Keep in touch: deploying marketing that focuses on the life cycle of the policyholder keeps agents connected.

The insurance industry is facing serious challenges within its traditional distribution systems. These challenges cover an array of issues, including revenue growth, profitability, market conduct compliance and orphan management. All of these issues have become more complex in recent years as the industry has shifted toward a broker-dominated distribution model.

Insurers that have eliminated their tied sales forces in favor of a brokerage model must differentiate themselves in a way that builds loyalty among distribution partners and generates profitable growth. But in too many cases, that differentiation strategy has been based primarily on compensation levels. This approach has rarely proven sustainable in other industries, especially industries with fairly homogenous products. There have been notable efforts by many companies to develop differentiated products in the marketplace. However, those that have met with some success are quickly copied and improved upon.

The broker model has been successful in shifting acquisition costs from a largely fixed to a largely variable structure; but in doing so, most carriers have lost the ability to build a deeper and more profitable relationship with their policyholders. Today's technology and marketing techniques make it much easier to identify and meet customer needs, but in most cases, the carrier has no real ability to take advantage because of the broker's control over the business.

The Orphan Challenge

Orphan management is perhaps the greatest long-term strategic distribution challenge facing the industry. The percentage of policyholders that no longer have a relationship with their original agent is much larger than most companies realize, and it is getting bigger by the day. There are two phenomena that are creating the problem.

One is the "out-of-sight, out-of-mind factor" that many agents have adopted. Those that have stayed in the business for more than a few years have generated too many customers to service properly given their focus on new business. Research by Covenant Group, a practice management firm, suggests agents can have meaningful client relationships with a maximum of 200 policyholders.

Beyond that number, a mere product relationship exists. Research suggests agents who have been in the business for 10 or more years likely have accumulated 500 or more clients.

Unfortunately, the vast majority of clients haven't heard from their agent in a long time.

To be fair, many conscientious agents have tried to maintain proper contact and servicing through the use of assistants or informal direct marketing initiatives. But in most cases, these have been both poorly planned and executed.

The other factor driving the growing orphan issue is that a small number of agents are staying in the business for the long term and few are qualified. Recent studies suggest that, if 100 agents are recruited into the business today, only 11 will be left after four years.

When both of these factors are combined, a significant problem emerges. In 2003, research by the NewLink Group revealed the extent of the situation. It found that 29% of the life policyholders surveyed had totally lost contact with their original agent. This figure is considerably higher than most carriers would estimate as it relates to their policyholder base. Perhaps even more disconcerting is that the same research revealed 16% of the same policyholders expect to purchase an additional policy within the next two years. The key question is "from whom?"

Many companies see a growing need to more closely monitor their agents' efforts to stay abreast of changing customer needs. Many lawsuits have been filed by consumers who felt their agent did not properly anticipate their changing needs. However, monitoring agent compliance in this area is difficult. The growing ranks of orphaned policyholders also create potential exposure as well.

The Life Cycle Approach

A well-designed and consistent policyholder marketing program effectively addresses many of these challenges.To reach its full potential, such a strategy must deploy a number of different distribution channels. Direct marketing techniques can play an important role here. Integrating the use of these alternative channels will help provide both the desired results and control. Relying solely on the traditional broker/agent channel to execute the strategy will likely yield disappointing results.

To be effective, the policyholder marketing program must be continuous. Individual "one off" campaigns can be useful in terms of helping to validate the concept or to fill short-term revenue gaps, but such an approach is unlikely to generate meaningful impact.

Designing the strategy around the logical life cycle of the policyholder provides an ideal framework for this approach. We look at this in the context of a typical term life policyholder. A variety of factors have reduced the margins on most term business to unattractive levels. Thus, the typical life cycle of that customer is a low margin return for the level period followed by an extraordinarily high lapse rate at the end of the period. To make matters worse, the opportunity to retain the customer rests solely in the hands of the agent, assuming the agent is still even in the business.

A life-cycle approach instead suggests several logical opportunities to both enhance profitability and strengthen and sustain customer relationships.

Upgrade at Issue--Underwriting an applicant for additional coverage and then offering a "one time only" opportunity to obtain the additional coverage, with no additional underwriting, is both easy to execute and highly profitable. It can be done on a direct marketing basis and still provides the broker/agent with a full commission on the incremental sale.

This one initiative should increase the amount of new business written by 8% to 12%.

Upgrade Post Issue--The same concept can be applied to the existing portfolio at regular intervals. While underwriting rules have to be defined, there are usually ways to offer these upgrades via direct marketing, on a simplified issue approach by offsetting expense savings with higher mortality loads.

Critical Illness Rider--Companies worldwide have reported success with selling riders that provide an advance of proceeds in the event of diagnosis of specified illnesses. Such a rider is relatively easy to develop and market.

Renewal Strategy--Today, most companies make virtually no effort to retain a term life policyholder after the expiration of the level period. Most rely on the hope that the commission structure on new business will entice the broker/agent to write the new policy. Obviously, such an approach does not provide much control over one's destiny. It also ignores the reality that a large percentage of those policyholders are really orphaned.

These are a few examples of the logical components of a life cycle approach to policyholder marketing.

Other possibilities likely exist depending on your portfolio of products.

Execution Is Key

Successful execution is largely a function of matching the channel to the offer being made and deploying the right technology solutions.

Heavily underwritten, complex products generally require a face-to-face sale. Conversely, guaranteed issue and simplified underwritten products tend to work best through low-cost media, such as statement-based marketing, direct mail and telemarketing. Ultimately, channel choice decisions come down to the type and premium level of the product being sold, the complexity of underwriting, channel volume restrictions, channel cost, expected response/ average premiums, and product profit margins.

Deployment of the right technology also is critical to a successful strategy. Customer life-cycle marketing is largely driven by predefined business rules. It is absolutely essential that a true marketing database be used, initially to define and generate appropriate offers, but also to keep track of all of the previous marketing activity. Legacy administrative systems are not designed for this task.

An effective policyholder marketing program will not solve all of the distribution challenges that your company faces, but it certainly can help in a meaningful way.

Key Points

* The broker model hasn't allowed most carriers to build a deeper and more profitable relationship with their policyholders.

* Orphan management is perhaps the greatest long-term strategic distribution challenge facing the industry.

* An effective policyholder marketing program must use a variety of distribution channels including direct mail and face-to-face sales.

Life Cycle Marketing: What's It Worth?

The answer is ultimately a function of many factors such as the scope of the program, new business volumes and underwriting requirements, but the following guidelines are indicative:

* A 24- to 36-month program of upgrading "at issue" and "post issue" can generate a 10% to 15% increase in the overall premium base of the portfolio, and an 8% to 12% increase in annual new business production.

* Constant policyholder communication will have a measurable, positive impact on overall retention.

* Pro-active retention initiatives prior to the end of a level term period could reduce expected lapses by 20% to 40%.

* Pro-active asset retention programs aimed at fixed annuity portfolios nearing the end of a surrender charge period and "at risk" retained asset accounts could improve retention rates significantly.

Garnering Agent Support

Agents recognize the need to leverage other channels of communication to keep in touch with their policyholders. However, some agents may not have the expertise or economies of scale to properly support the effort.

To ensure support for your efforts to integrate alternative channels, we have found that following a simple three-part formula is required: communication, control and compensation.

Communication

Proper communication begins with advance notification of any targeted marketing effort to an agent's policyholder base. Included in the communication would be samples of the offer, typical questions and answers, program timelines, commissions, etc. The agent intranet site deployed by most companies is an ideal tool for this type of communication.

Control

Providing the agent with the ability to eliminate their policyholders from specific offers provides them ultimate control in the program.This step will generally eliminate any suspicion that the company is "going direct" to their customer. Historically, we have seen "opt-out" rates of less than 2%.

Compensation

Regardless of their involvement in the marketing campaign, it is imperative that the currently assigned agent participate in the commission revenue. Experience suggests 25% to 30% of normal commission will suffice, assuming that the offer does not cannibalize their own sales efforts in which they would earn full commission.

Properly addressing these three issues effectively positions the program as a value-added service to the agent and not a direct initiative of the company.

Contributors: Michael Levison is chief executive officer and Brad Smith is president of ReMark Americas.