Auto insurance channel conflict: More smoke than heat.

Implications: Does Progressive's (PGR) consolidation of its Direct and Agency business units place added pressure on agency sales?  Progressive Insurance Company has been fighting fears of channel conflict for 15 years.  A recent UBS poll of agents brings the issue to the fore again.  Many independent agents claim to be reluctant to place policies with PGR because of fear that the company will cut them out and go directly to the policyholder.  But agents' business choices have consistently shown that competitive prices and efficient service far supercede channel loyalty as influencers of policy placement.

Analysis: Insurance distribution channel conflict is like burning autumn leaves -- lots of smoke, but not much heat.  Many auto insurers sell policies through multiple channels.  Progressive (PGR), however, has been the lightning rod for channel conflict because its business model emphasizes technology and process over relationships.

Insurance agents, despite chatter to the contrary, have consistently chosen to place policies with PGR and other multi-channel carriers (ALL, AIG, other non-public insurers) because of each company's competitive prices and ease-of-use, which translates into efficient agency operations and un-hassled customers.

PGR's decision to consolidate its Agency and Direct businesses is less a threat to agencies than it is an acknowdgement that the "Drive" brand intiative was ill-conceived and weakly executed.  "Drive" never delivered any special benefits to agents and simply diluted the company's brand building efforts.

PGR's vulnerability in the independent agency channel is not the stigma of channel conflict, but rather the fact that several major competitors have closed the gap on pricing and ease-of-use.  PGR remains the best operator of an auto insurance business, but SAFC, TRV and others have improved dramatically in the last few years and now trail PGR only slightly in pricing and operating sophistication.

PGR will continue to hold its own in the marketplace for a long time, but the company will not return to the go-go growth of 2002-2005 unless  the company finds an operational breakthrough; or one or two major competitors stumble and mismanage the increasingly competitive environment.