How State Farm's New Contract Sparked an Uproar

0:05A couple of months ago, thousands of agents with the insurance company State Farm converged on Las Vegas for a huge company event. They were flown in, they were put up in hotels on the company's dime. That's our colleague Jean Eaglesham. She covers insurance. And they basically had three days where they were working, but they were also having a pretty good time. They were kind of getting wined and dined. They had a pink concert. As in the artist pink. As in the artist pink. Free concert. They had Jake from, the actor who plays Jake in the commercials was taking selfies with them. I mean, he had to be there.

0:46I got to tell you, stand up here, reference State Farm. This is an absolute honor. So it was a pretty fun time. And then right at the end, the CEO got on stage and kind of dropped a bombshell. So he told this whole stadium full of insurance sales agents, we're axing your contract. We're moving you to a new contract.

1:17And so in that moment when the CEO makes this announcement, what was the vibe in the room like? It was just a sort of hush because it had been a very celebratory kind of vibe. And then there's just this, what does that mean kind of feeling in the air? Like what's happening? And there's this sort of stunned silence. And then when they got back to their offices, then they got a pre-recorded video and email with all the gory details. Those details included things like big cuts to benefits and more use of AI. This contract revamp is part of a push by State Farm to stay on top of the insurance business as its competitors start to get ahead.

2:03State Farm is the gorilla in the room. State Farm cherishes its position as number one in home and for decades and decades as number one in auto. It's been the market leader in auto since at least the Second World War. And I think it's deeply painful to think they're losing that crown. So they're looking to the future and they're saying, we can't afford to lag behind. We have to catch up. But in the process, the company has faced a backlash from its agents. The agents who contacted us, they feel really the company has almost turned on them. And there's a real feeling of anger and upset.

2:53Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza. It's Monday, July 20th.

3:06Coming up on the show, a shakeup at State Farm sparks an uproar.

3:19This episode is presented by Accenture. When your advertising operations fall out of sync, everything else follows. Spotify and Accenture are working together to reinvent the rhythm of ad sales, using automation, analytics, and smarter workflows to simplify campaign delivery and access better data across the business. The result? Less time spent on operations, more time connecting brands with the moments and fandoms that matter most. Learn more at Accenture.com slash Spotify. This episode is brought to you by Optum. Healthcare doesn't always work great. If you ever waited on a refill or couldn't schedule an appointment, you get it.

3:58That's what Optum is changing. They're using data and technology to integrate patient care, pharmacy, and everything else. So healthcare is connected, not complicated. That means cheaper prescriptions that are easier to get and care that looks at the whole person, how you need it. Optum is making healthcare work as one for everyone. Learn more at business.optum.com.

4:25State Farm has been around for over a century. It was founded in 1922 by, you guessed it, a farmer, who went on to become an insurance agent. And over the years, State Farm grew into an insurance behemoth. They're the leading home insurer. They were until recently the biggest auto insurer. State Farm has dominated the insurance industry in large part thanks to its agent-led business model. The company built its reputation on having local agents all over the country who could respond to customers quickly. The State Farm agents are there. You know, like the classic jingle says. Like a good neighbor, State Farm is there.

5:06Can you talk about State Farm's business model? The model is that they're independent contractors, so they're running their own businesses. They're entrepreneurs. but they only sell State Farm policies. They get their computers, their equipment from State Farm. They sell within essentially rules laid down by State Farm. So one of them said to me, we're not independent in the sense you would normally understand it. It's not like we can negotiate our own contract or our own terms, but we're independent in the sense that we run our own little business. And even though agents are not employees, they still got access to a great benefits package.

5:48State Farm agents had several health insurance options, and they got some retirement-style perks, like a program that pays out a percentage of their income once they've worked there for five years. A lot of agents loved these perks. High commissions, a flexible work schedule, and the feeling of being that good neighbor. Well, I was a State Farm agent. I've been a State Farm agent for 49 and a half years. That's Steve Pierce. He lives in Florence, Alabama. And he retired about six months ago after spending nearly his entire adult life working for State Farm. Steve says one of his favorite parts of the job was working with people in his community.

6:28You have a relationship with these people. I mean, they'd come in and they'd bring vegetables and sit down in our office for an hour. You know, I knew all about their kids. So we loved that. We loved it when people came in for a visit. and those people, when you establish your relationship with those people, nine times a ten, they're not going anywhere if you raise the rates 10 % because they know Steve is going to take care of me. You know, I had one time, it was so funny, it was a friend of mine, they called me and said, we've had a fire at our house. So I get in my truck and they head over there and I beat the fire department.

7:06So I knew all the firemen and they said, whoa, this is a good state farm commercial. You beat the fire department to the fire. Talk about a good neighbor. Yeah. But you know, there's stories like that that are a lot of fond memories.

7:23Steve was part of that giant network of agents that's given State Farm that good neighbor reputation. But that reputation is expensive to maintain. Insurance rates have gone up recently, driven by things like inflation and natural disasters. Those higher rates have increased the cost of commissions, which in turn have helped push up premiums for customers. The industry is doing really well. It's making a lot of profits. But it does have this issue where we've had really steep rate hikes since the pandemic. Since 2020, car insurance rates have gone up by about 40%. Home insurance is up 50%. Particularly on homeowners insurance, that's really hurt people.

8:07And a lot of state lawmakers are looking very hard at this now. You've got talk about price caps in several states. So one of the things the State Farm CEO said internally, according to documents we've seen, is we can't keep passing these high costs on to customers at the rate we have been. It's just people, the affordability squeezed at the moment is just too high. So to cut costs, State Farm turned to one of its main expenses, its massive network of small agencies. One of the things I think State Farm is looking towards is having bigger agencies. So rather than having an agent, all his offices, tiny offices, having bigger agencies.

8:49So it's all about making sales really more efficient, more effective, cheaper, essentially. Bigger centralized offices, and likely fewer agents overall. And for the agents that do stay, a lot of their beloved perks are going away. It is cutting health benefits, it's cutting this longer-term benefit you get paid out over 20 years after you've been there a while. And State Farm is setting pretty demanding targets for agents. And the thing they're now saying is, if you don't meet these very demanding targets, then your commission rates could be cut further. So agents are worried if they decide to stay, they're under massive pressure to hit the new targets.

9:39How much income are agents expected to lose overall? What we've heard from agents is it depends very much what position you're in. But so for some folk who've been there a long time who have a lot of their income coming from renewal policies, it's going to be a big maybe 30%, 40 % cut of the kind of numbers we've heard in gross income. State Farm said in a statement that it's making these changes to, quote, meet more customer needs, drive competitive prices, and strengthen the agency model for the future. It's essentially going to be, when it kicks in, a sort of take-it-or-leave-it option. So you either sign up to the new terms, or you can apply for a payout.

10:22And it's really their whole basis of compensation is being reworked. So these are folks, often some of them being with State Farm for decades, and their benefits and the basis of their commission is going to be radically different in future. This massive shift in State Farm's business model has sparked a lot of backlash from agents and customers. That's next.

10:58This episode is brought to you by Indeed. The right hire can make or break your company, especially if you're a small business. And relying on luck to find that person isn't really the best strategy. But you know what is? Using Indeed Sponsored Jobs. You can use it to boost your job post to make sure it reaches more people with the right talents, certification, location, and more. Sponsored jobs posted directly on Indeed are 95 % more likely to report a hire than non-sponsored jobs. Spend less time searching and more time actually interviewing candidates who check all your boxes. Less stress, less time, more results.

11:30When you need the right person to cut through the chaos, this is a job for Indeed Sponsored Jobs. And listeners of this show will get a$75 sponsored job credit to help get your job the premium status it deserves at Indeed.com slash podcast. Just go to Indeed.com slash podcast right now and support the show by saying you heard about Indeed here. Indeed.com slash podcast. Terms and conditions apply. Hiring now? Then this is a job for Indeed Sponsored Jobs. This episode is brought to you by Accenture. When your advertising operations fall out of sync, everything else follows. Spotify and Accenture are working together to reinvent the rhythm of ad sales, using automation, analytics, and smarter workflows to simplify campaign delivery and access better data across the business.

12:16The result? Less time spent on operations, more time connecting brands with the moments and fandoms that matter most. Learn more at Accenture.com slash Spotify.

12:32Right now, the entire insurance industry is trying to figure out how to manage costs for their customers. But State Farm in particular has another problem. State Farm, the model is still very successful. So State Farm is still doing really well. The issue State Farm executives see is that they're being overtaken by, particularly on auto, Progressive. Progressive, another insurance giant known for its memorable commercials. Welcome to Progressive.com. Did you find your policy okay? I did. Saved over$350. Marketing aside, Progressive's business model is different from State Farm's. While Progressive does sell insurance with dedicated agents like State Farm does, they also have other forms of sales.

13:22They sell direct to consumer. So you can just go on the website and just buy a policy. That's very cheap for the insurer. It's very quick. It's very efficient. Or you can go to an independent agent who will sell policies from a range of insurers. And again, that can be a cheaper way for companies to sell.

13:47Progressive and State Farm's other competitors have also leaned on new technology to make insurance sales more efficient. These days, all eyes are on how to best use artificial intelligence. All the insurers are racing to adopt AI. They're all doing different things with it at different speeds. Allstate, for example, is piloting sales done entirely by AI of a certain product in three states. So AI is being used in all kinds of ways by different insurers. And State Farm, if anything, is a bit slow to this race. And it sees this as a future and it thinks it has to move fast on it. So how does State Farm want to use AI?

14:28What tools are agents being asked to use? And what does State Farm want to see its agents do with this new tech? So State Farm says its strategy, they call it human plus digital. So they're very keen to stress we're not replacing agents with robots. What we're doing is trying to modernize things. And what that means is customers get to do more online. On the back end, agents are being encouraged to try new AI tools, like one that gives them instant product recommendations based on a summary of customers' needs. A State Farm spokesman said agents can choose if they want to use this tool, and 93 % opted to do so.

15:07State Farm is also piloting an AI assistant for customers to use. An internal document reviewed by the Wall Street Journal said that, quote, State Farm is under pressure to meet customers' needs. And it said that the company has, quote, a finite window to change.

15:26Jean says after her reporting on the new contracts, people wrote in with a lot of thoughts. Can you just give us a sense of what the response was like? Yeah, we got a huge feedback. We got over a thousand customers contacting us. And the feeling generally was a huge amount of scepticism about this change. And we had people saying the only reason they stick with State Farm is because of the help they've had from their local agents, say during a fire claim, or because the agent is someone they know and they can contact any time. So that relationship was really important. What we got as well from customers is a lot of people really, really hate chatbots.

16:11They loathe them. And the idea of being forced into more of this just fills them with dread. And so many said that. And it was words like, it's terrible. It sucks. It's maddening. It drives me crazy. There was one quote that I loved where it was one man was saying, you know, we've stuck with State Farm. They have great service by the local agent. And I don't have to spend 10 minutes shouting representative into the phone, which I really felt that. I was like, I have done this and I hate it too. Exactly. Exactly. Everyone hates it. Now, the company does said they're keeping the agents. You won't lose a human relationship.

16:49But I think even the idea of more automation, people are very skeptical about whether it's going to make life easier for them or just going to make life more profitable for the company.

17:05State Farm agents responded to Gene, too. Some said they're excited to try out the new AI tools. Others had concerns, like a worry that instead of freeing up their time to sell more, AI can cause glitches that actually slow them down. A State Farm spokesman said that the company continuously gathers feedback from agents, employees, and customers to refine its tech capabilities. But the agents said they have another problem with the new contracts, the benefits cuts. The agents who contacted us overwhelmingly feel betrayed and upset. Repeatedly we heard the trust is broken. Even Steve Pierce, who's retired from State Farm, says he's been impacted by the changes.

17:50I'll be honest with you, I didn't think it would affect me. I thought, you know, I've retired, I've got my benefits, this is their promise to me. that they're going to do this for me for the rest of my life.

18:05Well, all retirees, we were each getting$200 a month for me and my wife to help with reimbursement for a Medicare supplement. May not seem like a lot of money, but it helps. And then I get a letter where they're taking that away at the end of this year. So I thought, I haven't even retired six months, and now you're taking my benefit away from me. What does that mean for your retirement plan? Will you have to change anything that you were planning on doing? No, I've been blessed, okay? I have been blessed. I've made some really good investments. And so I feel comfortable in what I've got set aside.

18:49It was just more of a frustration and disappointment. But it's a lot worse for the current agents than it is for me. when they're cutting out their health insurance. They're cutting out some other benefits that they were getting. I think the part that really got the state farm agents is finding out the way they found out in the last 10 minutes of the convention back in April, I think, in Vegas. So that had to be hard on the current agents. When you look at the breadth of the story, Jean, how much of this is about a company making an AI pivot versus communicating that change poorly to its workers and its customers?

19:39This is a company making a big change in how it's going forward in the future. So it's a big strategic shift. It affects thousands and thousands of people there, as well as millions of customers. And a lot of insurers are going through the same kind of process. What I think makes this one stand out is both the size of State Farm, but also the way it was done, which appears very abrupt. and certainly agents would say was terribly communicated. So the feeling that it's sort of by diktat, I think is a lot of the concern here. And everyone understands this new technology is coming. Everyone knows there's painful change on the way, but a lot of it is how you discuss that with people.

20:28A company email that was reviewed by the journal told agents, quote, the competitive landscape is changing, adding standing still is not an option. State Farm says agent engagement is an important part of their work and that the company will, quote, continue listening, answering questions, and supporting agents. Was it inevitable? I mean, you know, we were talking about how every industry, including insurance, has been, you know, dealing with this shift towards AI. Was this going to happen regardless, do you think? These changes were pretty much inevitable. and the whole industry is shifting with insurances typically being, you know, very paper-based, very slow, lots of spreadsheets.

21:16It's changing. So this is going to have an impact right across the board. It was coming. In some ways, State Farm's been pretty late to the party.

21:40That's all for today, Monday, July 20th. The Journal is a co-production of Spotify and The Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts. We're out every weekday afternoon. Thanks for listening. See you tomorrow.