Internet and captive agents falter;
banks acquire agencies for life distribution
By Phil Zinkewicz
In the last decade, one of the most controversial topics of discussion was the forthcoming demise of the independent insurance agent. The cards were all stacked against the independent producer, solons were saying, for a whole slew of reasons.
First, property/casualty insurance companies were experimenting with multiple distribution systems. Traditional old-line insurance companies that had the American Agency System as their main marketing mechanism were attempting to sell directly to the consumer. Second, there was the advent of the Internet. Surely consumers would be wooed by the promise of cheaper insurance products if they purchased them online and eliminated the agent's commission. And finally, the decade ended with the passage of the Gramm-Leach-Bliley Act, a perceived masterpiece of legislation that would allow banks and securities firms to become involved in insurance, thereby giving consumers more choices and take business away from independent agency forces.
Now, as we have moved into the 21st century, we have found that those doomsayers were not exactly on target. In fact, according to a recent survey by Conning & Co., those negative predictions about the independent agency system were way off, most particularly in the area of life insurance sales.
The survey, Life Distribution Goes Independent: Succeeding in the Post-GLBA Environment, says that Conning projects growing "independence" among life insurance distributors and that sales through captive agents have declined and will continue to decline--although captive agents will still remain a significant distribution channel. Moreover, sales of life insurance over the Internet have not fulfilled their initial promise and will probably not do so in the future, says Conning.
"Captive agents, once the mainstay of life distribution, have declined in number and in premium production to the point where they are responsible for less than half of life premiums," says the study. "Data published by LIMRA (Life Insurance Marketing Research Association) in its 'Census of U.S. Life Insurance Sales Personnel,' illustrate that substantial reduction has taken place in the number of captive agents. The captive agent channel includes three types of companies: agency building, multiple line exclusive agents (MLEA) and home service. The reduction in captive agent count is the result of significant declines in the home service and agency building developments."
Conning says that in 1983, there were just under 150,000 captive agents in the agency building system. By 1998, that number had shrunk to 108,000, a 28% reduction. Home service had nearly 34,500 agents in 1983, and declined 58% to 14,500 by 1998. "Conversely, the MLEA segment has grown, increasing 12% from 60,600 in 1983, to 67,750 in 1998. However, when all three captive agent channels are combined, there has been a 22% reduction, from just under 250,000 in 1983, to 190,350 in 1998," says the survey.
Data from Conning's life distribution survey also confirm that, not only has the number of captive agents declined, but also their production is off, dropping from 29.0% of the survey total in 1997, to 21.5% in 2000, with a small additional decline to 21.0% projected for 2003. But the survey also says that, while captive agent counts were decreasing, independent producers have taken on a more significant role. Tracking them is difficult because they are not affiliated with a particular company. In addition, because the same individual can have a relationship with more than one company, there are no company-provided statistics available to quantify the number of life insurance agents operating as independent producers.
However, using production data from LIMRA's 1999 U.S. Annual Individual Life Insurance Sales report, Conning determined that independent producers have become major contributors to life sales. Sales by independent agents have grown from 43% of the industry total in 1989, to 46% in 1999, according to Conning. However, the market share held by captive producers has dropped over the same period to the point where it is now less than half of the total periodic premium, from 56% in 1989, to 49% in 1999.
Conning predicts that successful insurers will accept this new world, populated largely by independent producers. "The result of the move toward independence is a shift in influence and bargaining power from the insurer to the distributor. The producer no longer sells only the products provided by a primary insurer to its clientele, but now demands the products and features that will meet the needs of target markets, along with an easy-to-access and information-rich operating environment, before establishing relationships with insurers. With today's consumer being more savvy and more selective, those insurers that are willing--and able--to walk away from a controlled distribution environment and embrace one that is market-driven and responsive to both producers and their clients will be in a better position to succeed," says Conning.
But what about the Internet's threat to independent agents? Says Conning: "In spite of the reams of publicity about how the Internet was going to make the life agent go the way of the milkman, as new distribution channels have emerged, the preference for face-to-face selling has persisted," says Conning. "We conclude that the marketplace should be segmented by characteristics of the sale--advisory and transactional--rather than using customer wealth or income to segment the market. Advisory sales are those where the personal contribution made by a producer to solving a complex financial need is the primary deliverable, with the actual product purchase relegated to the role of a tool being used to implement the solution."
Conning says that the traditional sale of life insurance products generally is the result of a process comprising these steps:
* Leading the consumer to understand and accept the fact that a need exists
* Providing information and developing the specific solution to the need that has been identified
* Demonstrating to the consumer how a particular life insurance product can satisfy that need
* Motivating the potential insured to take action (make the purchase)
* Completing the process and implementing the solution (delivery of the product).
"While other distribution approaches may focus on some or all of the requirements in each of these steps, traditionally, it has been the insurance producer who has filled this role, from the fact-finding interview that begins to define the need for the delivery of the policy that puts the solution into place. The producer generally has played key roles in all steps of the sales process," says Conning.
However, while the consulting firm sees rosy times ahead for independent producers in the sale of life insurance, it does not deny that there will be changes among independent producers themselves. "While we expect that individual producers will retain key roles in life insurance distribution, an increasing number of them are likely to move to different channels. Banks, broker/dealers, independent marketing organizations and worksite marketing programs are just some of the channels that will need independent producers."
As for competition coming from the banking industry, the Conning report suggests that banks are also going the way of the independent producer. "Whereas insurers appear to be getting into some of the retail functions of the banking industry, bankers have been reluctant, for the most part, to venture into the underwriting and risk assumption aspects of the life insurance business," says Conning. "However, banks have learned that the distribution of insurance products can be a significant revenue source and have committed to develop a life insurance distribution capability. Banks have acquired many independent distributors, with property/casualty and life expertise."
Conning's survey seems to have some validity in the property and casualty insurance industry. Robert Madden, vice president for financial services for the Orchard Park, New York-based Gernold Agency, says that the agency has done well in the life insurance arena for the same reasons that the Conning study suggests: "that we are selling life insurance to our existing clients because of the relationships we have established."
Says Madden: "I think that people are suspicious of buying life insurance over the Internet. They want a face-to-face relationship with the agent. As for captive agents, people prefer to have choices, and a captive agent can only offer one company's products."
Mike Karp, president of USI Florida, a national brokerage firm, echoes those sentiments. "I started as a life insurance agent 33 years ago and then moved into the property and casualty side," says Karp. "Today, 50% of our business is not just life insurance, but pure asset management. I certainly agree with the Conning survey. Companies that use only captive agents have astronomical acquisition costs. Life insurance can't support the captive agent. And, consumers are suspicious of agents that only represent one company. The multiline agents and brokers are the best distribution system for insurance products because we have established a position of trust with the consumer." *
"The result of the move toward independence is a shift in influence and bargaining power from the insurer to the distributor."
--Conning & Co. survey