Tackling call blockers: a decline in sales rates traced to the new Do Not Call law is expected to continue for at least a year for companies depending on the pre-existing business relationship exemption.

Last year was tumultuous for telemarketing. Legislation was on the forefront and the changes came fast and furious. The long-lasting impact of all the changes on the future of telemarketing in the insurance business remains to be seen. In the short term the insurance industry expects a drop in sales rates due to Do Not Call laws, but sees a glimmer of hope in the exemptions to the law.

The Beginning

Many people believe that the use of telemarketing as a media channel started with the JCPenney 90-day bonus accidental death and dismemberment program, but that really only accounts for the past 20 years. Long before the Penney program, telemarketing, as a marketing medium, was an effective tool used by direct marketers and traditional sales organizations alike. Evidence suggests that the insurance field first used the telephone as a sales tool during World War II when gas rationing forced insurance agents to use the phone in lieu of expending precious fuel on face-to-face visits. Presumably, after the war the business went back to focusing on direct sales and continued as such until sometime in the 1960s.

From the mid-1960s through the 1980s, insurance telemarketing was a testing ground for new ideas and ways to sell mostly supplemental products, such as accidental death and dismemberment and Medicare supplement. But the 1990s were the "go-go" years and the giant JCPenney program was the most exciting program ever to bit the insurance telemarketing direct marketing business. Unfortunately, the same kind of growth was also occurring in other vertical markets, causing the volume of calls to consumers to grow at a very high rate.

Telemarketing Hits the Wall

This growth in call volume led to passage by Congress, and the Federal Communications Commission's implementation, of the Telephone Consumer Protection Act of 1991. The primary effects of the new law were to create company-specific Do Not Call lists, restrict calling hours, and add some disclosure requirements.

A couple of years later, Congress passed the Telemarketing Sales Rule, and the Federal Trade Commission was charged with its implementation. This new law was designed to beef up some of the provisions of the 1991 act and add some teeth to others. Specifically, the Telemarketing Sales Rule provided a mechanism for state attorneys general to sue violators in federal court. This was designed to stop the hit-and-run practices of fraud perpetrators who had been using the telephone to commit crimes for years.

Both the Direct Marketing Association and the American Telemarketing Association were allowed input into these two laws, and both bills attempted to balance the desires of the consumer with the rights of legitimate marketers. It is worth noting that they did, however, force a new level of responsibility on telemarketers of any type product. Insurance telemarketers were not the specific aim of these bills and, in general, have always been a cut above some other telemarketers, from an ethical point of view.

The cost of long distance had been coming down for quite some time, but by the middle 1990s, large telemarketers were funding they could negotiate very low telecommunications rates. This made the cost of an hour of telemarketing, and, therefore, the cost per call, much lower. Additionally, it was during this decade that predictive dialers took hold as the industry standard for telemarketing systems. A predictive dialer automatically dials consumers' phone numbers and then connects to a telemarketer once the consumer answers. This "dialing ahead" makes them efficient, but also leads to abandons, or consumers answering the phone to "dead air." All this resulted in geometrically expanding call volumes and increasingly irate consumers.

The only thing missing to complete the disaster was an increase in call volume capacity. The solution to this came with the public offerings of teleservices agencies' stocks and the millions of dollars this provided for adding seats. The 1990s made the telemarketing industry bigger, faster and cheaper, but unfortunately not better.

The Situation Today

Increasing consumer resistance to telemarketing caused sales-per-hour rates to fall, making the cost of acquisition higher. This was the harbinger of the beginning of the end of consumer cold calling.

By January 2002, the FTC announced a review of the Telemarketing Sales Rule. After months of hearings, and publicity, regarding the inevitability of a national Do Not Call Registry, the rule was approved on Dec. 18, 2002. It was a "Christmas present" for the American people, according to Tim Muris, Chairman of the FTC.

The revised Telemarketing Sales Rule did contain exclusions, plus there are industries where the FTC has no statutory control. Naturally, the rule exempts politicians. It also exempts charities. Industries not normally regulated by the FTC include airlines, banking, telecoms and insurance. In response to this, the FCC issued its long-awaited revised Telephone Consumer Protection Act. Basically, this "me-too" rule was designed to help to enforce the national Do Not Call Registry. However, there are differences between the two rules that Congress requires they close.

The most important exemption, particularly for the insurance industry is the Existing Business Relationship exemption. This allows calls to customers with whom there has been a financial transaction within the past 18 months and to prospects who have inquired within the past three months.

The Lawsuits

On Jan. 29, 2003, two lawsuits were filed regarding the legislation.

In US. Security et al vs. Federal Trade Commission, five organizations--U.S. Security, Chartered Benefit Services, Global Contact Services, Infocision Marketing, and the Direct Marketing Association--challenged the FTC in Federal District Court in Oklahoma based on violations of the First Amendment and equal protection rights. It also cited the fact that the FTC exceeded its statutory authority because the 1991 Telephone Consumer Protection Act specifically authorized the FCC to consider a national Do Not Call list.

In Mainstream Marketing Services, Inc et al vs. Federal Trade Commission, filed in Federal District Court in Colorado (and including the American Teleservices Association as a plaintiff), similar allegations were made concerning the First Amendment and equal protection.

Both First Amendment arguments were based on the notion that the FTC was attempting to discriminate against a certain kind of speech, while exempting other types of speech. It is the content argument and is usually upheld in every First Amendment case. Notwithstanding these two attempts to gut the FTC's revised Telemarketing Sales Rule, another issue emerged which directly affected insurance telemarketers. The FTC could not control several industries, including the insurance industry. Not so, claimed the FTC. If an insurance company used a third-party teleservices provider to make outbound calls, the teleservices provided were subject to the revised Telemarketing Sales Rule.

Consequently, this claim gives jurisdiction to the FTC over the insurance industry. As a result, the "free-to-paid" provision of the Telemarketing Sales Rule would severely affect the sale of insurance through third-party credit card sponsors--a multibillion dollar business.

On March 21, 2003, the only insurance company to challenge the Telemarketing Sales Rule stepped up to the plate. Stonebridge Life Insurance Company vs. Federal Trade Commission picked apart the FTC provisions on First Amendment and equal protection grounds. Stonebridge claimed that the distinction made in the Telemarketing Sales Rule between internal outbound telemarketing operations (nonregulated) and external outbound telemarketing operations (regulated) violates the equal protection rights of insurance providers who rely on third-party telemarketing.

None of these suits deterred the FTC from moving forward with implementation of the revised Telemarketing Sales Rule. Simultaneously, the FCC--which does exercise jurisdiction over the insurance industry--moved forward with its own re-examination of a revision of rules supporting the Telephone Consumer Protection Act.

The Initial Results

On June 27, 2003, President Bush made a Rose Garden announcement inaugurating the national Do Not Call Registry. Hard on the heels of the president's 8:30 a.m. announcement, FTC Chairman Muris and FCC Chairman Michael Powell hit the morning talk shows promoting the Web site and phone numbers for consumers to sign up.

The ensuing media attention caused a difficult summer 2003 for marketers, including insurance direct-marketing practitioners, as the national Do Not Call Registry headed for the Oct. 1,2003, kick-off date.

Then Federal District Court Judge Lee R. West, who was presiding over the U.S. Security, et al vs. Federal Trade Commission litigation, handed down a decision. According to the finding, the FTC did not have the authority to establish a national Do Not Call list. Other components of the complaint, especially the First Amendment and equal protection arguments remained undecided.

Reacting to the judge's decision, Congress managed to pass a bill authorizing the FTC to create and manage a national Do Not Call Registry in three days. President Bush signed it into law.

Virtually within hours of the Oklahoma District Court decision, Federal District Court Judge Edward W. Nottingham in Mainstream Marketing Services, Inc. et al vs. Federal Trade Commission handed down a decision.

"The FTC ..." wrote Judge Nottingham, "has chosen to entangle itself too much in the consumer's decision by manipulating consumer choice...." By exempting charitable and political calls, the FTC had produced no evidence that these exemptions were legitimate. In the context of the First Amendment, the list is "under inclusive." The judge likened the rule to Orwell's "Animal Farm," where the animals were all equal, but some were more equal than others.

That was not the last word. The FTC appealed to the 10th District Federal Appeals Court and won a partial victory. The 10th District allowed the Do Not Call list to be implemented, while the long, laborious court process moved forward, concluding that the FTC has a reasonable chance of prevailing on appeal.

New Rules in Place

It is going to take a significant period of time for the results of this process to play out. Meanwhile, the first anecdotal evidence of the impact of the Do Not Call list is emerging.

Several insurance operations acquired the Do Not Call list as soon as it was available. They then ran the Do Not Call list against their July and August campaigns to determine the impact. Apparently the Do Not Call list reduced the available numbers from 30% to 37% of the original list of prospects.

Discussing the list with third-party sponsors (credit card issuers and mortgage companies) revealed that they are, universally, intending to take advantage of the existing customer exemption. In some cases this is a seemingly risky thing to do since the FTC is looking for a high-profile user organization to litigate unauthorized use.

The bottom line is that as of this writing there are approximately 53 million consumer phone numbers on the national Do Not Call list. There are approximately 167 million phone numbers in the United States. So as of now 31.7% of those numbers have signed up to not be called. And, the list continues to grow.

The Future for Insurers

In the short term, anecdotal evidence suggests that a decline in sales rates will continue for at least the next year for those companies depending on the pre-existing business relationship exemption.

Is Telemarketing Dead?

Ultimately, and regardless of future court decisions, the answer is: of course not. The insurance business is particularly well positioned to take advantage of the Existing Business Relationship exemption. As a group, direct marketers aside, insurers have not been very good at marketing to policyholders. In the more traditional companies, the prospects for this type of marketing are the "orphan" accounts. These comprise a tremendous opportunity for underwriters to apply a very professional telemarketing approach.

Another area open for future growth, for instance, is "Permission Marketing." Since the law allows you to ask people on the Do Not Call list for permission to call, this will become a sophisticated way to keep leads active and call past customers who haven't done business within the 18-month time frame provided in the Telemarketing Sales Rule. The e-mail marketing business has shown us the way to get permission. For insurers, it represents a new way of doing business.

The problem seems to be getting customers to agree to be called. For insurers with good products and reputations, this should not be that tough a sell. Ways to approach past customers and the general public are being developed in order to comply with the permission exclusion of the regulation. To work, they must give the customer a good reason to agree. For example, that might be to save money on auto insurance, stay up to date with their life insurance or earn more on annuities. This is a new business that is just being birthed by a small handful of companies.

The message to insurers seems simple enough. The days of commodity telemarketing are rapidly winding down. Even if the laws don't kill the large formulaic programs, consumers will. Insurance companies (and others for that matter) need to create programs that focus on offers that people want. As telemarketing grew out of control the industry began to sell products--not offers. For example, several large insurers created accidental death and dismemberment products that were just like the ones already on the market and then used sheer volume calling to try to garner a piece of the market. The message to the consumer was, "I'm calling to sell you this product because I have it, not because you need it."

For insurers, this means following the more traditional agency model and doing needs assessment before offering a specific product. Contrary to the way the business has grown, not everyone needs Bonus AD&D. Underwriters need to look at the ways to recreate the success of the American agency system, but with the mantra of better, faster, and cheaper.

The future of outbound telemarketing for insurance is certainly bright enough. Between mining the gold that already exists in the policy files, asking permission to call past prospects, using direct marketing to generate new leads, and calling as a follow up, plenty of business exists. The insurance business simply needs to comply with whatever rules finally become law and move forward as it has always done.

Do Not Call List by the Numbers

53 Million

The Number of consumer phone numbers on the national Do Not Call List

167 Million

The approximately number of phone numbers in the United States.

31.7%

The percentage of all U.S. phone numbers on the national Do Not Call List.

Source: Jon Hamilton and Don Jackson

Revised Telemarketing Sales Rule Provisions

The Telemarketing Sales Rule was passed by Congress in the mid-1990s. Its mission was to close the coverage gaps in the Telephone Consumer Protection Act of 1991. Among the provisions of the revised Telemarketing Sales Rule are:

Abandonment Setting. It is now a violation to abandon anyone due to predictive dialing, unless the call falls under the "safe harbor" provision that allows for a maximum of 3% abandons. This means that the days of turning up the dialer to get more contacts is over. But it gets worse.

Abandon Message. When an abandon happens, to be considered eligible for the "safe harbor" the marketer must meet a couple of conditions. First, the phone must be answered within two seconds, and second, it must be with a recorded message giving the customer information on who is calling.

Caller ID. While this provision hasn't drawn much discussion, it could well turn out to be one of the most onerous of all. Anyone placing a telemarketing call now must pass the Caller ID information to the called party. The problem comes in that when the dialer calls a subscriber with the ID feature, the marketer's number or name will be displayed on the phone. With many of these phones, this information is stored. Imagine a consumer coming back from vacation and finding a particular marketing company had called 10 times, 20 times, or more?

Unsolicited Fax. Implementation of this provision has been put off for about 18 months. If it were implemented it would affect such consumer friendly systems as "Fax on Demand."

Free-to-Paid. The FTC also added a provision designed to protect consumers from unauthorized credit card charges. What they eliminated was an offer that, while sometimes abused, was basically consumer friendly. Free offers that convert to credit-card charges allowed people to try a product or service for a specific time period before being billed

Jon Hamilton is a senior consultant with JCG Group Ltd. and president of JHA Telemanagement, a telemarketing consulting service provider to the insurance industry. Don Jackson is chairman, JCG Group, Ltd., an international insurance and financial services direct-marketing consulting group.