Strength in Numbers.

Life insurance agents may have to band together to survive the recent downturn in sales.

No one in the life insurance industry needs to be reminded that even with a growing population, a decade of unprecedented prosperity, and near-record employment that life insurance sales have failed to keep pace. There has been more than one year when they have been painfully flat.

While everyone is attempting to understand this trend, enter the Internet. Granted, the early forays into selling life insurance online (with the possible exception of some term policies) have fallen below expectations. There is still the question, however, of how this new distribution channel ultimately will affect agents.

To understand the impact of online sales on agents, it's worth noting what's going on in the mutual-fund business. With the preponderance of no-load funds, along with their vast advertising and promotional budgets, one might expect that most sales would be direct. But this is not the case. Two-thirds of all mutual-fund purchases are made through representatives. The figure is reportedly up slightly from a decade ago.

If that seems surprising, consider this: The proliferation of mutual-fund products creates enormous confusion for investors who try to sort out differences and attempt to make comparisons. The vast amount of information available online only raises more questions for the consumer. In this environment, the adviser can play a critical role in assisting the mutual-fund customer to make the right decision.

The life insurance industry is no different. The consumer's age, objectives, obligations, family situation and tax circumstances demand a high level of professional competence when it comes to structuring a life insurance program. Product differences can be profound. With all this, the life insurance agent can have an even more critical role to play in helping consumers, perhaps more than at any other time in the history of the industry.

Inevitably, the mom-and-pop-type agencies are faced with closing their doors or joining with other agents in some type of consortium or cluster arrangement. John Watts, author of Survival Tactics for Wall Street and Main Street, saw this coming 15 years ago. He saw the demise of mom-and-pop insurance and financial-services shops. It would be "rising costs, lower commissions and a narrow band of products" that would doom the mom-and-pop operations, Watts wrote. It is ironic that this should occur at the very moment when the agent's expertise is needed most by consumers.

While the need for the agent is clear, the survival of the life insurance agent is in question. Like so many other industries, the cost bottleneck in life insurance is in distribution. To stay competitive, life companies are driven to reduce their distribution costs. It's only inevitable that they want to do business with larger organizations where there are efficiencies of scale.

Yet, agent clustering may be just the next iteration in the life insurance distribution system, particularly if it is sensitive to consumer needs. In fact, this change in the distribution channel may be what's needed to free the industry from far too many years of the frustration of flat sales.

If insurers come to do business with larger sales organizations or clusters of agents so they can reduce costs and increase efficiency, we can expect to see some major shifts. For example, underwriting, administration, product design and promotion all will be done in the field, where it actually belongs. The constant complaint from agents is that the home offices "just don't understand what's going on." Chances are, they don't. Bringing the process closer to both the consumer and the agent makes more sense- and undoubtedly will translate into more sales.

In effect, the insurance company will take on the characteristics of the type of company it is-the manufacturer. It will feed its products into a series of distribution channels to best serve its various constituencies. But as the mutual-fund industry is learning, there is a critical need for competent agents to interface with consumers.

For the agent, this change can mean greater access to products and more time to focus on sales and service. Just as important, it also means larger compensation checks since combined sales earn higher compensation rates. After years of eroding commissions, this is the turnaround that is needed.

Clustering isn't necessarily a panacea. Some arrangements will work better than others. Some may be so flawed they will fail. But models are emerging and improvements are being made. The concept makes sense. With the right technology and the right vision by both agents and insurance companies, consumers may be even better served than they are today.

Ronald D. Verzone, a Best's Review columnist, is president of United Underwriters Inc., Exeter; NH.