Mix and match: Insurers are using various combinations of agents, the Internet, work-site marketing and direct marketing to shape the 21st-century distribution system. (Industry Strategies).

Allstate commits to an organizational overhaul that embraces a greater role for Internet sales. USAA opens its world of direct sales to new partner Fortis Health. And Hartford Life taps into the business savvy of its legion of wholesalers to attract younger customers. These carriers and many others in recent years are using a growing variety of distribution channels--some tried and some new--to deliver their products to consumers.

Innovative initiatives and strategies abound, many aimed at streamlining transactions for consumers and agents or gaining greater efficiencies from the agency system itself.

If all this activity seems intense, it's because distribution, always critical to an insurer's success, calls for an even sharper edge these days in a highly competitive, hard market.

Distribution "is a key topic for the industry," said George McKeon, author of the Conning & Co. study "life Distribution Goes Independent." "Obviously, getting the product in front of the consumer is really what it's all about. No premium gets written until that relationship is there," McKean said.

Increasingly, insurers are employing multiple channels of distribution to build that relationship and, in doing so, are using more technology--especially the Internet. "The Internet, for insurance purposes, is a new medium, and the industry has been trying to figure out a way to use it for years," said Donald R. Jackson, an international consultant in insurance direct marketing, author of several marketing studies and chairman of JCG Ltd., Odessa, Del. Currently, he noted, carriers chiefly use the Internet in two ways: first, for business-to-business transactions, with an underwriting company dedicated to the agency distribution channel using it to facilitate agent sales and information and context transfer; and second, as a consumer information medium to support branding. But it is used least of all for actual transactions, with the processing of applications, binding and the issuance of policies virtually in real time, Jackson said.

Insurers long have looked to the Internet as a prime way to cut distribution costs, an expectation that can pan out, McKeon said. "The opportunities for greater efficiency and cost savings are there, especially for companies that are able to reduce costs of the various pieces by using the Internet to deliver them," he said.

But McKeon views the Internet more as a sales-support vehicle than a sales vehicle. "I still think it's going to be increasingly difficult for the Internet to motivate people to turn it on and part with the dollars needed to complete a program," he said.

Companies that have identified this channel as a promising avenue for revenue growth often have been disappointed, because it has failed to fulfill their expectations for insurance sales, especially the more complicated transactions.

"The Internet has a lot of information, and it's hard to distill it into intelligence," said Michael Cohen, vice president, life/health division, at A.M. Best Co. "You can get plenty of information, but how do you interpret it? And if you have any questions, or you need perspective on how this fits into your financial plan, the Internet isn't going to tell you that. You need a personal approach, someone sitting down with you and talking through the issues and explaining it to you."

Measuring Internet Use

In spite of the hype, there is no reliable measurement in place to accurately gauge how consumers use the Internet for insurance needs, Jackson said. "If one looks at all the reporting agencies that purport to assess utilization of the Internet--and that includes the U.S. government--for the most part, the numbers appear to be wildly inflated," he said.

He discounts figures claiming that half the households in the United States access the Internet for insurance purposes. "As near as can be reasonably estimated, the number of people who have used or are using or will use the Internet in the near future for the purpose of learning about insurance and making an insurance transaction is under 12 million a year," Jackson said.

For his part, McKeon is skeptical that life sales on the Internet will ever achieve the volume that some were predicting only three years ago. Current sales volume is small--measured in the 1% range--and most often it's focused on term insurance, he said.

"If you go out to the insurance aggregators--the Quotesmiths or the InsWebs--you're hard-pressed to get a quote for anything other than a term product," McKeon said.

For people who don't know the insurance business, even a term policy could seem complicated, Cohen said.

"If you look at the aggregators, you can still price- and feature-compare," he said. "If you understand what you're looking at, then you can go ahead. But what if you don't? How many people understand what they're seeing on the Internet, either in going directly to a company's Web site or to an aggregator?" So far, Cohen added, the aggregators have not generated enough business to become profitable, and some are in danger of going out of business as a result.

Back in 1999, Cohen and others predicted that the Internet would generate up to 15% of life sales by 2003. As the scenario played out, however, it became clear that consumers were seeking advice and weren't consummating enough sales just by going on the Internet, he said.

McKeon has more enthusiasm for growth in Internet sales of auto and homeowners insurance, because the mandatory nature of these cover-ages--in contrast to life insurance, which is purchased voluntarily--forces the consumer to initiate the transaction.

Jackson thinks the industry has erred in trying to use this real-time medium in the same way it has used other distribution channels for the last 100 years--that is, providing agent locators, or the introduction of a middle man, into the Internet mix. "The Internet is wholly unsuitable for that kind of functionality," he said. "The Internet is highly suitable for business-to-consumer transactions."

He pointed to published reports saying Allstate early on was disappointed that more people were not buying automobile insurance directly from the company over the Internet. "This is an entirely predictable state of affairs, given the very restricted marketing universe that the Internet represents for direct-transaction insurance sales," Jackson said.

Allstate's Major Move

Allstate, the nation's second-largest auto and homeowners insurer, launched its reorganization in November 1999, with completion projected for 2005. Part of the process called for the company to move from a mainframe environment with billions of pieces of critical data, to a Web-based personal computer network.

The new model seeks to blend use of the Internet and 800-number service with Allstate's agent force. Since 1999, the company redesigned its Web site to issue quotes and sell policies around the clock; installed thousands of desktop computers in agents' offices; and trained agents and field sales managers on the new hardware and software. Early in 2002, Allstate said it had rolled out its new direct-to-consumer network, dubbed "The Good Hands Network," in 30 states, with the potential of reaching 90% of the population.

The company has projected an investment of more than $1 billion in the overall project, much of the funding gleaned from $600 million in cost-cutting measures and other initiatives to promote efficiency.

Through the network's technology, regardless of whether customers deal with an agent, the call center or the Web site, the information is shared among those three access points. With the new system, customers can start a transaction with an agent, follow up with questions to the Customer Information Center and then review the changes to their policy online. By the same token, customers who prefer to transact business only over the Internet or the telephone can do so. With either of these contacts, however, an agent is automatically assigned to the customer.

Allstate's goal is to become the leading technology company in the independent agent channel, Edward M. Liddy, Allstate's chairman, president and chief executive officer, told equity analysts during an earnings conference call in February. Liddy said the company's development of a multichannel distribution system means that Allstate won't need to grow through acquisitions for now. "With our Good Hands Network, we really have an ability to reach the customer anyplace, any time, anywhere we want," Liddy said. "We sell products through independent agents on the Encompass Brand. We sell products through our independent contractors, the Allstate Brand. We can sell and service product over the Internet and through call centers. So we don't feel the need to add to the muscle that we already have."

In the course of its changeover, the company has faced legal battles. One is a class-action lawsuit in Pennsylvania brought by current and former agents who claim Allstate unfairly terminated about 6,400 agents. Another is a lawsuit by the Equal Employment Opportunity Commission, alleging that Allstate's plan to convert its 15,200-member agent force from full-time employees with benefits to independent contractors included improper "pre-emptive" retaliatory measures. The EEOC's suit focuses on a release that Allstate required its newly independent agents to sign and that bars agents from suing the insurer.

"Releases are standard operating procedure in American business," Liddy told analysts. "The agency conversion was well done, it was fairly done, and we expect to prevail in any and all litigation that results from it."

To John Flynn, who leads Sapient's Insurance Practice, Allstate's reorganization is a prime example of how distribution is 'moving out of the theoretical and into the actionable."

Financial Supermarket

At first, many people, including Wall Streeters, questioned how a company like Allstate could take its powerful brand identity woven around its captive agent channel and open that up for change, he said.

"As a company, they have really decided to persevere and make this change, because they realize they're going to need to become less of an insurance company and more of a financial supermarket," Flynn said. "The only way they're going to be able to do that is by bringing other distribution channels into the fold."

Allstate's move was ingenious in many ways, Flynn added. "It set the bar," he said. "It said we're going to control the destiny of our company and affect sources of distribution in a radical way. That's a pretty gutsy move. And it's starting to pay off."

Multichannel Strategy

While Jackson thinks the kind of multichannel strategy that Allstate is pursuing is the right way for insurers to go, he said the company has "over-invested in the Internet as a driver." But once the expensive infrastructure is in place and the technology is proven and workable, "it seems reasonable to believe that at some point in the future, this will become an additional source of business for them," he said.

Flynn's firm, Sapient, is a business and technology consultancy that builds technological support systems for businesses such as insurance firms that are challenged in becoming multiline and multinational or in carving out a particular market share. About 40% of Sapient's global financial-services work is on the insurance side, Flynn said.

Sapient has worked with Axa Japan to reduce the costs of online consumer service, with Lloyd's to enter the world of the Web via Lloyds.com, its online channel, and for ING, which has been acquiring traditional as well as nontraditional insurance or investment-product companies.

His firm also can assist insurers in making captive agent channels more efficient, especially in terms of cross-selling of products. They also focus on the independent producer with an eye to simplifying the way the producer can do business with the carriers.

Insurance companies have been trying to accomplish these business goals for years, but what makes it different now is the way the carriers are trying to reach these goals, Flynn said. "That's because, in large part, the technologies are getting simpler and more affordable, and they're increasing implementation success," he said.

For example, the notion of getting standard rating tools out to producers in the distribution channel does not break new ground. But being able to wrap the rating tools inside a Web service so carriers can publish it in a way that is easily accessible over the Internet to a producer is new, Flynn said.

"These technologies, like Web services, are making it easier for them to take these traditional approaches or traditional tools and actually get them actionable," he said.

He thinks insurance companies are quickly seeing the value of investing in Web services, because it allows them to migrate their business functions and tools to a more open platform and use them in multiple ways--both internally as well as externally with their partners.

"Insurance companies are really rethinking how they take the functionality they build for themselves and externalize these in a way that partners can just grab it, use it and, therefore, just bring them business" Flynn said.

Michael B. Ackerman, president of Ackerman Group Ltd., Denver, predicts that the Internet will have the greatest impact on the employee-benefits business.

"The employee-benefits end seems to have more success on the Internet than the individual side" said Ackerman, an independent consultant to the financial-services industry. He pointed to the many companies that are cropping up to service employee benefits, and numerous others that have partnered with employer groups or trade associations to service benefits or to prospect for clients in the corporate marketplace.

"The work-site marketing companies and enrollment firms also are getting online, so I think that's where the greatest revolution will occur," he said.

Characteristics of Property/Casualty and Life Products Sold on the
Internet

Products with high price sensitivity, low complexity and low levels of
underwriting are well suited for Internet sales.

                                 Life               Property/Casualty
                        Permanent       Term         Auto  Homeowners

Price Sensitivity             Low       High         High      Medium
Product Complexity           High        Low          Low         Low
Level of Underwriting        High     Medium       Medium         Low
Commodity                      No        Yes          Yes         Yes
Nature of Relationship  Long-term  Long-term   Short-term  Short-term

Source: A.M. Best Co.

RELATED ARTICLE: Alliances, Acquisitions Build Direct-Selling Channels

In October 2001, USAA Life Insurance Co. and Fortis Health embarked on an exclusive agreement to have USAA Life refer those of its members interested in individual, medical, student-select and short-term medical plans to Fortis Health. In turn, Fortis Health agreed to take over all the transaction activity previously administered by USAA Life.

At the core of the partnership are Fortis Health's two call centers, which combine direct-sales capabilities with a new telephone underwriting system to speed the health insurance application process for USAA's 5 million members. First, USAA supplies members with an 800 number that connects to Fortis Health's call-help center. There, a direct-sales agent screens and qualifies the caller, then transfers the party to a medical underwriter for a full application interview. The underwriter then notifies the agent of the decision and the agent tells the consumer to expect a callback within an hour with Fortis Health's offer.

This is just one newsworthy development in insurance direct marketing, the nearly $100 billion in-force premium business that uses direct mail, television, print advertising, billing inserts, telemarketing, billboards, the Internet or some other medium to solicit responses from consumers.

Earlier in 2001, Aegon USA announced the acquisition of the J.C. Penney Co. Direct Marketing Services unit, which includes J.C. Penney Life Insurance Co. That acquisition, together with the Aegon Special Markets Group and the previously acquired Providian Direct, makes Aegon one of the nation's largest life and health direct-marketing operations.

So far, the biggest success stories in direct marketing belong to USAA and Geico, said Donald R. Jackson, a consultant in insurance direct marketing and chairman of JCG Ltd., Odessa, Del. Geico, the Berkshire Hathaway subsidiary, bypasses agents to sell auto insurance directly to the consumer. "One reason they are so successful is they have not only made investment in technology but investment in infrastructure," he said.

Avoiding Pitfalls

Some insurers fail at direct-marketing attempts because of infrastructure problems, Jackson said. "It's one thing to solicit applications; it's quite another thing to be able to issue, bill and collect against those applications," he said. "And without appropriate systems in place--both IT and functional tasking--then the system is not going to work."

Another pitfall lies in some companies' abiding belief that direct marketing is no different from servicing an agent or broker. "In fact, direct-to-consumer sales is a field that is highly specialized, and companies often do not reach out to bring in experienced personnel," Jackson said. "If they do reach out, they don't offer those folks the infrastructure support necessary to successfully execute these programs."

Michael Cohen, vice president, life/health division, at A.M. Best Co., predicts that the general volume of business generated by direct marketing will not grow appreciably in the future because consumers have reached the information-saturation point.

"Response rates are still low," he said. "An increasingly thorny problem that direct marketers have faced is that people's mailboxes are just overloaded."

But Jackson thinks this distribution channel will continue to expand, because "it's gotten too big and it's coming under the scrutiny of too many senior executives in the insurance industry," he said. "It has already penetrated all product lines from things as complicated as pensions to universal life insurance to commercial line property and casualty."

But there's still a good deal of work to be done to improve the industry's "horrendous" image, he said. "Considering the hundreds of millions of dollars spent over the last 30 years in branding strategies, it becomes pretty apparent that they haven't worked so well," Jackson said. "People are not so interested in spending money on insurance, yet there is an underlying recognition that insurance is necessary and, in some cases, a necessary evil."

Working on Work-Site Sales

Allstate Corp.'s buying spree in the late 1990s included the $1.1 billion acquisition of American Heritage Life Investment Corp., the nation's third-largest work-site marketing insurer.

The transaction was designed to give Allstate access to the life, disability and health insurer's distribution network and its independent agents. American Heritage, meanwhile, would gain up to 15,000 new agents through Allstate's agent force, as well as the power of Allstate's brand name. The marketing name for American Heritage Life would become Allstate Financial Workplace Division.

Allstate, the No. 2 property/casualty insurer behind State Farm, made the move because the selling of insurance products through employers then was growing by 15% annually and promised continued growth. With American Heritage under its wing, Allstate was targeting smaller businesses with fewer than 1,000 employees to tap the least-penetrated middle market.

But as far as the entire industry is concerned, this face-to-face distribution channel has yet to live up to its potential.

George McKeon, writing in the Conning & Co. report, "Life Distribution Goes Independent," said that because of the economies of scale that work-site marketing offers, it is seen as one way to reach the middle market in a cost-effective manner. "But the lack of effective distribution has kept many companies from achieving a profitable sales level," he said.

So far, this channel has generated only a small portion of industry premium, McKeon said. He noted that the total new annualized premium on individual life products for 2000, as reported by Limra, was $11.55 billion, "giving the work-site channel a market share of slightly less than 4%."

"Frankly, I'm a little surprised that companies across the industry have not sought to make a bigger push into work-site marketing," said Michael Cohen, a vice president in the life/health division at A.M. Best Co. A very favorable benefit of this distribution channel is the ability to amass many customers at once, provided that the insurer has the support of a sales and administrative infrastructure, he said. Also, people are less resistant to having money taken out of their paychecks to pay for something like insurance than they are to actually write a check, Cohen said. "Business sold this way has better persistency, because they are not making a purchase decision every two weeks," he said. "And persistency is very good in work-site marketing."

But while many insurers have dabbled in this channel, the dabblers have not been successful, Cohen noted. "It's not just a hobby;' he said. "You've got to set up a whole business process and be committed to it as a core business effort to make it work. But if you make the necessary commitment, it can be very profitable."

Building the right structure is the biggest challenge for insurers in cracking the work-site market, McKeon agreed. For starters, this distribution channel requires a multitier sale, he said. First, the insurer must contact the, producer, who must then go out to the employer. The producer makes his presentation to gain the employer's permission to establish the work-site program. Then finally, the producer gets to sit in front of the consumer, "and that's where the first opportunity for seeing any business flows;' McKeon said. "So you have a bit of a structure that needs to be established before you can sell in the work site and see any sales results."

McKeon also says many insurance companies mistakenly take products off the shelf, change their names slightly and then label them as work-site products. "Any successful distribution initiative--including work-site--needs to have products that are specifically designed for the needs of that market, processes that are established with that market in mind," he said. "You don't use an extremely cumbersome underwriting technique to sell a product that ought to be issued guaranteed issue."

Donald R. Jackson, insurance marketing consultant and chairman of JCG Ltd., thinks work-site marketing will become a growing avenue for voluntary benefits programs in the future. But so far, the premium levels have proved disappointing "because of a general decay in the employer/employee relationship over the decades;' he said.

He likened this marketing device to the introduction of health insurance and allied coverages during and just after World War II. At that time, there was a great deal of employer/employee loyalty, Jackson noted. "But as society has matured and become more mobile, that loyalty has eroded;' he said, "and at each recession, the first thing you get is the number of layoffs."

To many employees, it doesn't make sense to opt for life insurance coverage to be deducted from their salaries on a monthly basis when they don't know if they will be working at the same place in a year's time and might have to go through a new underwriting procedure, Jackson said. In some cases, that problem is being solved with portability provisions, he added. "But in general, when you look at group auto coverages, normal life coverages, disability coverages and things of that nature, the coverage is not portable," Jackson said. 'What probably is much more important is that if you lose your job, you are unlikely to continue paying premium on a voluntary benefit program, because you just don't have the money"

Looking at Life Sales in a New Light

The strength of the life distribution system is in the large cadre of trained people who know their product, know the tax law and know how insurance can be used to solve their clients' financial needs, said George McKeon of Conning & Co.

And that knowledge creates a positive factor for those companies that can lay claim to some of those people as "captive distribution," he said.

But the number of captive agents has been decreasing, while independent producers have been taking on a bigger industry role. In the life business alone, the premium volume of independent agents is expected to increase to $1.84 billion in 2003 from $1.45 billion in 2000, roughly twice that of captive agents, according to McKeon's report, "Life Distribution Goes Independent."

Rather than leaving the business entirely, former captive agents often continue as independent agents or as representatives of other financial-services organizations, McKeon said.

"A lot of the switch from captive to independent is just individuals or groups of individuals changing their jersey' he said. "Today's captive agent for one company suddenly turns around and signs on with an independent broker or joins the insurance staff at the private broker. So it's the same individual--he's just playing for a different team."

There also is an overall shrinkage in professional insurance advisers, a trend that has been playing out for years and is expected to continue. But recruits are still coming in, lured by bankers or by stockbrokers. These newcomers wind up in insurance-producer type roles for those organizations, McKeon said. "So there is some new blood coming in, but it is a smaller flow than it used to be," he said.

Recruiting Trends

Michael B. Ackerman, president of Ackerman Group Ltd., Denver, and an independent consultant to the financial-services industry, doesn't agree with some dire predictions that the high-end individual life agent won't even exist 10 years from now. But he does note how the new, young producers are being recruited as financial planners and financial consultants. This broader base of expertise will be needed to serve consumers in their same age group--the late 20s to the mid-40s--who will require financial consultants and financial advisers as much as they need life insurance specialists, he said.

"It bodes well for the future, and I think that's the right way to go about things at this stage," he said.

In his work, Ackerman provides strategic planning with an emphasis on distribution to insurance companies, producer groups, banks, mutual funds, health maintenance organizations, trade associations, broker-dealers, accounting firms and law firms. And he looks for prospecting and buying opportunities for high-end agents in the individual life marketplace.

Succession Planning

He sees succession planning as one of the biggest issues confronting agents these days.

"We're an aging, graying industry," Ackerman said, citing statistics from the American Association of Life Underwriters that puts the average age of its members at about the mid-50s. "We're all on the downside of our careers. And many people are trying to figure out in the last, say, 10 years of their productivity, how to keep it at that high end."

When retirement time comes, passing the baton to younger people in the agency is still a favored option, he said. But in the last five years, another solution has gained momentum: acquisition by one of the four or five major consolidators, such as National Financial Partners or Highland Capital, to become part of a larger organization.

Ackerman thinks the biggest threats--as well as the greatest opportunities--for producers in the high end of the marketplace come from certified public accounting firms and attorneys. Most of the major life insurance companies have strategic initiatives to partner with accounting groups, he said.

"Now we have accounting-producer groups, accounting broker-dealers," he said. "Prudential bought a CPA broker-dealer about two years ago. Now life insurers realize that they have to either buy these organizations or partner with them in some way."

Well over half the members of the American Institute of Certified Public Accountants are licensed to sell life and health insurance, Ackerman said. "The ones that have been successful so far have partnered with insurance specialists," he said. "They are not eating into a huge chunk of our industry by any means, but they are a force."

Although attorneys are a relatively new presence in the industry, they will exert a stronger influence, he predicted. About a year ago, the New York Bar Association permitted its members to accept fees with other financial professionals. "I've had calls from law firms around the country that have asked me to consider helping them put together a strategic plan for this," Ackerman said.