Channel surfing: the search for the most effective means of distribution is taking life and annuity insurers in myriad directions.

In recent years, top executives at many life insurance and annuity companies have looked at their distribution systems and have found them wanting. To these industry leaders, improving distribution performance remains a priority, especially since considerable company resourcesr are devoted to this function, and that impacts the entire operation, said David Montgomery, a corporate finance vice president at the investment bank Fox-Pitt, Kelton.

In line with this, life insurers are finding that some distribution channels might hold more potential for growth than others.

One such promising channel is work-site marketing, which is generating increasing interest among those insurers rediscovering the middle market, said James O. Mitchel, vice president and head of the Market Research Center at Limra International, a member-owned organization of the life industry.

This channel is still in its early stages, said Lucian Lombardi, vice president and head of Limra's Distribution Research Center. "But we're starting to see some companies that have made some great inroads in developing a fairly successful worksite marketing program, particularly for life insurance, both group and individual," he said. He pointed to Aflac Inc. as a prime example.

Even though work-site marketing has been catching on, brokers still dominate this channel, Lombardi said. Direct sales between employers and insurers don't figure in unless the employer's size is on the order of AT&T Corp. of General Motors Corp., he noted.

On the other hand, bancassurance, common in some European countries, has yet to catch fire in the United States and represents less than 1% of the market share of life sales, Lombardi said. Fewer than half of American adults know that banks can sell life insurance, and even then, consumers prefer to deal with an agent, he said.

The underserved middle market is attracting growing numbers of life insurers, with multiple-line companies beginning to make inroads in that customer segment, Mitchel said. "They already have the connection through auto and homeowners, so they seem to be effective in marketing life insurance through that media," he said.

When consumers set out to buy life insurance, they seek out a familiar contact--their property/casualty agent, said Pete Jacques, associate scientist in Limra's Market Research Center. "A lot of the effort then is proactive on the consumer's side and not necessarily from the agent's side," he said.

Introducing the Internet

Another winning channel for the life industry is the Internet, which carriers use primarily to service their producers, Montgomery said. "It provides the producers with up-to-date competitive intelligence and product information," he said. "Oftentimes, there are very sophisticated workstations that producers, both affiliated and independents, can tap into to get information that allows them to generate new business and service existing customers more effectively and efficiently."

These workstations, Montgomery said, also can help improve the ties between producers and carriers, leading to improved distribution performance.

The Internet also aids insurers from an administrative standpoint. Increasingly, companies are employing straight-through processing that allows producers to fill out applications electronically for basic products such as term insurance or simple annuities. "The applications then go right through to the back office for processing, eliminating both the time it takes to turn around a policy and the associated costs with handling and touching a piece of paper multiple times," Montgomery said. "It's a good expense savings, and it can help to improve the productivity of the agent--he gets to spend time selling and not working with administrative tasks."

But use of this low-cost channel for life companies has its limitations, at least in the near term, Montgomery added. It's very difficult to sell more complicated products such as a variable life product through the Internet, he said. Although online sales have been increasing, customers mainly use the Internet for information gathering, Montgomery said. "Leading insurers have been responsive to this customer need by providing a lot more useful information to customers via their company Web sites," he said.

Agents Rule

By far, the biggest portion of business in the life industry comes through personal sales by affiliated or independent agents, Mitchel said. More than 90% of life insurance business in annualized new premium sales comes from agents. Independent agents sell more than 50% of that total, with affiliated agents--those who sell exclusively or primarily one carrier's products--accounting for about 40%, Lombardi said. In 1997, for the first time, independents surged ahead of affiliates in this category, mainly because maw carriers bad ended their career distribution channels in favor of using independent agents or had added independents to their agent mix.

"We don't expect that gap to widen--we expect it to stay about the same," Lombardi said. "We do see those two channels, at least for the next three to five years, playing a big role in selling life insurance."

While life insurance relies heavily on these traditional distribution channels, annuities have a very diverse channel strategy, with no one channel a dominant source of sales, he said. For fixed annuities, the largest channel is independent agents, who write nearly 40%. Banks follow at about 35%. Affiliated agents have been declining in this category and represent only about 15%, Lombardi said. "All the others, be it a stockbroker of direct, of other ways of selling that product, represent a very small percentage of that business," he said.

Sales of variable annuities are dominated by securities brokers, who represent slightly more than 40% of dollar-weighted sales. Affiliated agents make about 25% of these sales, but that has been declining slightly. All other channels represent less than 10% each, Lombardi said. The long-term trend Limra sees here is "a fairly steady decline in affiliated agents selling this product, whether it be variable or fixed," he said.

A decade ago, Montgomery observed, the drive was to establish multiple distribution systems combining such channels as financial advisers, affiliated and independent agents, the Internet, banks and call centers. Now, with many multichannel companies operating, the focus is on optimizing performance within each channel and across channels, he said. "What's working is that companies are in the appropriate channels, but what's not working so well is the integration of these multiple channels, resulting in performance issues," he said.

Fewer and Older

Meanwhile, agent retention and productivity continue to worry life insurers. Retention levels for career agents commonly hover around 11% at the four-year mark. If, as some estimates maintain, the affiliated channel might be easily 30% more expensive for a carrier to operate, that demonstrates one reason many of these insurers sought other, lower-cost channels and shifted resources several years ago, Montgomery said. Still, he added, this higher cost might be slightly misleading; firms with a strong affiliated distribution system often are able to retain customers longer, which can greatly improve profitability, Montgomery said.

In 2003, the average insurance agent was 52 years old, up from 37 about 20 years ago, according to GAMA International. And the number of agents has nose-dived in those 20 years, the organization said.

Furthermore, insurers burdened by the need to achieve quarterly results have slashed investments in their sales forces.

"For our traditional insurance channels, where we are very reliant for sales of life insurance, we are very concerned about the recruiting going on in the agent field force," Lombardi said. "If there is a key issue for the remainder of this decade, it's how we're going to replenish the aging agents."

Prudential Financial Inc. thinks it has found a solution to the agent retention problem. Under its new Financial Services Associates program, Prudential puts candidates through a nine-step selection process, then gives them a two-year salary and a 10-week deadline to obtain their Series 7, Series 66 and life and health licenses. During this time, they also begin to learn about the company's sales process and some of its products, said Terry Kinsella, vice president of learning.

They are launched into the business in one of 72 Prudential agencies where a designated manager coaches and manages them through the process, and they can receive commissions on top of their salaries based on their performances.

Current-year retention for first-year hires in 2000, when the program began, was about 45%, Kinsella said. Two years later under the program, Prudential was able to achieve a 68.8%, retention rate, she said. "We have also increased the average working agent productivity measure significantly based on what they were able to sell and achieve over that period of time," Kinsella said.

"It's a stand-alone program in the industry--nobody else does that," she said.

U.S. Individual Life Market Share By Distribution Channel

Affiliated agents have seen their market share of first-year collected premium shrink over the past 20 years, while independent agents have gained share. Other distributors have improved their positions in the past decade, but still account for less than 10%. Percentage are based on U.S. first-year collected premium.

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DISTRIBUTION

Trends

Improving distribution performance is a top priority throughout the industry. Insurers are rediscovering the middle market, and multiple-line companies are making the greatest headway. Carriers are using the Internet to service providers with product information and offer them straight-through electronic processing of applications for basic products. Independent and affiliated agents will still play a major role in life sales for three to five years, but affiliated agents' sales of annuities will steadily decline.

The Up Side

Carriers with strong, affiliated-agent distribution systems often can retain customers longer, boosting profitability. Companies are making inroads in developing successful work-site marketing programs for life insurance. Leading insurers have been using their Web sites to respond to customer needs for greater information.

The Down Side

Brokers still dominate the worksite marketing channel. Bancassurance, common in Europe, represents less than 1% of the market share of life sales in the United States. Customers use the low-cost Internet channel mainly for information-gathering, rather than purchasing. Companies that have gone multichannel now have to optimize performance within each channel and across channels. Agent retention and productivity continue to be major concerns.

The Way Forward

Faced with an aging, dwindling agent force, traditional insurance channels must find ways to recruit and retain greater numbers of agents.

Different Strokes

Industry insiders say that Northwestern Mutual Life Insurance Co. is one carrier that has gotten its distribution system right.

It helps that it is not a publicly traded company but a mutual company owned by its policyholders, said J. Edward Tippetts, vice president in charge of field development. That gives Northwestern Mutual more wiggle room in refining its distribution system, he said. "As a mutual company, we're able to think long-term, and that's helped us weather some storms and avoid some crisis kinds of decisions that some other companies have experienced," he said.

Two years ago, Northwestern Mutual recognized that some change was needed in the way it approached the marketplace, so the company conducted interviews with about 3,000 policyholders as well as nonpolicyholders in its target market to find out what they expected from a life insurer.

First, people overwhelmingly said they wanted a long-term business relationship with one person, Tippetts said. "That really surprised me, because I had begun to believe consumers were day trading and buying insurance on the Internet when, as a matter of fact, that's not what they wanted."

Respondents also expected to receive expert guidance in complex areas of finance and wanted top products in investments and insurance. Lastly, they wanted their financial representative providing the products and services to put all of this together in an understandable plan so they could make financial decisions.

These four responses have driven Northwestern Mutual's distribution strategy, Tippetts said. Its distribution system is one-channel, relying on 7,000 career agents, referred to as financial representatives, and 600 people in field management.

Committed to Career Agents

While many carriers have disbanded their career agent forces, usually for financial reasons, to focus on multichannel systems, Northwestern Mutual "is absolutely committed" to keeping its career exclusive distribution system, Tippetts said." It's the only way we've done business for almost 150 years, and we know that it still works," he said.

Having well-trained financial representatives can meet the public's need for long-term business relationships. "Working in conjunction with these representatives are specialists in long-term care insurance, disability income insurance, and investment products and services," Tippetts said.

Todd Schoon, managing partner of the Schoon Agency, New York City, has been a financial representative for Northwestern Mutual for 15 years. The biggest change for him has been refocusing his business to incorporate this network of specialists to tackle complex planning and financial issues.

"Fifteen years ago, I would have tried to provide all of the products to the client, which is a big job," Schoon said. "I thought that's what I had to do, and if I didn't, I wasn't providing the value to my clients."

Now, with this network of specialists, Schoon said he can focus on building relationships with clients while guiding them to specialists who can solve the clients' problems.

In servicing its distribution system to meet customers' needs, the company also has provided its financial representatives with an architecture that gives them superior products and some dynamic planning possibilities, Tippetts said. As a result, Northwestern Mutual can target customers at various life stages, starting with young parents who need life insurance, disability insurance and a savings plan. Then, with those basic needs met, the company can address wealth accumulation products such as investments and, later in life, supply them with wealth-preservation and distribution products.

A Limra report in 2001 said Northwestern Mutual had a 94% retention rate among its financial representatives at five years or longer--50% greater than the industry average. "Many other companies can experience high turnover where people go from company to company" Tippetts said. "And if you really believe in long-term financial relationships, you have to have the financial representative in the business long-term"

Limra studies also show that Northwestern Mutual's average first-year commission for its veteran financial representatives is twice the industry average. "So the reason they stay is they're productive, and the reason they're productive is we provide this network of services around them to meet their customers' needs," Tippetts said.

With $102.93 billion in admitted assets in 2002, Northwestern Mutual was the ninth-largest life writer in the United States, according to A.M. Best Co.

Multichannel Success

Hartford Life Insurance Co., another carrier that credits enhanced customer service for its distribution performance, is multichannel, selling its products through broker-dealer firms, wire houses, individual dealers and banks. The life division was formed 20 years ago out of Hartford Group's property/casualty business "in the belief that we could cross-sell," said Michael Kalen, senior rice president and director of individual life distribution for Hartford Life, a subsidiary of Hartford Financial Services Group Inc.

That move has borne fruit. In 2002,Tillinghast ranked the company as the No. 1 seller of variable universal life insurance in the United States, an outcome that Hartford Life attributes to the institutional support it gives brokers. "The service and assistance we provide is a big differentiator," Kalen said. Through these brokers, Hartford targets affluent Americans with assets of more than $3 million who need life insurance for wealth preservation and transfer, business continuation, and supplemental retirement income.

Hartford Life significantly enhanced its customer-service capabilities in 2001, after investing millions of dollars in its individual life insurance service capabilities, Michael Keeler, senior vice president and director of individual life operations, told insurance executives in May 2003. The carrier rebuilt its customer-service management team, and job descriptions were rewritten and required job skills revised for customer-service representatives. Also, Hartford Life launched new training initiatives, linked compensation to performance, and designed and implemented a new automation infrastructure to support higher service standards, Keeler said.

On the technology front, the company has new Internet capabilities to provide service around the clock, as well as the imaging of life insurance applications, digitally recorded calls, a consolidated system for all customer information and a system that can generate projections or illustrations for the future performance of life policies.

In partnering with banks, Hartford Life's account executives have helped support bank representatives seeking to increase life insurance sales for wealth transfer, business planning and other advanced client needs, Kalen said. "They're doing more financial planning with customers," he said. "The larger banks have become particularly good at helping their clients in these areas."

Bank loan departments and business departments also are seeing opportunities for life sales to the affluent, Kalen said. "Our model supports all of those distribution channels as well," he said.