MAD Sponsors Distribution Trends Session at 2006 Life Spring Meeting
MAD Sponsors Distribution Trends Session at 2006 Life Spring Meeting
by Rob Stone
Editor's Note: This article is intended to provide a summary of the material presented and does not necessarily reflect opinions of the section, the author of the article, or the author's company.
The Marketing and Distribution Section sponsored a session on Distribution Trends at the 2006 Life Spring Meeting. The section was pleased to have Lucian Lombardi (LIMRA) and Ted Quinn (McKinsey and Company) report on research jointly sponsored by their respective companies.
Affiliated agents were the first topic discussed. One key trend for this distribution channel is a difficulty in new agent recruiting. With 60 percent of today's independent agents starting out as a career or multi-line agent, it is clear the industry has benefited from past recruiting of affiliated agents. Currently, however, more than half of independent agents are past age 53, while the total number of affiliated agents is 30 percent less than at the high point in 1973. With about 35,000 total inexperienced agents recruited annually in the industry, and with only 10 companies doing over 70 percent of the new agent recruiting, the number of affiliated agents will decline to only 43 percent of the 1973 high by the end of this decade. Recruiting would need to increase to about 55,000 agents per year to stem this declining tide.
Adding to the difficulties in the affiliated agent channel is continuing pressure on the profitability of this business. While agent productivity has nearly doubled over the last 10 years, agent retention is at an all-time low. From a bottom-line standpoint, companies with low retention and productivity of recruited agents incur three times more cost to develop a new agent than companies with high retention and productivity. Clearly finding means for improving both are critical to the future of this channel.
A third trend in the affiliated agent channel is the increasingly difficult task of providing unbiased advice on widely diverse and complicated financial products. A majority of agents surveyed in the LIMRA/McKinsey research cited increasing demand for advice from clients. At the same time, products have become widely varied and complicated, making it hard for one person to be 'all things to all people.' To help combat this issue, partnering/teaming with product specialists has become increasingly utilized. Companies are also learning that long-term practice development for representatives is key, especially one that recognizes different target markets and stages of agent growth. This combined with the partnering/teaming concept and an event-driven advice model may help deliver the right message to the right person at the right time.
A second part of this session focused on the rise in third-party distribution in the life insurance industry. There has been a shift in our industry over time from one dominated by mutual companies, where sales were mostly in term life, whole life and fixed annuities to a post-demutualization world where ROE reigns and carriers seek less capital intensive products with faster payback on investment in distribution. Product features are more unbundled today (UL and variable) and an overall shift has taken place toward less-profitable products. Additionally, many new and poorly understood risks have appeared in products. As a result, overall profitability of new business has eroded, volatility of earnings has increased, new business volume has shifted to third-party channels to meet perceived customer demand for independence on investment-type products and career channels are under strain from being less capable to sell investment-type products.
Along with the rise in third-party distribution, the product mix sold in this country has changed since the 1980s. In 1984 41 percent of premium was whole life, 22 percent was fixed universal life, and 4 percent was in variable products (not meant to add up to 100 percent of sold product). In 2004, 14 percent of premium was whole life, 38 percent was fixed universal life and 38 percent was variable products.
According to the presented research, third-party channels are growing faster than career channels and taking market share. Increasingly carriers are forced to compete for shelf-space among these independent representatives, resulting in more attractive commissions, pricing and product features. When combined with the overall lower persistency, higher not-taken rates and ability to exploit pricing errors in the independent channels, profitability of these sales are very low. Additionally, competition and commoditization of products and carriers is increasing, and the independent channel's growth convinces many high-performing affiliated representatives to cut ties with their career company.
Third party channels have further changed the landscape by taking over parts of the insurance company value chain, including underwriting processing, sales and marketing support, and administrative support and infrastructure. This allows companies to turn to third-party channels to quickly grow sales with limited internal investment. This has resulted in increasing market share for independent channels in life insurance, variable annuities and fixed annuities, placing a strain on career distribution. Career companies are losing high-performers to the independent channels as well as an increasing percentage of business being 'sold around' the captive contract. The product mix being sold in the industry is also shifting to products that cannot support the fixed costs of supporting a career system.
As can be imagined, the trends referenced above are mutually reinforcing. Demutualization and the entrance of new insurance carriers has bred both a demand for less capital-intensive products (creating shift in product mix) and a demand for less capital-intensive distribution growth (giving rise to third-party distribution). A shift to investment-type products (like variable) creates a perceived need for independent advice (further fueling the rise of third-party distribution) while the continued rise in third-party distribution creates representatives who focus on high-commission products (further fueling the shift in product mix). The rise in third-party distribution and shift in product mix both put a strain on career distribution, which causes career reps to demand third-party products (further shifting the product mix) and to leave for the independent channel (further growth for third-party distribution).
The bottom-line is clear: the rise in third-party distribution has created economic challenges for carriers due to thin margins. According to the presented research, a large fraction of third-party business often destroys value without the carriers' knowledge, although sometimes carriers have done this while building distribution. The challenge for carriers going forward is to systematically measure and manage profitability at the channel, firm and representative level while creating an economically sustainable value proposition to third-party channels.
The Marketing and Distribution section would like to thank Lucian Lombardi and Ted Quinn for sharing their expertise at this session. Lucian can be reached at email@example.com and Ted can be reached at Ted_Quinn@mckinsey.com .