Strategic issues in insurance distribution management

Strategic issues in insurance distribution management
Carriers use a variety of techniques for growing the book and most consider distribution management as a key component of their growth strategy. They are expanding channels, adding distributors, moving into new territories, and working to optimize their existing channel to improve customer acquisition and retention. Some carriers are investing in improving the servicing of distribution channels. Others are focused on managing the compliance aspects of distribution management — assuring the distributors have the right licenses, and that state appointments are made in a timely manner. Many carriers are concentrating on using compensation tools and techniques to more effectively stimulate production. To understand what top carriers are doing in this area, I conducted a survey of carriers around this topic. The goal of the survey was to understand how the carriers are organized to manage the distribution channel, what types of techniques they use, how effective those techniques are, and what challenges they face. Check it out here.
  • In most organizations, a formal Distribution Management organization has primary responsibility for channel management. Managing relationships and compliance are seen as the biggest issues they face.
  • A wide variety of compensation techniques are used by carriers and most say they get value from those programs – although carriers report that it is more important to calculate compensation accurately than to assure compensation is effective at driving desired business. Some techniques such as incentive comp and contests may only be available to top tier or qualifying agents – but receive mixed reviews on their effectiveness. Only 25% of those offering incentive compensation programs see them as effective. “Having an incentive compensation program isn’t highly effective, but not having one would be even worse.”
  • Most carriers rely on a variety of different systems to manage compensation – including Excel and find efficient calculation and distribution of compensation to be quite challenging. For many, the ability to administer a compensation program easily is the key driver as to whether the program will be offered. While they may wish to utilize a particular technique, their technologies create barriers.
  • Compliance is another challenging area with many carriers in the early phase of considering additional automation.  Fewer than half of carriers have automated any of the major processes – validating licenses, processing an appointment or providing self-service to distributors. Those that have automated the processes generally report them as delivering value.
Managing the distribution channel requires discipline in a number of areas – from managing the day-to-day relationship, assuring the distributor is in compliance with the licenses and appointments, and strategically managing compensation. However, carriers face significant challenges in performing these tasks efficiently. Carriers looking to improve distribution effectiveness use technology as a strategic differentiator.

Count down to RDR: The final piece of the jig-saw? Paper on ‘legacy assets’ issued today

Count down to RDR:  The final piece of the jig-saw?  Paper on ‘legacy assets’ issued today

Yesterday, we held a successful event in London on the key challenges and implications of implementing RDR in the UK following our report issued earlier this month. The event was supported with some great and insightful content from the FSA, Focus Solutions and Altus – oh, and of course ourselves.

At the event, the FSA told us that the long awaited final guidance on the rules for handling legacy assets were imminent. What they didn’t tell us was how imminent…the consultation paper was issued this morning with a target response date of 16 January 2012. It is already generating plenty of debate in trade articles. From our research, the treatment of ‘legacy assets’ was considered to be one of the key final pieces in the jigsaw that would enable product providers to complete their designs for RDR readiness at the end of next year.

From a quick scan of the consultation paper, it would appear that the original intent has been maintained. My current interpretation (pending a more detailed review) is that if advice has been given on a ‘top-up’ decision, then adviser charging applies and not commission. Trail commission on products sold prior to RDR continues and is unaffected. If the client decides to ‘top up’ their policy themselves without advice, then existing product rules on commission continue.

Beyond the obvious behavioural and motivational implications, from an operational and technology perspective, this presents some interesting challenges – especially from the view point of a product provider facilitating charges on behalf of an adviser.

  • How does the product provider (or the regulator for that matter) know if advice has been given or not? What is the nature of the ‘hand shake’ that needs to take place between adviser and the product provider to determine whether the ‘top-up’ needs go via the advice charging route or the commission route?
  • Each product open to ‘top-ups’ (and therefore the system supporting it) will need to be able to manage both adviser charging and commission and switch between them depending on whether advice has been given or not.
  • Likewise, illustration systems, documentation, and financial performance reporting will need to change to cater for advice charging and commission in a similar way.

The best way to bring this to life is through an example. From my understanding, if a client has £50k invested in their pension, has an additional £50k to invest, and takes advice resulting in this new amount being paid into their existing pension, then trail commission will be paid on the original £50k and an advice charge will be payable on the additional new £50k.

In this scenario, the system supporting the product will need to differentiate which part of the investment pot was advised and which part was not. If you consider that most product providers do not have just one system supporting multiple products and that commission logic is often embedded inside each legacy product system, then this change may need to be repeated for as many systems as there are open products.

Sounds like a pretty tough and complex implementation challenge – especially when you consider that there are now less than 283 working days between now and the RDR deadline, and that the consultation paper is not yet final.

Product providers now need to work through this paper to assess the impact on their plans and finalise designs if they are to be ready in time. It will be interesting to see if any product providers choose to close books to ‘top ups’ owing to the inability to make a solid business case to keep the books open, or if any product providers seek to secure direct ownership of the client to avoid the complexity. This is an area that we will be watching with interest!