Favorite child: should insurers reward more profitable sales channels with a different menu of products?

Increasingly, U.S. life insurers are selling their products through multiple distribution channels, including both captive and independent agents systems. This is driven by several factors, including insurers' need to achieve growth in a generally mature market and the decline in sales capacity for certain channels.

This trend raises important product positioning issues for insurers, such as: Will the same products be sold in all channels or will different channels have different products? Should the relative level of product competitiveness vary by channel? Should products be priced with the same level of distribution allowances and target profitability across channels? Should the services provided to distributors vary by channel? Should the same brand be used for all channels?

Answering these questions can be complex because of the myriad channels involved: retail producers who sell to consumers, including career agents, independent agents, stockbrokers, personal producing general agents, bank representatives and direct response; and intermediary producers who support retail agents, including wholesalers, brokerage general agents and managing general agents; plus variations of those.

Conventional wisdom has held that products sold through more loyal channels, such as career agents, do not need to be as competitive as products sold through more independent channels, in which there is greater competition for the agent's business. Under this thinking, insurers tan develop separate products for their career channel. For example, the products might be designed with higher distribution allowances or greater profitability.

However, we are now seeing an environment where this conventional wisdom is being challenged. Agents in systems with less competitive products are sensitive to selling what customers might perceive as sub-par products. Consumers may be offered different products from the same company through different distribution channels and might naturally question the reason for the difference in price and/or features. The relationship between some career systems and their proprietary manufacturers does not appear to be as strong these days, and the share of non-proprietary business sold in career companies continues to increase.

As a result of these factors, insurers increasingly appear to be offering the same products through all of their distribution channels because it puts both agents and the consumers they serve on a more level playing field.

Of course, there are always issues that need to be considered in this product positioning, such as:

* Proprietary manufacturers do not always offer a complete or consistently competitive product line. In some cases, companies choose not to compete on certain product lines because their perception of the risk/return trade-off for a given product is not attractive.

* Some career agents choose to sell outside their system regardless of the nature of the proprietary product offering to avoid taking a compensation "haircut" on proprietary sales through the system. However, the regulatory climate appears to be changing here, and an increasing portion of sales may begin to go through the system.

* In some cases, differentiation can be provided within the same product. For example, products can be designed so different face amount bands have significantly different levels of competitiveness and different channels focus on different band levels.

* Some companies with a strong focus on their career system want to give their agents the best product and service, so their offerings to independent agents may be limited to what they provide their career agents.

* Some insurers maintain different brands for different product offerings in different channels.

Understanding the relative profitability of the business sold is an important aspect of selling identical products through different channels.

In moving to the sale of the same product across all channels, higher-cost systems will either have to find a way to live within their allowances or insurers will have to accept that this business will earn a lower return on capital relative to business sold by other channels. Some argue that a lower return for certain channels is acceptable if the channel produces more consistent production levels. However, this approach puts these systems in the dangerous position of being the "ugly stepchild"--showing consistently lower returns than other products--which can be difficult to sustain.

Despite these challenges, we expect the trend toward offering the same products across multiple channels to continue as various forces drive the industry to a more level playing field.

Best's Review columnist John Fenton is a Towers Perrin principal and consultant for the firm's Tillinghast business. He can be reached at [e-mail].