The current face-to-face distribution model faces a number of barriers in dealing with the vast untapped middle market. Whether it is an existing policyholder or a new prospect, the low premium, low commission nature of the sale and sheer size of the middle market make it difficult to effectively align a face-to-face sales effort. Of course, every challenge presents an opportunity, and there are a number of tools that proactive reinsurers can utilize to overcome these middle market challenges.
At a conference in New Orleans earlier this year that we hosted with The Covenant Group, more than 70 senior life insurance executives from Canada, the U.S. and Mexico gathered to discuss strategies for unlocking the profits of the middle market. A central theme was a recognition that the middle market presents a potential solution for the flat revenues the industry has been seeing for the past decade. However, to effectively align with the middle market, the industry must look at doing business differently.
Middle Market Research and the Need for Change
In the past 3 years, we have sponsored research aimed at uncovering the distribution issues in servicing the middle market. The first research project in 2004 was aimed at policyholders. The second project, completed in early 2006, was aimed at advisors. Both research projects were conducted by NewLink Group, an insurance management consulting firm based in Toronto.
Life insurers tend to take a sterile view of “orphan” policyholders, who typically represent a middle market profile. In the case of brokerage companies, “orphans” typically don’t exist, as they are an issue for the brokers who “own” the customer. In tied agent companies, “orphans” are often re-assigned, thereby theoretically eliminating the problem.
But at the heart of the issue is what the policyholder thinks. In most cases, the industry has failed to address whether the methods deployed for managing orphan policyholders are really effective in the view of the policyholder. In addition to the true orphans, what about the policyholders who never hear from their advisor? Do they consider themselves orphans, regardless of what an advisor or insurer might think?
Of the total number of customers polled, 65% had never owned a policy, had lapsed a policy, or felt they were orphans. Of those who actually owned a life insurance policy, one-third felt they were orphans.
Clearly, there is a large segment of the market that does not have regular contact with a financial advisor. Would they buy if they had access to an advisor and who would they buy from?
More than 24% of customers are likely or highly likely to purchase a life insurance policy in the next 24 months.
If they are purchasing a new policy, 60% would buy from their existing insurer, whereas 20% would not and 10% are undecided.
It is interesting that 30% of policyholders are undecided or would not buy again from their existing insurer. Could it be that they feel abandoned or under-serviced? Of further interest is that 49% of policyholders are somewhat or very likely to utilize a non face-to-face channel for their next insurance purchase.
The story from advisors mirrors the views of the policyholders. Of the advisors participating in the survey, 37% felt that they could sell a policy to their “B and C” policyholders. But, finding the time to service these policyholders is a challenge.
Advisors cited the average size of the sale and the time available to sell to their middle income policyholders as the key barriers. Perhaps the most telling statistic is the advisors’ willingness to support a program run by an insurer, where they would have no involvement but would be compensated for each sale. More than 84% would endorse such a program.
Terry Windrem, CEO of The Protectors Group, Peterborough, Ontario, a successful financial planning firm and top Great West Life producer, spoke at the conference on the challenges advisors face in dealing with the middle market. He cited the low premium and commission rates on term insurance vs. the process involved in selling as the primary issue. He does not believe universal life insurance is an alternative for the middle market. Despite much higher commissions and average premiums, he feels the middle market cannot afford the product.
Windrem noted: “There is no economic justification for pursuing middle market customers. If you already have them, there is no incentive to service them. There may be a disincentive to replace old policies with new because the old ones have better renewal streams. These people don’t get the service they need and believe they are entitled to. That reflects badly on us.”
Key Components for Change and the Role of Reinsurers
From an advisor’s perspective, the following key issues would allow for greater penetration and customer satisfaction in the middle market:
Multi-channel marketing capability: The ability to deploy more cost effective mediums of managing mass market customers, including direct mail, Web and telemarketing.
Product Design: Is 10- or 20-year term the right product for the middle market? Complex and abstract needs analyses, combined with level term periods that often don’t match the real insurance needs of the middle market consumer, complicate the sales process and affect the long term profitability of the business.
Process: The cost and time of underwriting products for the middle market is a major issue. There is disincentive to manage the lengthy and labor intensive application / underwriting process for the minimal commissions involved. The concept of “on-the-spot underwriting” and “straight through processing” becomes a central focus to be explored.
As reinsurers battle for market share and consistent profitability, the ability to penetrate the middle market cannot be ignored. Straight-through processing initiatives currently being explored by Transamerica Re and Hanover Re are gaining attention from organizations focused on middle market distribution. More importantly, these initiatives demonstrate the willingness of reinsurers to better understand the challenges of distribution and become part of the solution.
For the insurance industry to grow, we must find ways to better penetrate all market segments. Advisors, insurers and reinsurers must all accept responsibility for change. It’s no longer optimal for an insurer to stick to manufacturing and for a reinsurer to further distance themselves from distribution issues.