Insurers Flexing Their Distribution Models
Doug French | December 09, 2015
(Editor’s note: During the summer of 2015, EY interviewed executives at approximately 20 leading US insurance manufacturers, distributors and reinsurers as part of an ongoing effort to understand how the life insurance and annuity industry can surmount current challenges and move forward. The objective was to understand the views and concerns in the eyes of industry executives and stakeholders – and to outline the industry opportunities and challenges from the perspectives of customers, distributors and manufacturers. The interviews focused on the global economy, innovation, distribution, talent issues and consumer protection. This is the third article in a five part series, where we will walk through our key findings. You can read the first article here and the second article here.)
Survey respondents are clear-eyed about the shifts away from traditional distribution models, as well as rising consumer empowerment and the breakdown of the information advantage insurers have traditionally enjoyed. Historically, the industry has operated with a high degree of opacity, due to the “low-engagement” nature of the life insurance business, where products are “purchased and then put in a drawer,” as one survey respondent put it.
Overall product complexity means consumers lack visibility into the costs and inner workings of complicated insurance products. In this context, the traditional distribution model made sense, with predominantly face-to-face distribution with commission-based agent compensation and a general focus on affluent markets.
But today, the playing field has changed. Customers have unprecedented access to product and pricing information, thanks to the Internet. Their preferred shopping methods have changed globally, with a pronounced preference for mobile shopping and self-service channels that are available 24/7.
Today’s consumers are more comfortable with self-service and have educated themselves to a greater extent than in the past. Further, technology is challenging the traditional advice model and facilitating the emergence of new, low-cost, online-based advisor models. These so-called “robo-advisors” have had a major impact, according to survey respondents. Consumers seem especially attracted to the objectivity of the advice and the continuous updating of guidance.
It is important to note a few contrarian views among survey respondents. Some expressed little faith in Internet sales, questioning whether average consumers understand their own insurance needs. Similarly, robo-advisors may only be appropriate for select people who are comfortable with the significant information input required to make such models work.
Still, the overall impact is clear: the insurance advice model is changing. Customers who still engage advisors may only seek to confirm purchase decisions, rather than guidance on the purchase decisions themselves. Further, customers now expect a high-quality, customer-centric experience and seamless, high-tech digital experiences. Survey respondents recognize the industry has struggled to deliver these in the past.
One distinct trend is the shift toward “omni-channel” distribution. With an omni-channel approach, insurers offer a range of channels to suit the diverse purchasing preferences of consumers. For example, a consumer may come to the company digitally and then switch to an advisor for a more personalized service experience. Additionally, the mix of channels will vary by product as well. Improving the efficiency of traditional advisors is another priority. The need to digitize steps in the sales process is driving the significant investment around Client Relationship Management (CRM) and electronic applications for agents, as well as an improved underwriting process.
The key is to change the role of the agent at the point of sale to unlock customer lifetime potential, not just take an order or close a sale. Such a transition would require a new focus on providing holistic advice for customers based on a deeper knowledge of their needs and are finding the right offering for those needs. “Life-cycle selling,” or a program to re-engage throughout a customer’s life after the initial sale, may open up significant cross-selling opportunities, such as integrating 401(k) plans with options for life, health, and disability.
If this strategic evolution were to succeed, insurers would not only have to develop new products, but also shape an entirely new value proposition for consumers. One respondent exhorted the industry to become more “involved in protecting, monitoring, and advising on health rather than just being involved at death.”
Looking forward, “more digital” does not equate to “no face-to-face.” In fact, even as new distribution models grow, in-person contact will remain predominant, according to survey results. According to one executive, “I can’t believe that a meaningful amount of life insurance can be distributed without human contact.” Another disagreed, stating, “A significant portion (not majority) of sales will be agentless.”
Whatever the exact percentage of sales that move to direct channels, it is clear digital platforms are here to stay. Thus, the carriers with the most advanced capabilities—especially in terms of mobile—are most likely to win. Further, customers will have more freedom and authority in choosing how they want to engage with the company; carriers and their distributors will not set the terms of engagement, as in the past. One respondent highlighted the need for “peaceful co-existence between channels.”
Beyond channel orientation, the more significant step may be adapting to consumer expectation and perception about the value of life insurance products. Providing a good customer experience, both at the point of sale and throughout the customer’s lifetime, will be the key. One respondent mentioned the need to “actually own customer relationships,” rather than “producer relationships.”
In any case, significant recalibration of compensation models, a highly sensitive issue in the past, appears likely. It seems clear that simpler, fee-based compensation, with fewer bells and whistles is a possibility. Looking ahead, one respondent described the future vision this way:
“An agency model where we provide technology, a product set, and regulatory compliance/oversight tools [to attract producers], and if the compensation that’s been built into those products is sufficient, [agents will] be the judge of whether they want to sell the product or not.”
This model applies to both life and annuity sales. Robo-advisors will continue to gain traction, potentially diminishing commission on annuities, but there is a clear and pressing need to keep such products attractive to consumers.
While the Internet has closed the product knowledge gap between insurers and customers, information asymmetry will re-emerge in the long-term. Yes, the Internet has given customers more access to pricing and product information, which benefits consumers, but this is a temporary phenomenon. Once consumers react, with the addition of advanced analytics, insurers will once again have more and better data, which may ultimately give insurers an informational advantage over consumers.
What respondents say:
- “Buying habits are changing, and we’re going to have to change with them.”
- “The fact that middle market isn’t as penetrated as it needs to be; that’s old news. But there are swaths of current customers on our books that are underserved.”
- “There are false distinctions between [agency/brokerage, worksite, and direct] distribution channels. The reality is if you go omni-channel, you have to direct people to the environment where they’re most comfortable working. It’s the customer’s call.”
- “We find a lot of the people either calling/using the Internet do eventually want an agent—maybe not on that transaction, but it at least gives leads to agent to cross-sell.”
- “I can’t believe a meaningful amount of insurance can be distributed without human contact.”
- “I don’t see much pricing power as an industry… so you have to be able to differentiate around service and experience.”
- “We think a lot of our products will be best presented and reviewed via the internet, only to have a follow up by a call center or an individual. We see that combination needing to peacefully coexist for a long time.”
- “At some point you just accept the consumer has full transparency and work from there.”
The views expressed herein are those of the authors and do not necessarily reflect the views of Ernst & Young LLP, the global EY organization or the Insurance Technology Association. Doug French is the managing principal of the Insurance and Actuarial Advisory Services practice within Ernst & Young LLP in New York. He can be reached at firstname.lastname@example.org.
- The Rapid Evolution of Consumer Protection Regulation
- Talent Hunt: Finding, Attracting, Retaining Top People
- Insurers Flexing Their Distribution Models
- Technology Driving Disruption in Insurance
- Fear of ‘Next Bubble’ Challenges Life, Annuity Carriers
- Technology Allows Commercial Lines Insurers to Stand Out
- Single Sign-on Viewed as Biggest Tech Challenge for Agencies
- ISCS Observes 20th Anniversary; Scurto Predicts Major Changes Ahead
- Policyholders and Their First Impressions
- Progressive Making Progress on the UBI Front
- High and Dry: Insurers Search for Disaster Recovery Plans
- Insurers Sign The (Un)Dotted Line
- Reflections of a Retired Insurance CIO
- Mobile Device Management Just One Answer to BYOD Issue
- Lessons from GEICO and Progressive on Winning the Critical Buying Stage
- You Are a Target for a Cyber Attack
- Web-based Systems are the Next Evolution in Claims Technology
- Gaining a “Wow” Experience from Web Users
- Time to Shift from Business/IT Alignment to Business/IT Alliance
- Healthcare Insurers Changing to Consumer Model
- Organization is the Key for Selecting Software Vendors
- Analysts Expound on the Needs of the Mid-tier Insurance Market
- Finding the Cure for Obamacare’s Website
- New Software Solutions Benefit Insurers on the Inside and Outside
- Products, Market Impede Investment in Systems for Life Insurers
- Combatting Cyber Threats: Predict, Prevent, Persist
- The Future of Telematics Heads Beyond Insurance
- The Shame in Cyber Security Lapses
- Building Policy Administration Systems for the Future
- Insurers Look Into The Eyes of Their Policyholders
- It’s a New Dawn for the ITA
INSURANCE IT NEWS
The Email Chat is a regular feature of the ITA Pro magazine and website. We send a series of questions to an insurance IT leader in search of thought-provoking responses on important issues facing the insurance industry.
ITA LIVE 2019
The tide is up! It's time to register for ITA LIVE 2019, our annual educational and networking conference! Our theme is "The InsurTech Revolution: Cutting Through the Hype." and we'll be bringing in a torrent of industry thought leaders, amazing insight and wonderful perspectives on the world of insurtech and its impact on the insurance landscape.
ITA LIVE 2019 will present real-life examples of true startup technologies that are helping insurers gain real advantage -- and a competitive edge -- in the marketplace. We’ll highlight the more successful InsurTech partnerships, while offering case studies that demonstrate exciting innovation and cutting-edge techniques impacting all aspects of the insurance ecosystem.
Ride the wave to LIVE 2019. Sign up today! We look forward to seeing you in May, 2019!
BLOGS AND COLUMNS
Insurance carriers interested in meeting or exceeding their customer’s expectations regarding mobility are looking at a two-pronged approach... READ MORE
Robert Regis Hyle
Everybody has a wish list and it seems that atop the lists for insurance carriers still operating with legacy systems is the desire to do away with... READ MORE
As Guidewire Software prepares for the start of Connections, its 11th annual user conference that begins on Nov. 2, Brian Desmond, chief marketing... READ MORE
Strategy Meets Action will hold its annual Summit in Boston on Sept. 14 and the focus for this year is: Becoming the Next-Gen Insurer... READ MORE
Starting last fall when the technology company dropped Mastek from its name and became simply Majesco, its mergers and acquisitions, and hirings have... READ MORE
Digital represents a continuous form of disruption to existing or new business models, products, services or experiences enabled by data and... READ MORE
In spite of all the arm-flapping and hand-waving stirred by the Affordable Care Act (ACA), the way health insurance is purchased, and employee... READ MORE
- Vendor Views