Printer Friendly

Weaving compensation into the whole: Enterprise Incentive Management can help insurers influence diverse distribution channels and gain an overview of channels, products and markets.

Insurance industry executives recognize that, with the exception of a few niche markets, competitive advantage in the financial-services industry will come from distribution excellence, not product innovation. The move toward distribution excellence has spawned many business and technology initiatives over the past 10 years, seeking to increase the efficiency of traditional distribution systems, as well as support a wider portfolio of new channels and markets. In the early 1990s, distribution-focused technology spending centered on financial-planning and product-illustration software, customer contact management, and field-to-home-office connectivity for new business submission and general communication. Later in the 1990s, focus shifted heavily toward leveraging Internet business models and the promise of Customer Relationship Management technology.

The post-2000 realization that the Internet and CRM technologies are tools, not panaceas for difficult business problems, has left many business leaders with a bad taste for enterprise-class technology projects without immediate return and longer-term business value. From this current climate of fierce pragmatism and a desire to continue to deliver long-term benefits, Enterprise Incentive Management emerges as an attractive investment option for insurance business leaders, seeking to influence an unwieldy set of distribution channels.

Making the Most of Distribution

The insurance industry has experienced a slow transformation in distribution channels over the past 10 years. A combination of financial-services industry convergence, renewed acquisition activity, waning market performance and uncertain underwriting environments has increased competition and expense pressures enormously. This pressure is driving insurers toward expanding and optimizing distribution during a time when the population of experienced agents and brokers is diminishing, shifting power in the channel relationship to the producer. As producers grow in power and demand more value from the insurance carrier in exchange for their business, carriers must leverage every dollar of distribution expense to meet this rising producer expectation and corporate pressure to reduce overall distribution expenses.

Insurers seeking that leverage must be prepared to:

* Understand their products, markets and distribution factors at a greater level of detail than ever before;

* Invest in process and technology that will provide accuracy and efficiency in dealing with channel partners (reducing unit cost of transactions);

* Be "unfair" in their treatment of producers, to reward positive behaviors and punish negative ones;

* Examine new partner opportunities through a rigorous set of performance metrics (possibly by setting up a distribution company with separate profit and loss); and

* Disengage old and loyal distribution partners that no longer suit the profitable distribution profile for the carriers' current and furore business.

Achieving this level of accuracy, efficiency and knowledge in core operational business processes requires insurance carriers to re-examine current processes and technologies as part of an externalized distribution chain. EIM plays a central role ha optimizing and motivating channel relationships as insurers embark on this journey of transformation.

More Than 'Paying Comp'

The insurance industry has long embraced the concept of "pay for performance" in its relationship with captive and independent distribution forces, developing increasingly complex compensation structures (and supporting systems) over the years to influence producer behavior. While other industries could rely on simple spreadsheets, the complexity and the sheer volume of transactions insurers deal with drove the early development of relatively sophisticated compensation processes and technology. Typically, compensation was considered part of the policy management process and most insurance policy administration systems can still do basic compensation calculations. This approach suited an industry where product innovation was the road to competitive advantage, channels were few and mostly captive, and producer loyalty was a cultural attribute. Producers didn't mind receiving two or three commission statements from the one company they wrote business for and they focused on how the next new product would increase their book of business.

As new product types led to a proliferation of policy administration systems over time, and producers became more independent and even supposedly captive producers developed additional relationships, the business processes and technologies designed to pay commissions began to break down. Independent producers are more likely to cherry pick their business, placing it across multiple carriers to maximize their own returns, forcing insurers to implement total production bonus schemes across multiple product lines to maintain a profitable mix of business. At the same time, many insurers were launching, and many are still in the midst of, single compensation statement initiatives to increase producer satisfaction with the carrier and reduce the ever-increasing number of compensation statements generated by siloed systems. This dual push led to the development of consolidated commission systems designed to aggregate commission information across the enterprise, normalize payment cycles, facilitate the calculation of overall production bonuses and produce the consolidated commission statement.

Unfortunately, the aggregation of product and compensation data on a single statement highlighted the siloed nature of product and line of business-based compensation schemes and actually hindered the introduction of lower margin/commission and higher volume product lines, such as mutual funds and variable annuities, among more traditional insurance channels in the early 1990s. The market changes that made these new products attractive also introduced greater complexity in channel relationships as the lines between investments and insurance blurred even further, and a carrier's producer could just as likely be a large wire house as a captive insurance agent. The flexibility required to meet the needs of these diverse channels and the growing need to view products and channels as a balanced, managed portfolio required the next step beyond a consolidated commission system.

Why EIM?

As insurance companies expand both product portfolios and independent channel relationships, creative partnership structures and customized compensation strategies become even more critical. That puts even greater strain on existing process and technology originally developed for captive channels. The inability to consistently and accurately deliver on these more complex relationships created difficulties for traditional insurance executives seeking to transform from a traditional insurance player to a financial services manufacturer/distributor. Both business process and technology must be flexible and robust enough to manage a wide range of relationship hierarchies, compensation plans and reporting requirements with a high degree of day-to-day operational excellence at a low unit cost.

A complete Enterprise Incentive Management strategy also can provide timely, accurate and detailed product and channel information. Once deployed, the EIM system is the best place in the insurance application architecture to derive production information because it contains the most accurate data that is readily consolidated across products, channels and lines of business.

EIM applications live at the heart of the insurance application architecture, interfacing with policy administration systems, new business systems and financial systems. These systems also must have external interfaces to agents and brokers, channel partners and regulatory bodies, as well as provide data to enterprise data warehouses. This need for both inward- and outward-facing integration requires interface flexibility, holistic security models, enhanced audit-ability and attention to operational excellence (due to transparency of process to partners) not found in traditional back-office systems.

System of Record

An enterprise-class EIM solution not only must interface with a wide range of existing internal and external systems, but also become the system of record for all direct and indirect compensation for the enterprise. It also may become the system of record for producer information for external partners, as it is generally impractical to house information on a carrier's external broker relationships within the corporate human resources system.

Putting these pieces together, a well-crafted EIM solution must bridge front-and back-office business activities. Unlike enterprise CRM or Producer Relationship Management initiatives, which share that difficult "in-between" space in the insurance application architecture, EIM initiatives are not as prone to the strategic fuzziness and lack of producer buy-in found in CRM initiatives. This is due to EIM's solid connection to a current core business activity (paying producers) and its role as a motivator of distribution behavior rather than as an enabler of business process transformation.

Over the next five years, insurance executives face a difficult distribution management challenge, as the relationship between carriers and producers continues to evolve. A well-planned and executed EIM initiative today can arm these executives with the knowledge and insight into which partners can add the greatest value to their distribution network as well as with the ability to do business with a wide variety of future business partners quickly and efficiently.

RELATED ARTICLE: Key business factors in evaluating EIM technology.

Enterprise Incentive Management solutions are becoming a key delivery mechanism for strategic advantage in forging and maintaining channel partnerships and--through those partnerships--obtaining market share. The role of insurance and financial-services compensation has changed dramatically over the past decade as most companies continually expand product lines and increase the complexity of distribution relationships. When selecting an EIM solution, here are some criteria to consider and questions to ask:


* Can the product provide facilities for electronic transaction between partners?

* Can it satisfy partner reporting needs through shared networks and/or the Internet?

* Does it interface with industry-standard financial clearinghouses?

* Can it facilitate communication with agents and brokers in areas such as production reporting, dispute resolution and organizational management?


* Can the system support current (and legacy) compensation strategy as well as new turns in the market (for example, gross dealer concession vs. commission and health insurance commission calculated by member vs. premium)?

* Can it pay commissions based on the distributor's calendar--not a twice-a-month system driven calendar?

* Can it pay compensation for all the products in a portfolio, and can it create market-basket incentives?

* Can it support a team-selling environment?

Reliability and Risk Management:

* Can the system handle the number of agents and number of relationships expected in two, five and 10 years?

* Is the vendor's support strategy adequate, and is the supporting organization able to deliver on that promise?

* Does the technology support incremental upgrades of hardware?

* Is the application architecture current and forward looking?

* Has the vendor made industry-standard technology choices that can be supported with skills found in today's market?

Information Transparency:

The information contained in the EIM solution is often the most accurate and timely sales information in your enterprise--if it is accessible.

* Does the solution give access to premium/compensation data?

* Can it provide data for compensation recognized but not paid?

* Can it calculate measures and incentives on a daily basis even if you pay weekly or monthly?

* Can it distribute data in a controlled, secure and timely manner throughout your enterprise?

* Can you find out what you want to know, right now?

Chuck Johnston is director of Industry Marketing at Callidus Software.
COPYRIGHT 2004 A.M. Best Company, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2004, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:Distribution
Author:Johnston, Chuck
Publication:Best's Review
Date:Jun 1, 2004
Previous Article:Talking in code: will a mandate to update the national medical coding system help health-care providers and minimize the coder shortage--or add...
Next Article:6 steps to mission accomplish: avoid over-budget and incomplete IT projects by starting out with a focused list of business requirements.

Related Articles
Creating Value.
Enabling Multichannel Distribution.
Electronic battlefield: Insurers are using e-business initiatives to attract and retain customers and, most importantly, to increase market share....
Put your money where your growth is: strategic spending on IT in 2004 is necessary to prepare insurers for the next growth cycle. The question is:...
Channel surfing: the search for the most effective means of distribution is taking life and annuity insurers in myriad directions.
One for all: a Customer Interaction Center, coupled with a smart customer strategy, provides insurance companies with improved service, streamlined...
Jump start for sales: insurers can use these six steps to boost sales and promote profitability and growth.
A better grip: technology can help insurers turn undeveloped distribution processes into tools to help producers boost sales.
Could it happen here? The regulators' response to scandals in the mutual fund and insurance brokerage industries may hold some harsh lessons for life...
A winning strategy: profitable growth can be achieved through improved sales performance.

Terms of use | Privacy policy | Copyright © 2022 Farlex, Inc. | Feedback | For webmasters |