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Keeping the PEACE.

Insurers trying to develop new outlets for their products have been met with organizational turf wars and agent revolts. The trick is to manage multiple channels without alienating traditional producers.

Insurers worldwide are seeking to boost growth and improve profit margins by expanding into multiple distribution channels. Business objectives cannot be achieved by relying solely on the traditional high-cost agent network. However, the push into newer channels has often been fraught with difficulties. To ensure success, insurers must design their multichannel approach more effectively around customers and critical capabilities, while achieving quicker results.

Several forces have stimulated the growth of distribution channels:

* increasing consumer power and sophistication;

* explosive new technology capabilities;

* consolidation within the financial-services industry; and

* continuing deregulation.

By adding channels, insurers provide consumers with more choices in how they purchase products and obtain service. New customers are to be found among those who distrust agents or who are self-directed consumers. Additional outlets also can lower distribution and servicing costs through fewer human interventions or by leveraging fixed costs.

Multichannel distribution has begun to permeate the insurance industry. The sale of insurance products through bank distribution channels-bancassurance--is well entrenched in Europe, where banks sell more than 20% of life insurance. In France, banks' share of life insurance sales exceeds 50% and accounts for more than $1 billion in yearly profits.

In the United States, the bancassurance movement is in its infancy, although nonagent channels sell more than half of variable annuities today. Some carriers, such as Hartford Life Insurance Co., have been successful selling through banks, stockbrokers, financial planners and other nontraditional channels.

The Internet also is profoundly changing insurers' views about adding channels, as they realize that electronic commerce is necessary to effectively sell products and service customers. One of the largest U.S. insurers--Allstate Insurance Group--announced at the end of 1999 that it would sell insurance directly via the Internet and telephone as well as restructure its exclusive agency force to move its agents toward an independent-contractor status.

Despite the clear business imperative to expand channels, many carriers have struggled to design and manage multiple distribution channels. They have found the multichannel arena to be more complex than expected. In many instances, new channel sales have missed targets; organizational turf wars have erupted over customer control; agents have revolted against the new channels; operational and technology impediments have handicapped execution; and customers have received varying levels of service by channel.

To avoid the constraints of the existing agency-dominated culture and infrastructure, some insurers have set up separate organizations to develop new channels. But this often has led to ballooning distribution and servicing costs due to duplication and lack of scale.

Moving to a multichannel world requires an appreciation of the unique characteristics of each channel. Channels can loosely be grouped as:

* individual relationship-based (agents, financial planners);

* institutional relationship-based (banks, brokerage houses);

* affinity-based (employers, associations); and

* direct (Internet, telemarketing).

Each conveys different value to the customer, from advice to convenience to low cost. Each economic structure is different: Some are fixed-cost channels and others are variable-cost channels. And customer interactions differ by channel. Some channels require third-party intermediaries, while others involve a two-part sale to a gatekeeper/sponsor and then to the consumer. Thus, channels can't be managed in the same way or in a similar way to the traditional agency business.

Company-specific factors also strongly affect the multichannel approach. These include the insurer's particular market positioning and its internal infrastructure and capabilities. For example, an insurer with a strong brand name will have greater opportunity to rent shelf space in new channels and consider direct-selling channels, such as the Internet. An insurer with a strong exclusive channel may find that agent resistance limits its options. Alternatively, operational capabilities might limit an insurer's ability to support a channel or impose constraints on how that support is provided. For example, compensation systems that lock in the payment of traditional, high first-year commissions and administrative systems may prevent timely introduction of products or services.

Paths to Success

Multichannel success requires a clear understanding of what must be done, how it will be done and by whom. Multichannel managers must understand which customers and products are best suited to each channel, how they intend to interact with customers and intermediaries and how to manage channel conflicts.

The experiences of companies that have successfully navigated multichannel distribution suggest three winning strategies:

* design the business around the customer;

* focus investments around critical capabilities; and

* move quickly to put the multichannel business model into operation.

Many insurers design their business around a limited set of products that they push to customers through a single channel. Forcing consumers to fit particular product specifications, however, is no longer tenable in today's world of savvy, price-conscious shoppers who have more options than ever from which to choose.

Multichannel distribution requires the organization of channels and access points around the needs and satisfaction of specific customer segments. For many carriers, this presents a radical shift and will require them to redefine their product portfolios. The products and services provided via specific channels must align with the channel's attributes and its economics. The exact portfolio will depend on the interaction between channel attributes, product characteristics and consumer needs.

For example, commodity-like products such as term life, personal automobile or other simple products lend themselves to direct and affinity channels.

Direct Line Insurance plc rose to prominence in direct-selling personal auto insurance in the United Kingdom by clearly identifying a group of consumers who were willing to forgo an intermediary in exchange for lower-cost insurance. When launched in 1985, Direct Line was the first U.K. carrier to use the telephone as its primary sales tool. Today, with more than 2 million policyholders, it is the United Kingdom's largest private car insurer.

Similarly, European banks have capitalized on strong brand names, consumer trust and convenience to sell simple life insurance products to middle-income customers. In contrast, it is expected that complex business insurance and estate-planning products will continue to require personalized, one-on-one selling.

Trying to sell simple and complex products in the same channel invariably results in disappointing sales of complex products, because the expert advice, typically provided by the agent or other financial professional, is absent.

Insurers must offer some reason for customers to use a particular channel, such as lower prices, greater convenience or the opportunity for self service. Typically, customer value results from creative segmentation of customers and channels.

Focus on Critical Capabilities

A new multichannel business model is necessary for an insurer to achieve sales and customer-satisfaction goals, while avoiding escalating costs. This model creates sharper distinctions between an insurer's manufacturing and distribution activities that clearly divide the roles and responsibilities between channel units and product units. Channel activities will focus more on new sales and customer relations, while production activities will be keyed to product development, efficient core production, administration and compliance management.

To support the greater autonomy and responsibility of the channel and product units, more insightful management of financial performance is required. For example, data and analytical tools should allow comparisons of channel, customer and product profitability. Cost-efficiencies will be realized if the units that shared certain back-office processes, administrative functions and basic business processes are re-engineered.

Insurers who fail to move quickly to market with multiple channels risk having to pay a high price for penetration or being locked out of some channels entirely.

Some players, like SunAmerica Inc., a financial-services unit of American International Group Inc., are moving rapidly to solidify their positions by buying distribution channels outright. SunAmerica's ownership of six broker-dealers represents one of the largest retail securities sales forces in the United States, putting it in the company of more well-known brethren such as Merrill Lynch & Co.; Salomon Smith Barney Inc.; Morgan Stanley Dean Witter & Co.; Discover & CO.; and Paine-Webber Group Inc. SunAmerica's nearly 10,000 registered representatives help ensure shelf space for its products.

Be Ready for Change

It takes a combination of strong project management and focused development of capabilities to achieve this speed. By proactively managing expectations, obtaining support from the organization's key decision makers and carefully segmenting the products and customers by channel, turf wars can be avoided.

Most insurers lack the time and resources to build all the critical capabilities required for multichannel management. Thus, they must quickly decide which of their existing processes, technology and infrastructure can be used as a foundation and which capabilities need to be developed.

In preparing for multichannel distribution, insurance companies must be ready to accommodate change with respect to products, service and relationships with different channels. A mentality geared for change will help prepare an insurer when, for example, a large financial institution through which it distributes products builds its own call center and assumes the customer-servicing role.

Moving to a multichannel world is challenging and complex, but it must be done quickly, because the playing field is getting crowded. The keys to success are designing a strong business framework within which to make tactical decisions, setting and adhering to a time frame and effectively executing.

Andrew Power is a partner in the Insurance Industry segment of Andersen Consulting's global financial-services practice.
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Author:Power, Andrew
Publication:Best's Review
Date:May 1, 2000
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