A.M. Best Special Report: Individual Life and Annuity Distribution --Two Sectors Take Different Paths.

OLDWICK, N.J. -- The U.S. life insurance industry has experienced profound and accelerated change over the past 30 years. These changes have been broad and have included, among others, an explosion in product development; significant consolidation of the industry; evolution of the legal, regulatory and competitive environments; greater efficiency driven by advancements in information technology and the overall globalization of the industry. One of the outgrowths of these ongoing changes has been a material divergence in the direction of distribution between individual life products and individual annuity products, according to a special report by the A.M. Best Co.

This divergence has come primarily in the form of channel diversification. More specifically, while the insurance industry has succeeded in developing a variety of additional individual annuity distribution channels to complement the traditional affiliated agent channel, it has realized only limited success in doing the same for individual life distribution. The factors contributing to this phenomenon are varied and include the behavioral tendencies of consumers, producers and even product manufacturers.

Market research by LIMRA indicates that consumers tend to segment their financial activities into two broad groups--insurance and financial planning. Because consumers typically view annuities as investment products, they are often more willing to consider traditional investment product distribution channels, such as banks, stockbrokers, financial planners and other financial advisers, as acceptable sources for purchasing them. However, unlike the market for annuities, none of the existing financial services distribution channels--other than the traditional affiliated and nonaffiliated agent channels--offers the same alignment with consumer preferences for insurance products. As a result, consumers continue to gravitate toward traditional insurance professionals to buy life insurance.

Producers' behavior also has been an obstacle to growing alternative life distribution channels. While representatives of non-insurance financial channels, such as stockbrokers, financial planners and independent broker-dealers, have acclimated to the relative simplicity of annuity products, they often find the product- and process-related complexities associated with selling life insurance to be a disincentive. While some insurers have attempted to utilize wholesalers to sell life insurance products through channels such as wirehouses, broker-dealers and financial institutions, the level of penetration into these channels pales in comparison with the progress made in annuities.

From the standpoint of the product manufacturers, only limited progress has been made in providing the necessary tools, training and sales support to make selling life insurance more attractive to the uninitiated producer. In A.M. Best's view, product manufacturers will continue to be challenged to grow life sales through nontraditional channels until this issue is addressed more comprehensively.

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Founded in 1899, A.M. Best Company is a full-service credit rating organization dedicated to serving the financial services industries, including the banking and insurance sectors. For more information, visit www.ambest.com.