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Conflict and channel management in property-liability distribution systems.

Conflict and Channel Management in Property-Liability Distribution Systems


Using data provided by 94 insurance marketing managers, this study examines the distribution channel management strategies of the property-liability insurance industry. Results from the study indicate that channel conflict does not vary significantly between independent agency and exclusive agency insurers. Independent agency insurers use significantly more coercive and significantly less noncoercive agency management strategies than do exclusive agency insurers. The use of coercive channel management strategies was associated with increased channel conflict for both independent agency and exclusive agency insurers. The use of noncoercive channel management strategies was associated with decreased channel conflict for independent agency insurers, but not for exclusive agency insurers.


While several studies [Etgar (1977, 1976B, 1976C)] have examined the strategies used by property-liability insurers to attain efficiency within their marketing distribution channels, additional research on insurance channel relations (i.e., the relationship between insurance marketing managers and their agents) appears to be warranted. Agents' commissions accounted for 12 percent of the net premiums written by property-liability insurers in 1987 [A. M. Best Company (1988)], and effective coordination between insurers and agents is a vital component in maximizing the return from these expenses and in the consistent implication of marketing strategies [Booms and Bitner (1981), Etgar (1976B)]. Throughout the 1980s, however, relations between many insurers and their agents would appear to have deteriorated, especially among insurers using the independent agency distribution. (1) Independent agents' associations have publicly criticized several of the actions taken by their insurers to improve marketing effectiveness [Fenske and Freedman (1987), Friedman (1984, 1986)]. In contrast, little information is publicly available about the agency management practices used by exclusive agency insurers, perhaps because the insurers' influence over their marketing systems has prevented the exclusive agents from developing active (and hence vocal) trade associations.

This study examines the agency management strategies of the property-liability insurance industry. Attention is focused on the effects that such strategies have on channel conflict. (2) Agency management strategies and measures of agent-insurer conflict are compared between independent agency and exclusive agency insurers in recognition of their inherent organizational differences. A description of the literature on channel management and conflict is provided in the next section of this article, followed by a discussion of the research methods, results, and implications of this study.

Channel Management and Conflict

Previous research suggests that insurance managers can control the behavior of their agents more effectively by utilizing coercive and noncoercive channel powers. (3) If agents perceive that an insurer has attained power and can exercise that power in a punitive or beneficial manner when dealing with them, they are more likely to act in accordance with the strategic goals of that insurer. Channel conflict can arise, however, if agents perceive the goals of their insurer(s) as a threat to the attainment of the goals of their agencies. When faced with such conflict, agents may attempt to overcome the control of their insurers by exercising countervailing powers which enable agents to resist and the counterbalance the influence of their insurers [Etgar (1976A)].

While agents may derive countervailing powers from several sources, (4) differences in the countervailing powers held by exclusive and independent agents can be traced primarily to differences in the agents' dependency upon the resources of their insurers [Skinner, Donnelly, and Ivancevich (1987)]. Compared to exclusive agents, independent agents are less dependent upon their insurers in managing their daily activities, as they are typically autonomous marketing intermediaries who can write their clients' insurance through one of several different insurers. Independent agents also derive more countervailing power than exclusive agents by virtue of owning the legal right to renew the policies of their clients. As a result of these organizational differences, property-liability insurers using the independent agency distribution system are thought to maintain considerably less control over their marketing channels than do insurers using exclusive agents [Etgar (1976B)].

The relationship between insurer-agent conflict and the countervailing powers of agents has not been extensively studied. In reviewing the literature on channel power and conflict, Gaski [1984, p. 26] proposes that conflict is directly related to the countervailing power in the channel; that is, channel leaders such as insurers become dissatisfied when intermediaries (i.e., agents) exercise their countervailing powers and fail to adhere to corporate marketing plans. In this context, given the considerable management autonomy held by independent agents, the channel managers of independent agency insurers could be expected to experience more conflict with their agents than do exclusive agency insurers.

In addition to affecting conflict, differences in the countervailing powers of insurance agents may also influence the use of coercive and noncoercive insurance agency management strategies. For example, if the autonomy of independent agents enables them to disregard the directives of their insurers, these insurers may feel forced to rely more heavily than do exclusive agency insurers upon coercive agency management strategies (e.g., providing less responsive underwriting service or threats of canceling agency agreements) to encourage adherence by their agents to corporate marketing plans. (5) In contrast, exclusive agency insurers may be more likely to use noncoercive agency management strategies (e.g., providing incentives such as sales training and advertising budgets) since their more centrally administered channel structure allows them to offer such incentives in a more cost effective manner than can independent agency insurers [Etgar (1976B)], and since independent agency insurers are often reluctant to offer such incentives, fearing that their agents may use the services to benefit rival insurers within their agencies.

The use of coercive and noncoercive powers may have diverse effects on channel conflict. Studies of noninsurance distribution channels [Gaski (1984), Lusch (1976)] suggest that the use of coercive power sources is associated with increased channel conflict, while the use of noncoercive power sources is associated with decreased conflict. Recognizing the relevancy of these finding to the effective management of agency sales forces, a comparable analysis of the relationship between agenty-insurer conflict and different power sources may provide useful information to property-liability insurers about minimizing channel disruptions.

In short, based on the issues presented in this section, this study examines three hypothesis:

Hypothesis 1: Agent-insurer conflict is more prevalent for independent agency insurers than for exclusive agency insurers.

Hypothesisis 2: Independent agency insurers are more (less) likely than exclusive agency insurers to use coercive (noncoercive) powers.

Hypothesis 3: Agent-insurer conflict is directly (inversely) related to the use of coercive (noncoercive) powers.

Research Methods

Data regarding channel conflict and coercive or noncoercive powers were solicited via mail questionnaire from 107 of the largest property-liability insurers in the United States. The researchers personally contacted each of the targeted insurers by telephone to identify executives who were familiar with their firms' agency management practices and to request their participation in the study. A first and second mailing of the questionnaire to the 107 marketing executives yielded 94 usable surveys, a response rate of 88 percent. This response rate is quite high for a mail survey [Yu and Cooper (1983)], perhaps reflecting the favorable effects of the personalized prenotification of the respondents and their familiarity with the foundation that sponsored the study. Sixty of the respondents reported that independent agents comprised their predominant distribution system, while the remaining 34 insurers primarily used an exclusive agency system. (6)

The constructs examined in the survey measure the insurance managers' perceptions of the conflict existing between their insurers and their agents, as well as the extent to which they used coercive and noncoercive powers to control their agents. Previous studies [Guiltinan, Rejab, and Rodgers (1980); Skinner, Donnelly, and Ivancevich (1987); and Skinner and Guiltinan (1985)] and in-depth interviews with several insurance marketing personnel were used to identify the specific items included in the survey to measure power and conflict. In pretests of the initial questionnaire with several insurance marketing personnel, no problems regarding its clarity or coverage were revealed. The internal consistency of the items comprising the conflict and two power scales was established based on item-to-total correlations [Nunnally (1978)]. Factor analyses confirmed the convergent validity of these three scales. (7) As a result, measure of conflict, coercive power, and noncoercive power were calculated for each respondent by summing the respective scale items. (8)

Pearson product moment correlations and simple t-tests were used to analyze the data relative to the hypotheses. To determine whether perceived conflict, the use of noncoercive powers, or the use of coercive powers differed significantly between distribution channels, the means of the aggregated scores reported by independent agency and exclusive agency marketing managers were compared using t-tests. To study the relationship between conflict and coercive or noncoercive power for the two marketing systems, correlations between the conflict measure and the two power measures were calculated separately for exclusive agency and independent agency insurers.


The means of the aggregated conflict measures for independent and exclusive agency insurers are shown in the first row of Table 1. Comparisons revealed no significant differences in conflict between the two marketing systems, thus providing no evidence in support of the first hypothesis.

The means of the aggregated coercive and noncoercive power measures for independent and exclusive agency insurers are shown in the bottom two rows of Table 1. Independent agency insurers were found to use significantly more coercive power than did the exclusive agency insurers, while exclusive agency insurers reported that they used significantly more noncoercive power than did their independent agency competitors. These results support the second hypothesis, as the organizational differences between independent and exclusive agency distribution systems appear to affect their agency management strategies.

The correlations between conflict and the use of coercive and noncoercive powers generally supported the third hypothesis. Conflict was positively correlated with the use of coercive powers for both independent and exclusive agency insurers (.380 at a .003 significance level and .368 at a .033 significance level, respectively), thus suggesting that punitive agency management strategies are associated with increased tension between insurers and agents. In contrast, conflict was negatively correlated (-.218 at a .080 significance level) with the use of noncoercive powers by independent agency insurers. This latter finding offers limited evidence suggesting that by providing sales training, advertising, and other such noncoercive marketing incentives, independent agency insurers have been able to reduce the conflict that they encounter with their agents. By contrast, the correlation between conflict and noncoercive power was positive but not statistically significant for exclusive agency insurers.

Mnagement Implications

By analyzing perceptual data provided by the managers of exclusive agency and independent agency insurers, this study offers useful evidence about property-liability insurance agency management. For example, in testing the second hypothesis, comparisons between independent agency and exclusive agency insurers revealed significant differences in agency management strategies. Respondents from exclusive agency insurers reported using significantly more noncoercive agency management strategies than their independent agency counterparts, perhaps reflecting the more centralized channel coordination of the former. In this context, marketing managers for exclusive agency insurers may feel obligated to provide noncoercive marketing incentives to their agents, as exclusive agency channels are designed to remove the management responsibility for such activities from the agents and transfer it to a more centralized coordinator [Etgar (1976B)]. Exclusive agency marketing managers and their agents may thus view their insurers' provision of noncoercive marketing incentives as an implicit contract of the exclusive agency agreement. By contrast, independent agency insurers may be less likely to offer such assistance unless they are contractually assured that the incentives will provide them increased sales and will not be used to benefit other insurers within the agency.

Tests of the second hypothesis also indicated that independent agency insurers use significantly more coercive powers than do exclusive agency insurers. These results are consistent with previous work on channel theory and social power. More specifically, Wilkinson and Kipnis (1978) found that firms are more likely to use coercive tactics to deal with channel members that they feel are performing ineffectively. Such findings closely parallel the strategic marketing position of independent agency insurers in the 1980s; in an effort to reduce their agency forces, the insurers may have been unwilling to negotiate with their marginally productive agencies. In contrast, the continued marketing success of most exclusive agency insurers made it unnecessary for them to use coercive agency management techniques.

Correlations between the measure of conflict and the use of different types of power were consistent with the third hypothesis. The use of coercive power was directly associated with heightened insurer-agent tension for independent agency insurers as well as exclusive agency insurers. Clearly neither type of insurer can use punitive agency management strategies without experiencing increased conflict with their agents.

The negative correlation between the channel conflict experienced by independent agency insurers and their use of noncoercive power, although marginally significant, offers a useful insight into insurance agency management. Based on these results, it appears that independent agency insurers have been able to reduce conflict by providing marketing assistance (e.g., advertising allowances, computer equipment, and sales training) to their agents. On the other hand, such marketing services would not appear to be effective in reducing the conflict perceived by exclusive agency insurers. In this context, exclusive agents may be less likely to modify their behavior in response to receiving additional marketing services since they expect to continue to receive such services from their insurers. Thus, as a result of their centralized channel coordination, exclusive agency insurers may have less opportunity to reduce channel conflict than do their independent agency counterparts.

Despite the highly publicized disagreements between independent agency insurers and their agents and the presumably larger countervailing power held by these agents, conflict was not found to differ between insurers using the independent agency and exclusive agency distribution systems. Based on these findings, it appears that organizational differences in insurance distribution systems may not affect conflict significantly, as a similar amount of agent-insurer tension may exist in both exclusive agency and independent agency marketing systems. (9)

(1) Independent agents can represent more than one insurer, own the right to renew the insurance policies of their clients, and pay their own office expenses. Exclusive agents usually represent only one insurer, generally do not own the renewal rights on their clients' insurance policies, and are often reimbursed by their insurers for their office expenses [Cummins and Vanderhei (1979); Johnson, Flanigan, and Weisbart (1981); and Webb et. al. (1978)].

(2) In this context, conflict is defined as the perception by insurance managers that the achievement of their corporate marketing goals is impeded by their agents. Conflict could also be measured from the perspective of the agent. The authors felt that the insurance channel managers' perceptions of conflict were more appropriate for this study, however, since the managers have first-hand knowledge about agent-insurer conflict, and since they presumably have much better knowledge than do agents about the entire spectrum of agency management strategies used by their insurers.

(3) Power refers to the ability of one party (the insurer) to evoke a change in the behavior of another party (the agent) [Gaski (1984)]. Researchers [Hunt and Nevin (1974); Lusch (1976); and Lusch and Brown (1982)] define coercive powers as the ability to influence another party through the use of punishments, and noncoercive powers as the ability to influence another party through the use of rewards or assistance.

(4) Etgar (1976A) found an inverse relationship between the insurance agents' use of countervailing power, as measured by variables such as an insurance agency's premium volume or client loyalty to an agency, and their insurers' power. Studies of noninsurance channels support these results, and further suggest that a party can enhance its countervailing power by joining trade associations or gaining industry experience [Skinner, Donnelly, and Ivancevich (1987), pp. 579-80].

(5) In this regard, Wilkinson and Kipnis (1978) report that coercive powers are more likely to be used by firms to influence individuals when other channel strategies have proven ineffective. See also Fenske and Freeman (1987), and Friedman (1984, 1986).

(6) The study focused initially on the 125 largest property-liability insurers in the U.S. in 1987, based on a listing published by the A. M. Best Company [Robinson (1986)]. Seven of these insurers were omitted from the study because they primarily wrote reinsurance or became insolvent, and 11 other insurers were excluded from the study because the authors were unable to identify appropriate marketing executives within their firms. The 94 respondents include 20 officers or senior vice-presidents, 39 vice-presidents, 12 assistant vice-presidents, and ten directors of marketing or marketing-related positions. (Other job titles were reported by 13 respondents.)

(7) More specifically, factor analysis indicated that the conflict items consistently loaded on a single factor. In contrast, factor analysis of the power items offered a consistent divergence of the items onto two separate coercive and noncoercive loadings. A copy of the survey is available from the authors upon request.

(8) For other studies using these research methods, see Frazier (1983); Robbins, Speh, and Mayer (1982); and Skinner and Guiltinan (1985)].

(9) Thus finding should be viewed with caution, as it is based upon the perceptions of the managers who implement insurance channel strategies rather than the agents who are the targets of such strategies. A similar survey based upon the perceptions of insurance agents thus could help to verify that conflict is similar between both marketing systems and perhaps provide a more pertinent measure of channel conflict.

[3.] Cummins, J. David, and Jack VanDerhei, 1979, "A Note on the Relative Efficiency of Property-Liability Insurance Distribution Systems," Bell Journal of Economics, 10: 709-19.

[4.] Etgar, Michael, 1976A, "Channel domination and Countervailing Power in Distribution Channels," Journal of Marketing Research, 13, August: 254-62.

[5.] Etgar, Michael, 1977, "Cost Effectiveness in Insurance Distribution," Journal of Risk and Insurance, 44: 211-22.

[6.] Etgar, Michael, 19767B, "Effects of Administrative Control on Efficiency of Vertical Marketing Systems," Journal of Marketing Research, 13, February: 12-24.

[7.] Etgar, Michael, 1976C, "Service Performance of Insurance Distributors," Journal of Risk and Insurance, 43: 487-99.

[8.] Fenske, Doris and Marian Freedman, 1987, "Agent/Company Roundtable," Best's Review Property/Casualty Insurance Edition, 88: 28-38, 91-102.

[9.] Frazier, Gary L., 1983, "On the Measurement of Interfirm Power in Channels of Distribution," Journal of Marketing Research, 20, May: 158-66.

[10.] Freedman, Sam, 1984, "Agents Ask Companies to Forsake Dual Marketing," National Underwriter--Property and Casualty Insurance Edition, February 10: 2, 25.

[11.] Freedman, Sam, 1986, "IIAA Blasts Carriers For Failure to Show Agents 'Visible Support,'" National Underwriter Property and Casualty Insurance Edition, December 19: 1, 32.

[12.] Gaski, John F., 1984, "The Theory of Power and Conflict in Channels of Distribution," Journal of Marketing, 48: 9-29.

[13.] Guiltinan, Joseph P., Ismail B. Rejab, and William C. Rodgers, 1980, "Factors Influencing Coordination in a Franchise Channel," Journal of Retailing, 56: 41-58.

[14.] Hunt, Shelby D. and John R. Nevin, 1974, "Power in Channels of Distribution: Sources and Consequences," Journal of Marketing Research, 11, May: 186-93.

[15.] Johnson, Joseph E. George B. Flanigan, and Steven N. Weisbart, 1981, "Returns to Scale in the Property and Liability Insurance Industry," Journal of Risk and Insurance, 48: 18-45.

[16.] Joskow, Paul L., 1973, "Cartels, Competition, and Regulation in the Property-Liability Insurance Industry," Bell Journal of Economics and Management Science, 4: 375-427.

[17.] Lusch, Robert F., 1976, "Sources of Power: Their Impact on Interchannel Conflict," Journal of Marketing Research, 13, November 382-90.

[18.] Lusch, Robert F., and James R. Brown, 1982, "A Modified Model of Power in the Marketing Channel," Journal of Marketing Research, 14, August: 312-23.

[19.] Nunnally, Jum C., 1978, Psychometric Theory, 2nd ed. (New York: Harper and Row Publishers).

[20.] Robbins, John E., P. W. Speh, and M. L. Mayer, 1982, "Retailers' Perceptions of Channel Conflict Issues," Journal of Retailing, 58: 46-67.

[21.] Robinson, Jill D., 1986, "The 200 Leading Property/Casualy Companies and Groups," Best's Review--Property-Casualty Insurance Edition, 87: 25-30.

[22.] Skinner, Steven J., James H. Donnelly, Jr., and John M. Ivancevich, 1987, "Effects of Transactional Form on Environment Linkages and Power-Dependence Relations," Academy of Management Journal, 30: 577-88.

[23.] Skinner, Steven J., and Joseph P. Guiltinan, 1985, "Perceptions of Channel Control." Journal of Retailing, 61: 65-68.

[24.] Webb, Bernard L., J. J. Launie; Willis Park Rokes; and Norman A. Baglini, 1978, Insurance Company Operations--Volume I, (Malvern, PA: American Institute for Property and Liability Underwriters).

[25.] Wilkinson, Ian and Kipnis, David, 1978, "Interfirm Use of Power," Journal of Applied Psychology, 63: 315-20.

[26.] Yu, J. and Cooper, H., 1983, "A Quantitative Review of Research Design Effects on Response Rate," Journal of Marketing Research, 20, February: 36-44.

David A. Cather is Visiting Assistant Professor of Insurance at the Wharton School. Vince Howe is Assistant Professor at the University of North Carolina-Wilmington.

Financial support for this research was provided in part by a grant from the CPCU -- Harry J. Loman Foundation. The authors would like to thank Sandra Gustavson, Steven Skinner, and two anonymous referees for their helpful suggestions.
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Author:Cather, David A.; Howe, Vince
Publication:Journal of Risk and Insurance
Date:Sep 1, 1989
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