Evaluating Distribution Channel Options for Individual Insurance Products, Part 1: Agent Channels

By Art Lewis

NewsDirect, August 2022

Selling a product through multiple channels requires understanding the strengths and characteristics for each channel as well as the interaction between them. Even with this understanding, finding the optimal mix of channels isn’t straight forward. It varies by product type, target market, channel management effectiveness, competitive environment, and companies’ existing resources and strategic priorities. To give some insight into this challenge, I’ll provide a high-level description and some considerations of the major channels regardless of product category (e.g., P&C, Life, Health). This article will focus on the agent channels with other channels discussed in a subsequent article.

Agent Channels – Captive and Independent

Overview of Both Agent Channels

Agents remain the primary source of sales for individual life and P&C products despite the increased focus on other channels. Many consumers still prefer using, and have greater trust in, a local insurance agent. The personal relationship, customized service, knowledge of the area, and frequent referrals, cannot be matched by other channels. As a result, agents are well positioned to support their clients by:

• Discussing product needs from a broader perspective. For example, if a client requests a term life product, the agent can easily ask about the purpose of the request—the client’s financial needs. As a result, the client may determine that a whole life product is a better option than a low-cost term life product.
• Helping clients understand the level of coverage they need, such as the type and face amount of a life insurance product or the benefit options of long-term care products.
• Suggesting supplemental products and benefits based on their knowledge of the client, such as survivorship benefits on an annuity.

Due to the trust and personal relationship, agents can focus on meeting their clients’ needs when exploring these topics rather than having questions appear as searching for up-sells.

Insurers benefit from agent channels. They gain access to individuals who prefer the personal interaction and can obtain a higher quality of business, larger written premium per policy, and better member understanding of policy terms. An agent will also highlight such things as an insurer’s financial strength, service quality and rate stability, which help insurers leverage their competitive advantages in these areas.     

Agent channels are expensive. However, the strengths listed above make it well suited to complex products where individuals lack the confidence and understanding to select the best option.  

Captive Agents

In their primary product category (e.g., life insurance), captive agents can only offer the insurer’s products. This enables the agents to have a thorough understanding of the company’s products and guidelines as well as having better access to the company’s administration. Insurers and agency managers benefit from this close relationship. Given the volume of business, they can monitor each agent’s member experience scores, quality of business, compliance, and training needs. Captive agents also make it easier for an insurer to promote their product strategy, such as new product launches and cross-selling opportunities. 

Despite the benefits, there are disadvantages. The cost to develop and maintain a captive agency force is very high. These costs include extensive initial and ongoing product and sales training, information on how to set up their agency, marketing support, administrative systems, and frequently, income support when agents are building their business. In addition to cost, it is also challenging to quickly change the number of agents in response to profitability concerns and market opportunities. Given these issues, there has been some movement away from this channel.

The captive agent channel can be very successful, but it requires a strong and trusted brand to counter consumers’ preferences for multiple product options. Insurers contemplating this channel, even with a strong brand, face major challenges. Significant investments are needed to hire the staff and build the necessary infrastructure.

Independent Agents

Independent agents are business owners, though they will frequently work within an agency or under some other sales entity to share expenses and obtain support. They have contractual relationships with multiple insurers, which enables them to offer the product that best meets their client’s needs as well as cross-sell products from different insurers. 

There are many factors that influence the insurers and products that independent agents will propose to their clients. Obviously, they select products that meet their clients’ needs and are competitive. As business owners, commissions and other sales incentives are important. Other factors include: High quality member experience since referrals are a significant source of leads; rate predictability to avoid the “bad news” calls to their clients; easy-to-use systems to monitor application status and commissions; predictability of underwriting results; cost and quality of marketing material; and agent support such as a responsive help desk. Insurers who approach this channel from the perspective of helping their agents look good to their clients will be rewarded for their efforts.

Additional Considerations for Insurers 

Independent agents may produce selection issues. Agents generally have a good feel for each company’s underwriting standards so insurers may disproportionally obtain poorer risks when their standards are less stringent than their competitors. Agents may also prefer a different insurance company despite having a competitive product. For example, a competitor’s production and quality incentives may result in an insurer receiving a disproportionate share of higher risk applicants. 

Acquisition costs are significant but “appropriately” calculating them can be challenging. For example, commissions cover agents’ marketing costs through their commissions, yet also benefit from the insurers’ marketing campaigns. However, insurers benefit from agents’ marketing and promotion. The allocation of an insurers marketing expense across this channel is thus somewhat subjective yet can have a significant effect on calculated channel profitability. Also, acquisition costs cannot be evaluated in isolation. Even though higher, the quality of business, larger premium, and better retention may well offset this additional cost.

Insurers can gain significant insight by listening to their premier agents. Agents’ knowledge of their local market and insurers’ competitive position, both in terms of product characteristics and support provided by the insurer, can help identify market opportunities and prioritize product and service enhancements. 

Finally, compared to the captive agent channel, insurers can quickly increase or decrease product access, either geographically or by reducing the number of agents. The ability to respond to changing market conditions can lower risk and enable insurers to take advantage of market opportunities.   

Summary

The agent channel is not appropriate for all products. Low-cost products in a competitive market are challenged with the expense of this channel. From the agent’s perspective, unless a low-cost product is an easy add-on to a higher premium product, the commissions will be too low to justify their time. For the right type of product, though, agents can add significant value to the organization.

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the newsletter editors, or the respective authors’ employers.

Art Lewis, FSA, MAAA, is a member of the SOA’s Marketing and Distribution Council. He can be reached at artlewis425@gmail.com.