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?

Individual Productivity. The next step is to assess current individual productivity, which involves determining what is required for agents to be able to sell more business. The issues that we typically consider in this step include measuring whether the agent has access to enough prospects, defining appointments and prospect productivity, measuring sales success rate with prospects, analyzing sale size per sale and developing follow-up opportunities. Focusing on these matters will help determine whether there is a productivity problem at the agent level or if the problem is at the channel level.

Channel Productivity. After examining productivity at the agent level, we might find that underproductive agents may not be a problem at all. The lack of productivity may lie with mismanagement or poor organization at the agency or channel level.

Effective agent management starts with a clear process for measurement of agent performance and feedback to the agent. Setting measurable expectations and then letting agents know whether they are meeting certain goals is important. The simpler the measurement tool, the more effective its use.

The other aspect of agent management is the organization of the agents actual job and the agency support offered to execute that job. The burden of non-sales administrative activities can lead to agent inefficiency with respect to sales.

Some agents are expected to provide service. If so, it is important to understand the impact providing that service is having on an agents sales opportunities. In some situations, it might be appropriate for management to consider service as part of the agents job. If that is the case, performance measurements should reflect this situation.

Successful agents, generally without the help of the insurance company itself, usually segment their jobs by hiring staff to take care of the parts of their job not directly related to selling. The opportunity to segment the agents job depends upon how the agent works within his branch and his role in servicing policyholders after the sale. In the right circumstances, we have advised clients to structure this segmented approach globally among all of their agents.

In summary, we have found that assessment, solutions design, implementation and performance monitoring are key elements in our analysis of distribution effectiveness.

In the assessment phase, it needs to be determined whether the problem or opportunity is at the agent or management level. If it is at the agent level, then we look at compensation and market alignment and training. If it is at the management level, we look at performance measurement and expectations.

Depending on the assessment, solutions appropriate for the problem or opportunity must be structured. This may mean redesigning compensation, refining agent selection methods, identifying markets and matching agents to those markets, and/or improving sales and product training.

At the organization level, the solution may mean redefining agents jobs or organizing appropriate branch level support structures for sale administration.

Finally, once a solution is devised, the company must implement changes and develop new measurement tools to monitor the ongoing performance of the sales force and to identify future potential problems.

Douglas Bennett, FSA, Consulting Actuary, is a Principal in the Life Practice of Milliman USAs Hartford office. He can be reached at doug.bennett@milliman.com. Camilo Salazar, ASA, MAAA, is a Principal, Latin America, in Millimans Denver office. He can be reached at camilo.salazar@milliman.com.


Reproduced from National Underwriter Edition, May 19, 2003. Copyright 2003 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.