By Shelby J. Smith

The Internet has fallen short in selling insurance directly to consumers, and there is little hope this reality will change anytime soon. The Internet is, however, becoming a cost-efficient way for carriers and distributors to provide producers with needed supplies, support and information to write business.

The acceptability of “e-mode” is developing, as older producers become cyber-proficient and current cyber-savvy producers gain sales experience. Most carriers and distributors now have online sales materials, rate histories, forms, applications, software, commission tracking and much more.

Unfortunately, the Internet is not a primary tool for most producers for two reasons. First and foremost, there is no monetary incentive to substitute the Internet for hard copy and home office dependency. Second is the inconvenience of having to use several Internet sites to access a multiple carrier menu of favorite products.

Most carriers have developed online capabilities and are committed to maintaining these facilities. These are fixed costs. The marginal cost of another user is zero; thus, to the extent producers substitute the Internet for home office assistance and hard copy habits, total production costs of the carriers will be lower.

Accordingly, doesn’t it seem logical for these cyber-producers, who help reduce the carrier’s production costs, to receive special compensation in the form of enhanced commissions?

Unfortunately, most insurers cannot currently measure the cost effectiveness of their producers. Granted, each producers business is meticulously tracked, but the lack of cost-per-premium-dollar by producer prevents companies from identifying cost-effective producers.

In lieu of functional cost capabilities, carriers try to retain the high-volume producers, nix the low-volume ones, and agonize over the majority in between.

A better alternative might be a zero-marginal-cost, Internet-only option and an enhanced commission for those producers willing to accept such. This may work well, especially for the middle majority of producers whose cost effectiveness currently escapes quantification.

In the absence of a functional cost measurement for premium dollars, insurance companies have implemented a “street level” commission. To discourage cutthroat commission competition and to guarantee spreads sufficient to assure service and support from distributors, insurers generally require distributors to pay identical “street level” commissions to producers without regard to cost effectiveness.

This lack of price competition among distributors, and insurers’ inability to measure cost, has prompted distributors to shift service and support to the home office.

Distributors then differentiate themselves by concentrating on (a) recruitment; (b) non-cash incentives; and (c) “unofficial” higher commissions for prolific producers. The upshot is a higher service and support load for the home office staff, further complicating the cost-effectiveness of producers and distributors.

If higher commissions were paid for web-only access, what would be the impact upon distributors and producers?

Distributors would no longer be able to direct the “high maintenance” agent to the home office since this de facto would mean a lower commission. They, too, would be market-driven to change to the two-tier commission system or to specialize in either the traditional or Internet channel.

Distributors could continue to represent multiple carriers from a single web site and/or with traditional marketing models. Producers would now have a choice of how they want to access a carrier and could assess the monetary impact of that choice. Given the restrictive transfer policies of most insurers, producers will be saddled with the burden of severing old relationships and establishing new ones.

While this mobility to the e-mode will create short-term hurdles for producers, they will craft ways to realize their aspirations for higher commissions by severing relationships and finding substitute products. In due time carriers and distributors will be compelled to recognize the cost effectiveness of the e-mode and change their operations accordingly.

However, there remain “traditionalists” among both distributors and carriers. Distributors argue their “loyalty” merits “protection” against the low-cost, web-oriented distributors who are raiding their producers.

Carriers rationalize that “channel conflict” threatens their distribution and the status quo warrants protection. There also remain victims: the prolific, experienced, low cost web-savvy producer who is subsidizing high-cost, traditional producers. The “Internets Higher Commission Genie” is now out of the bottle since there are several business-to-business web portals dealing exclusively with cyber-producers and openly paying them higher commissions and better incentives.

Once producers discover the monetary advantages of using the Internet as the primary support medium, there will be a renewed interest in becoming cyber-literate as well as a new round of commission negotiations with marketing companies and carriers.

Competition is generally a good thing because it provides choices–the foundation of a market economy. What does this development portend for the insurance industry? Will Internet-savvy producers earning higher commissions increase in number as the traditional high-cost producers shrink?

Chances favor this being another development to which carriers will have to adjust. Accordingly, it’s time to review the policies and practices regarding commissions, transfers and cost measurement.


Reproduced from National Underwriter Life & Health/Financial Services Edition, May 6, 2002. Copyright 2002 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.