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The Art And Science Of Growing A Life Insurance Distribution Firm

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The Art And Science Of Growing A Life Insurance Distribution Firm


Long-term growth is an amazing, almost magical accomplishment for any business. It creates that heady feeling that inspires employees and creates wealth for all stakeholders. It has an almost supernatural quality of transforming a static or dying organization into a dynamic, vibrant entity. It breeds confidence and energizes both employees and management. It seems to propel ordinary activities into meaningful steps toward the completion of a mission.

Growth creates wealth for owners and empowers employees to unlock their creativity–and this empowering seems to energize vendors and customers as well. Everyone wants to be on the winning team and to be part of “something special.”

But long-term growth has been very elusive in all industries. There is only one company remaining from the original Dow Jones Industrial Average–General Electric–and even GE left this group for a time.

A recent study by McKinsey and Company has shown that only one out of 10 companies that exceeds the growth rate of their industry in any given year is able to repeat that performance for another nine years. Growth in any industry is hard to achieve and even harder to sustain.

When I was a life agent for Northwestern Mutual, and for the first few years I worked as a consultant for McKinsey and Co., I was convinced that achieving long-term growth in the life insurance distribution business was simply a matter of achieving day-in and day-out excellence in the mechanics of client-building and the two-interview sale. We had our “one card” sales management system and we practiced it over and over again until we became proficient. It worked. And it still works.

In recent years, however, long-term growth, always elusive, has become even more difficult to achieve for life insurance distribution firms. Contributing factors include:

1) The pace of change in the industry has increased significantly. New competitors, new technologies, new regulations and tax-law changes have accelerated all planning cycles to the point where it seems life insurance producers have to change their strategy and approach almost weekly.

2) The degree of uncertainty has increased more rapidly than at any time in the past. New consumer needs and demands have placed the life insurance product in a different light and have forced alliances between life insurance distributors and banks, brokerages, CPA firms, and law firms that were unheard-of a few years ago and are mostly on terms that are not favorable to the life insurance producer.

3) The economics of the business are changing. There are new, larger-scale requirements. Margins are no longer increasing and are slowly starting to decline for all but the biggest firms. Carriers are learning wholesaling and multi-channel management skills and are fighting to get their leverage back.

Given the difficulty of achieving long-term growth in general, and the even more difficult situation facing life insurance distribution firms today, how can successful life insurance entrepreneurs steer their firms toward another 10 years of growth?

Its not easy, but the secret lies in a personal and management juggling act of continually reinventing business while maximizing the efficiency of current operations. That is, life insurance entrepreneurs have to create the mind-set in which they “seed” and “harvest” at the same time by looking at their business simultaneously over three time horizons.

Life insurance entrepreneurs now have to be able to master an environment in which they are managing the present, while slowly taking measurable steps to reinvent themselves by redefining how theyll compete in the future. We have to realize that efficient day-to-day execution still matters, but we also need strategy and a transforming end-game vision.

Ask most entrepreneurs with life insurance practices and theyll tell you that they hope this reinvention of their business will result in an organization with a stream of qualified referrals, a network of professional alliances, a diversified revenue stream, and a feeling of satisfaction that their time is spent solving client problems and not chasing prospects. They hope they will have stable relationships with a short list of high-quality carriers that keep integrity in their products and in their selling agreements. In short, they want to steer their “selling organization” into a “marketing firm.”

To appreciate the difference between a sales shop and a marketing firm, an executive I know will often ask listeners to equate the typical daily work experience of a surgeon to that of the typical life insurance sales person. Can you imagine if the surgeon had to go to work each Monday morning with no scheduled surgeries and no plan to fill the calendar? After years of study and preparation, he or she would be spending his or her time with the phone book calling people hoping to make appointments.

This is the horrible feeling I felt every Monday as a life insurance agent and the one felt every day by many life insurance sales people. We need to do better if we are to recruit, train, and develop life insurance entrepreneurs and sustain the growth that the best in the industry have been able to achieve.

The transition from a sales shop to a marketing firm means managing the business concurrently across three time horizons.

Horizon One is the present situation in which the financial services entrepreneur must defend and extend the core business. Horizon Two involves actively building emerging competencies and exploiting current market trends. In Horizon Three, the entrepreneur must create viable options for the successful transition from a sales shop to a marketing firm. (See chart.)

These successful entrepreneurs who have built firms through salesmanship, enormous energy, motivation, superb execution, and “seizing the moment” must now develop the management skills to concurrently manage their current business successfully to generate cash and hit profit targets, while building developing competencies that will be their main source of revenue and profits in two years, while “planting seeds” for a future business and organizational structure that may be four or five years away.

Sounds hard, and it is, but its not impossible and its definitely necessary. A good example of managing the three horizons of growth is Charles Schwab, especially since Schwabs Horizon Three has been in direct competition with the life insurance business with his direct term and universal life offerings.

Schwab actually began his firm as a full-service, full-commission stock brokerage in 1971, but after an SEC ruling in 1975 allowed brokers to set their own fees, Schwab introduced the idea of the discount brokerage and thus began an amazing 25-year growth run that featured 25-30% annual shareholder returns and almost $600 billion in assets under management.

Schwabs Horizon One discount brokerage is profitable and still growing, and has expanded to Latin America and Asia. But, Schwab has also built two Horizon Two businesses while defending and extending his Horizon One discount brokerage. In the 1980s, he launched a mutual fund supermarket business and then a 401(k) business that continues to grow and should displace the discount brokerage business in revenue and profits.

But, while he was defending his Horizon One discount brokerage and developing his emerging 401(k) business, Schwab leveraged his back-office technology, customer base, and the emerging consumer fatigue with the traditional life insurance agent, to incubate and grow a life insurance and annuity distribution business.

Life insurance producers are already starting to feel the pressure of this emerging Horizon Three business. Just wait until life insurance develops into a Horizon Two business and Schwab really makes a significant investment in this line.

For financial services and life insurance entrepreneurs with successful firms, managing the growth horizons means keeping a portfolio of lines of businesses and competencies in the pipeline while hitting their current profitability and cash flow targets. The final end-game will be the slow but measured transition of the firm from a sales organization to a marketing organization in a way that wont cripple current product sales, recruiting, and sales management systems.

Horizon One: Extending and defending the core business

When managing Horizon One, the entrepreneur must focus on the core businesses underpinning current profitability, bottom-line performance, and cash flow. Typical initiatives will include increasing current revenues by charging fees, compressing the sales cycle, and maximizing the profit margins on current products (like the mix in variable universal life). Other Horizon One initiatives focus on cost and expense improvements like staff reductions and eliminating or outsourcing non-core activities.

While managing Horizon One businesses, life insurance entrepreneurs who have joined national distribution firms will closely follow their monthly “Pre-distribution Income or PDI” reports and financial ratios that relate profit and net revenue to expenses or to the number of full-time employees. They will compare their financial performance against other firms in their network.

They will also study the reports that measure the extent to which they have leveraged the services offered by their national distribution company. They will create the idea sheets to help them decide which functions they should outsource to their national aggregator and which functions they will maintain in-house.

Horizon Two: Building emerging competencies and developing new businesses that exploit market trends.

Life insurance entrepreneurs managing the development of new businesses and emerging competencies that will soon be added to or replace the core Horizon One business activities will focus on revenue and top-line growth instead of bottom-line growth.

They will re-examine their value proposition to their customers, employees, and core carriers and theyll expand the ways they can create and capture value. Theyll take the time to understand the strengths of their competitors and theyll begin to develop a strategy that outlines where, how, and when they can compete. Theyll start to think about “career ladders” for their staffs and look to their national aggregator as a partner in recruiting and possible employer. Theyll begin to relate on a more business-to-business mode with their core carriers.

Typical initiatives will include launching new competencies in their firm, such as asset gathering and management, pension planning, deferred compensation, and executive benefit planning.

Entrepreneurs managing this horizon will be entering into local alliances with CPA firms, banks, and law firms. They will be investigating local acquisitions. Their focus will be on increasing revenue and local market share. They will be measuring the quality and quantity of their referrals. They will start measuring their assets under management as well as measuring their business mix to create diversified revenue streams.

And, if they have joined a national aggregator, they will be watching their monthly reports that show the ratio of pre-distribution income to new premium production as well as measuring their net revenue growth rates, efficiency, and profit against the other firms in the network. Having created a local “brand” through their good reputation, Horizon Two planning will now compel these firms to strengthen their local brand and build a regional presence.

Theyll begin to think about how they can leverage the national presence and capital of their national aggregator to better manage local alliances, to make local acquisitions, to access technology, and utilize management planning tools.

Horizon Three: Creating viable options for the transition to a marketing firm.

The life insurance entrepreneur must take risks today to build the future capabilities necessary to become a marketing firm. Managing this horizon means focusing on the long-term future goal instead of the present business or the near-future emerging competencies and businesses.

Here the focus will be on finding time to explore new technologies, developing branding strategies, building end-customer information management skills, aligning with a national aggregator, and investing time with a coach or a good consultant. He or she will need the courage and the free time to challenge a few “sacred cows.”

By creating and managing Horizon One business, the life insurance entrepreneur has earned the right to grow and to invest the time, creative thought and energy to enter into this re-invention process. Horizon Three planning only makes sense for those who are already successful and are on or near the top.

The usual performance metrics dont have great applicability when managing options in the third horizon. Managers will start to carefully track the revenue they earn by cross-selling to other firms in their national network. Theyll carefully detail each idea and measure their idea-to-business conversion rates. Theyll also be carefully following the growth in value of the stock of their national aggregator if they have joined one. They will learn how to manage their businesses to earn more of this stock for themselves and their key employees. Theyll know their exact market share in their local market and theyll manage the transition from their local brand to their national brand. Theyll develop alliance management skills that will result in a continual stream of qualified prospects and theyll master acquisition skills to build market share and to provide “exit opportunities” to local sales people who didnt understand the “horizon” concept. And theyll learn how to leverage the capital and national presence of national distribution companies. They will participate in the strategic planning and coaching programs offered by their national aggregators and other consultants and coaches. They will also add a layer of communication skills to their entrepreneurial and local management skills to play shaper roles in national distribution firms and carrier/distributor alliances.

By managing the three time horizons concurrently, life insurance entrepreneurs and their national distribution company partners will transform the distribution of life insurance from a sales job to something resembling a practice. They will create the new marketing companies in financial services. By actively managing the three horizons, they will also have managed to keep their businesses growing and profitable in a time of unprecedented industry change and uncertainty.

is vice president, strategic planning, for Highland Capital

Holding Corporation. E-mail him at [email protected].

Reproduced from National Underwriter Life & Health/Financial Services Edition, June 11, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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