Agents Are Customers, Too.

Customer-value-management techniques can help insurers analyze and evaluate agents' performance.

Distribution ranks among the greatest strategic challenges faced by life insurance executives, and perhaps all financial-services providers. While direct-selling methods have gained some headway, adviser-based distribution endures as the dominant sales channel. The underlying reasons are an outgrowth of supply as well as demand.

On the demand side, a major driver is product complexity, coupled with the inability of consumers to readily match product-design features to their accumulation and protection needs. Although some "experts" have pointed to greater product transparency in recent years, it seems that the distinction is more evident to pundits than to consumers. Perhaps the most compelling evidence of this is the high percentage of Web-enabled consumers who use the Internet to research life insurance but rely upon an agent to close the sale.

On the supply side, there are two words that cause producers the greatest concern: "channel conflict." Even if direct sales were the wave of the future, how would one get there without undermining the current distribution network? The delicate balance between current and future profitability invariably seems to be resolved with an inclination toward the present.

Customer-value-management techniques are the lifeblood of direct sales and marketing. Combining advanced analytical procedures with measures of customer value, the techniques enable a profitable book of business to be cultivated through the mail, the phone and, potentially, the Internet. While not indispensable to sales and servicing under the adviser system, customer value management can add significant value in identifying prospects most likely to buy given products, isolating customers for retention efforts and pointing to customers most likely to generate the greatest lifetime value.

Despite its advantages, customer value management faces interesting challenges in the agency setting. It requires a shift from a sales to a marketing culture, a transformation that might entail significant organizational change. And the trend toward separating product manufacturing and distribution into distinct lines of business would have manufacturers more focused on results than process. On the surface, these developments appear to imply a limited role for customer value management. In fact, they suggest the opposite by applying it to the performance of agents.

Two fundamental premises of customer value management are that not all customers create equal value and that the sales process can be improved by understanding the drivers of the value differences. Exactly the same could be said of agents. It is old news that major performance differences exist between experienced and new agents. But treating agents as customers and performing various types of value analyses can clarify many questions.

For example, what accounts for the superior profitability of a top agent's book of business? Does the contribution to overall profitability by product differ for top and "typical" agents? To what extent is higher profitability driven by case size vs. margin per case? And, how does the relative influence of these two factors vary by product? How important is an agent's cross-selling ratio in contributing to overall profitability? How does the influence of policy cancellations on profitability differ for new vs. experienced agents?

Do customer characteristics vary among agents' portfolios? If so, are the most profitable agents gaining advantage solely by screening for the "right" customers, or is customer selection only part of the puzzle that underlies the value added by top agents? How do the best agents combat adverse selection? Do they sell to a smaller number of extremely high-margin customers, or do they find a way of selling to a greater number of customers who, statistically, are not those with the highest propensity to purchase?

In the case where product manufacturing and distribution are treated as separate business entities, the extension of customer value management to agents should feel quite natural. This is because, under such a structure, the agent is the manufacturer's customer. But even within an agency context, the application of customer-value-management techniques in understanding the value dynamics of agents can be a source of significant advantage. It makes available a unique perspective on the performance drivers for different agent segments, providing insights that can be acted upon to realize the untapped potential of the work force and improve agency economics.

Vic Hoffman a Best's Review columnist, is customer value management director--analytics in the New York office of Tillinghast-Towers Perrin.