” says Larry R. Smith of Omaha, president of the independent National Association of State Farm Agents. “Two out of three agents would like to get out if they could afford to do so.”

The dispute, along with a number of other initiatives aimed at boosting competitiveness, could threaten State Farm’s long-successful partnership with its agents. It also could sidetrack broader efforts to expand life insurance sales, introduce new services like variable annuities and online banking, and offer one-stop financial services.

Last year, State Farm took in $26.1 billion in home and auto premiums, a 2.3% increase over 1996. Life insurance sales recovered to $2.5 billion, after dropping slightly in 1996 to $2.4 billion. Still, life policies represent just 13% of the 28 million households who buy the company’s auto or homeowner policies.

“They continue to sell life products that people don’t want to buy anymore,” says Colin Devine, an analyst with Solomon Smith Barney Inc. in New York.

Agent defections and retirements — driven partly by changes in hiring practices and resistance to the new contract — have helped shrink its agent force 5% to 16,600 from 17,500 agents in 1992.

Last month, the National Association of State Farm Agents — a group that says it represents more than 20% of the sales force — proposed a buyout package to encourage agents either to sign the new contract or to retire.

The company rejected the proposal.

“It’s difficult to believe that anyone active in our business today could think we have interest in encouraging seasoned agents to end their active State Farm relationship,” Leon Maxwell, vice president of agency operations, wrote to the association last month. He promised to continue discussions in the summer and fall.

At issue is a contract proposal that trims homeowner’s policy commissions to 10% from 15% and auto policy commissions to 8% from 10%. The new contract also replaces a lucrative retirement and severance benefit with a less attractive annual bonus, following recent court rulings that called into question just who owns the local book of business — State Farm or the agent.

“Our intention in proposing the buyout was to get everyone to go along with State Farm’s plan,” says Mr. Smith, 55. “We had determined that the longstanding contractual obligation of State Farm when an agent retires or is terminated was inadequate.”

State Farm says it is offering agents an opportunity to earn back the commission cuts by meeting underwriting quality goals, which will help the insurer reduce claims (and hence, prices), retain customers and attract new business.

“The net result is the new contract is better for everyone,” says State Farm’s Mr. Maxwell. “We could give them a high-paying commission, but if they can’t sell the policy because the cost is too high, what difference does it make?”

nothing but agents

Indeed, State Farm and Madison, Wisc.-based American Family Mutual Insurance Co. are the only two major insurers that still rely solely on exclusive agent sales. A host of competitors — from Allstate Corp. and Farmers Insurance Group to Nationwide Financial Services — have all launched direct-response sales efforts.

“Can the productivity of the agency distribution system outweigh the perceived cost advantage of the direct writers?” asks Mr. Maxwell. As a former Air Force officer, he is a former customer of direct-response competitor United Services Automobile Association of San Diego. “We believe that customers we serve will continue to find value in having an agent as a risk adviser, and they’ll be willing to pay for it, just like millions of families choose Disney resorts over lower-priced competitors.”

The challenge for State Farm is proving there is value in having a human counseling customers on setting coverage limits and other risk-management issues.

As the insurer is trying to make its services cheaper, it also has launched a major effort to serve customers on their own terms — instead of only during agent office hours. The new technology is also aimed at freeing up agents so they can prospect for new business and cross-sell to existing customers.

In the last 12 months, State Farm has opened call response centers at its Bloomington headquarters and in a Minneapolis suburb that automatically answer after-hours calls. The insurer is expected soon to complete a third call center in Jacksonville, Fla.

virtual bank logging on

State Farm has also joined three Internet-based insurance shopping services. But instead of providing online quotes, like Allstate and Zurich Kemper Life Insurance Co., State Farm is parceling out leads to nearby agents who call prospects to provide quotes. The insurer hasn’t made a decision about offering quotes online.

In November, State Farm also plans to launch State Farm Federal Savings Bank — its World Wide Web-based virtual bank. The venture, which will open initially to the insurer’s agents, will eventually offer a full range of bank services — from home mortgages and conventional loans to checking and savings accounts. The bank is slated to open to the public next year.

Still, State Farm clearly appreciates the marketing muscle of its agent sales force and is loath to risk a mass defection. The insurer’s agents still stand out against competitors for their experience and productivity.

Notes Thomas Upton, an analyst with Standard & Poor’s Corp. in New York: “Every company is grappling with it the best they can. It’s not a situation where you can expect everybody to walk away happy.”