May 2013

Agents, Can’t Live With Them, Can’t Live Without Them

Douglas Bennett

By Douglas Bennett

The title of this article borrows from the more widely known quote from Dutch philosopher, Desiderius Erasmus, said about women. I would guess though, at least among product development actuaries, that the restated quote has been muttered more than once since the mid 1840s, when life insurance agents first became a primary source of distribution for the industry. In my own case, this usually followed a request by the field member of the product development committee that we simply develop a new product with lower premiums and higher commissions. Actuaries are not the only ones who have observed the difficulty in living with agents. Owen Stalson described in his book “Marketing Life Insurance: Its History in America” published in 1942, the attempt by companies to shift the balance of power between home office management and agents in the early 1900s by writing, “As management takes this tighter control however, it finds itself becoming increasingly paternalistic in its attitude toward agents, more over, the agents have not only accepted all they were offered but have avidly demanded more.”

In looking at the history of the agent distribution channel, an argument could be made that in fact the quote in the title, as it applies to agents should be reversed, “Agents, can’t live without them, can’t live with them.” For almost any industry, it is easy to claim that the growth of that industry is tied to the growth of its primary distribution channel. But for the life insurance industry, it was more than the increase in the number of agents that had an impact on the industry’s growth, it was their motivation and the way they went about the sale that profoundly impacted the industry.

Looking At Motivation First
From its inception in the United States until about 1845, salesmen did not sell life insurance full time, it was only an ancillary line of business. In fact, during the very early years, anyone seeking to insure their life was expected to present themselves at the home office of the company. Eventually a sales force evolved to service those who could not easily travel to the home office. But for most of these sales representatives, life insurance was not their primary source of income. In many cases their primary business was selling trust or fire and marine insurance. At this time few, if any, companies had life insurance as their only line of business. In some cases, the managers of the life insurance line of business doubled as the sales force. The attitude seemed to be, if you want life insurance they would sell it to you, but companies and sales representatives were not going to go out of their way to induce you to buy it. Besides, the rep did not make very much money on each sale, at least not by today’s standards, only around five percent of the initial premium.

The industry’s “reactive” approach to sales changed in the mid 1840s with the advent of mutual life insurance companies. Prior to then, mutual life insurance companies existed in England but not in the United States. Here most of the companies selling life insurance were trust or fire and marine insurance and operated as stock companies. The concept of mutuality became known to the general public because of the response to the great fire of 1835 that destroyed most of the business center of New York City. All but three of the fire insurance companies went bankrupt and the capital of those that remained was absorbed by losses. Investors were reluctant to put their money into the stock of fire insurance companies. As a result, mutual fire companies developed. In the years that followed the fire, 43 mutual fire insurance companies were chartered in New York.

One of the first U.S. mutual companies was The New England Mutual Life Insurance Company. While it had been chartered in 1835, it did not start operations right away. The Mutual Life Insurance Company of New York was the first to put the mutual plan into practical operation in 1842.

Unlike stock companies, mutual companies had no paid-in capital. There was no surplus to pay unexpected early claims. So boards of trustees required the organizers to show they had solicited a minimum amount of coverage, $500,000 in the case of the Mutual Life Insurance Company of New York, before they were allowed to commence business. So the sales function became extremely important to these new mutual companies. They needed agents to solicit business but the organizers could not pay them until they met the minimum threshold. Since these newly organized companies would be life insurance-only companies, the salesmen had to depend exclusively on the sales commission to make a living. The solution was a significant increase in commissions paid to the agent. For the organizers, the urgency was increased by the fact they could not start getting paid a salary for managing the company until the company became operational.

Not only did the use of life insurance agents create the opportunity for these early mutual companies to succeed, over-all it drove the growth of the industry in general because by the early 1900s mutual companies accounted for the majority of life insurance sales.

Their successful sales efforts clearly demonstrated that one could make a living selling life insurance. As described previously, the agents that came before them only sold life insurance on the side, these new agents were working for companies that only sold one line of business—life insurance. They could not depend on trust or marine and fire insurance sales as an alternative source of income. Nor could they use the reactive sales model employed by those prior agents. Because unlike marine and fire insurance, life insurance was a product that was sold. It was rarely bought. To be successful, agents had to become proactive, some might say pushy, if they wanted to survive. Fortunately the urbanization of the population and the need to replace the safety net provided by close-knit rural communities and growth in overall wealth during this time provided the opportunity for agents to successfully employ proactive sales techniques.

The life insurance industry would not be alive today, at least as we know it, without the agent and the agency form of product distribution. This also explains, at least to some degree, what may seem the outsized importance agents and general agents have played in the management of life insurance companies in the United States. Unlike many of the companies in England that were run by actuaries, for many years the old line-mutual companies in the United States were run by former agents or general agents.

Douglas Bennett, FSA, is consulting actuary, Ideation Insurance Services. He can be contacted at