By Douglas Bennett and Camilo J. Salazar
Distribution effectiveness as a conceptual and strategic issue is perhaps one of the most difficult issues to address for most insurance companies. Distribution costs, which mean paying and supporting either tied or independent agents, are by far the largest expense for most life insurance companies.
Over the years, many attempts have been made to reduce this expense. Most recently, the Internet was put forth as a substitute for agents in the life insurance sales process. However, just like telephone solicitation and direct mail, which were the prior suggested replacement options for agents, the Internet does not appear to be working as a substitute for mainstream life insurance sales.
Recently Milliman USA surveyed a group of U.S. life insurance company CEOs regarding their view of the future of the life insurance industry. Eighty-seven percent of these leaders indicated that an agent-based sales process will continue to dominate the distribution of insurance. Therefore, in the United States, and we believe worldwide, the agent channel in one form or another is here to stay. The challenge is to make this type of distribution as cost-effective and productive as possible.
When asked by our insurance company clients to analyze the effectiveness of their agent-based distribution channel, we approach the review from one of two directions. The first and most common approach is to look at the sales force performance relative to the cost of compensation. The second approach assumes that the agents compensation is appropriate, but the sales force is not organized or managed correctly. These issues are closely related, and we often find that problems with performance can stem from mismanagement or poor company organization.
To assess distribution effectiveness, there are four benchmarks that must be considered in any review of agent-based distribution channels. They include analyzing market alignment, compensation alignment, individual productivity and channel productivity.
Market Alignment. One of our first activities for clients is to identify the market(s) that an agent is trained to service, and then look at what market(s) he or she is actually serving. If an agent has been trained to address the self-employed, upper income or professional markets, but is then placed in a branch that has significant traffic in middle-income prospects, there will be a clear mismatch in skills and effectiveness. This mismatch could be a result of improper training or lack of appropriate market identification by the agent or branch managers.
Some insurer clients will minimize this identification of markets as a concern by defining their agents territory as “everyone.” In our experience, unless the agent is operating strictly as an order taker (prospects already know which product and how much they want to buy), generalized selling is neither efficient nor productive.
Compensation Alignment. A key first step in determining compensation alignment is to analyze whether the pricing of the products sold supports the compensation paid. Is the distribution allowable that actuaries used when the products were priced sufficient to cover the cost of agents commissions as well as all other distribution costs? If the company cannot afford to pay agents what they expect, then it must either pay them less or motivate them to sell more. However, the company might not know which of these two options is the solution until it identifies the allowables.
The second point, and the one with which most companies mistakenly start, is analyzing alignment with the competition or companies that are likely to hire away good agents. Agents drive the focus on this point because they are always comparing their compensation contract against those of other companies. Agents are usually quick to point out where their contract is inferior, and they are not hesitant to pursue their company to make comparable adjustments.
Unfortunately, agents do not always have all the facts when making contract comparisons. Therefore, for no other reason than to deal with agents perception of the competition, we must test a clients compensation program against the competition to make sure the comparisons are apples to apples. In this context, it is also important to ensure that the products behind the compensation are similar.
The final point of alignment when considering compensation is that of motivation. What results or activities was the compensation contract originally intended to motivate? What is it actually motivating? Is there a difference between the home offices perception of the motivating elements of the contract and the fields perception?