Bob MacDonald, former CEO of Allianz Life, on Monday charged executives of some of the nation’s largest life insurance companies with taking unwitting, self-destructive actions that could virtually destroy the industry’s system of independent marketing organizations and threaten the future of the industry itself.
Writing in his blog, www.bobmaconbusiness.com, MacDonald claims these insurance executives seem determined to eliminate any semblance of integrity, cohesiveness and coherency in the independent agent distribution system. If this trend continues, he says, any resemblance to an organized, stable agent distribution system and, ultimately, the very existence of the insurance industry itself will be in doubt.
“Life insurance and annuities are products that must be sold; they are not bought,” MacDonald says. “Because agents must be recruited, trained and supervised to perform this function, the insurance industry is making a shambles of that simple paradigm.”
MacDonald points out that for over a century, the sale of insurance policies was achieved by a system of captive agents. In exchange for company support and training, agents were contractually required to write business for only one company. There was, for the most part, no concept of an “independent agent.”
Then, in an effort to reduce expenses, MacDonald says, most insurance companies abandoned the concept of captive agents about 25 years ago. This action gave rise to the independent marketing organization (IMO) that stepped in to assume the role of recruiting, training and supervising agents. MacDonald argues this system has worked well for the consumer, companies and agents.
“However, over the past few years, insurance company executives, more interested in short-term results than in long-term stability and lacking an understanding of the nuances of the IMO system, have allowed or even encouraged the decay and elimination of the fundamental precepts of this successful system,” MacDonald says.
He continues that agents are now given nearly free rein to move from IMO to IMO, with little or no discipline regarding compensation levels. Agents can be enticed to move solely by the lure of higher commissions. The result, he says, is that the IMO and independent agent system has become a Wild West — a lawless, free-for-all that can lead to disastrous results for all concerned: the insurance companies, IMOs, agents and even the consumer.
“The dolts running the insurance companies don’t seem to have enough sense or integrity to recognize the problem,” he says. “They see their company paying the same level of compensation as always and care little as to how it is disbursed. They are blind to the fact that their complicity in this free-for-all could lead to the destruction of the very distribution system they depend upon for their own survival.”
With IMOs now forced to compete for agents based only on commission levels, MacDonald says they have witnessed their profit margins shrink, and even disappear. When an agent can easily move from one IMO to another, drawn only by higher commissions, the IMOs know there is little chance to receive a return on any investment in the agent. Accordingly, says MacDonald, there is less capital available and little incentive to properly train, support and supervise the agents, who are left to fend for themselves. He adds that this problem is compounded when previously independent marketing organizations are now owned or controlled by a company. These “captive” marketing organizations compete directly with independent organizations and, with company capital and backing, have the ability to offer even higher compensation.
“If this laissez-faire approach to the independent agent distribution system is allowed to continue, it will ultimately lead to the elimination of the IMO and the destruction of the independent agent system itself,” MacDonald says. “The irony here is that ultimately the insurance companies will end up dealing directly with the agents, at a cost that is greater than that of a captive system, with few of its benefits.”
Bob MacDonald was formerly CEO of ITT Life, wholly owned by The Hartford. He founded LifeUSA, which he sold to Allianz SE in 1999 for $540 million and became CEO of Allianz Life of North America. Since 2002 MacDonald has headed CTW Consulting, a vehicle for offering his experience and unique approach to management and corporate culture development.
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