Ch 23 LIFE INSURANCE MARKETING

STRUCTURE OF MARKETING DEPARTMENTS
companies will organize their marketing function in the way that they feel is best for them based on their target markets, products, distribution system, strategic goals, capabilities, and culture

know their customers and distributors well enough to design products that meet the needs of both parties, while still returning a profit to the company.

non-distribution marketing functions AKA Marketing services” or “marketing support”
research
planning
product development
advertising
sales promotion
market development (lead generation), etc.

Policyowner service may or may not be part of marketing;
Trends to call centers, it may fall into marketing in future

THE DISTRIBUTION FUNCTION
Life insurance company must have a continuing, incoming flow of new profitable revenue, this is accomplished through the distribution of its products, or to use Drucker’s terminology, by creating and keeping customers

Layered tiers Levels of authority – lowest tier, in a specific geographic region. Controls and supports a specified number of field outlets.

Need for a Field Organization
it is the agent, supported in his efforts by advertising and sales promotion, which put life insurance in the ascendancy after 1842.

98% new individual life premium comes from individual producer
2% from policies sold without a producer

Sales made by quoting services are included as broker-mediated sales, since those services are indeed run by brokers (or brokerage general agents) with licensed salespeople staffing the phones.

A few individual companies have been quite successful with a direct response distribution strategy.

Functions of the Field Organization
Until new distribution channels achieve the success that producers have achieved, the great majority of companies maintain a producer distribution system in order to survive.

there is a constant search for successful alternatives to the individual producer.

consumers, in general, rarely apply for life insurance (irrespective of the need for it) until they are solicited

Good producers analyze applicants’ needs and advise them about the most suitable types of policies, amount of protection, cost and premium payment, more important provisions of the contract, the optional ways benefits can be paid after death, and the appropriate choice of and rights regarding a beneficiary.

Good agents, in their advisory role, will also explain how life insurance can be used in many creative ways to achieve desired aims in such diverse areas as funding education, relieving tax burdens, continuing businesses, supplementing Social Security, paying off obligations, dissolving partnerships equitably, enhancing credit, financing business buy-sell agreements, canceling mortgages, and funding pensions.

Life insurance needs are not static but require frequent review and adjustment to meet changing conditions.

This is particularly true of beneficiary provisions. Therefore, the relationship established by a producer with a client is a long and mutually beneficial one.

Variations on a Theme Ordinary agents
• Ordinary agents (sometimes referred to as agents within an “agency-building” system) devote at least 75% of their time selling individual life for one company that generally provides financing, training, supervision, sales support, and office facilities (also called housing).

There 108,100 ordinary agents, and their share of new life premiums is 39%

Home service agents
Spend 75% time selling ordinary & industrial life for one company that provides financing, training, supervision, sales support and office facilities.

Sell in assigned territory called debit and sometimes collect premiums at the insured’s house or office.

There 14,500 home service agents, and their share of new life premiums is 2%

Multiple-line exclusive agents (MLEA)
Sell individual life, but usually their primary products are property and casualty products.

Sell for one company that provides financing, training, supervision, sales support, and office facilities.

There are approximately 67,750 MLEA and their share of new life premiums is 6%

Personal-producing general agents (PPGAs)
Receive both a producer’s commission and the overriding commission that would usually go to a manager or general agent on personally produced business.

Many are single-individual operations but some personal producing general agents hire and support a number of subproducers.

Specialize in niches and typically have contracts with several companies offering products appropriate for those niches.

Often have a primary company relationship, usually reflecting the niche they serve most frequently. Sometimes companies require a minimum production level to keep these PPGA contracts.

Over time, large national organizations called independent marketing organizations (IMOs) have evolved that likewise specialize in certain market niches, providing training and marketing materials to their agents and finding products from carriers that are appropriate to those niches.

These independent marketing organizations usually recruit highly successful experienced agents. The share of new life premiums from 22%

Brokers
FT producers working independently and have no primary relationship or minimum production requirements with any company.

There are two important distinctions between brokers and PPGAs:
1. Brokers do not receive overriding (general agent) commissions.
2. There is neither a tendency nor an intent for the company to achieve a primary-carrier status with brokers.

Independent agents
Independent agents are primarily property and casualty producers who have no primary relationship with a company.

Brokers and independent agents’ share of new life premiums is 25%

Stockbrokers
included among producers because an increasing number of them sell annuities, single premium life, and variable products.
Stockbrokers account for about 3% life premiums.
Financial planners
Producers who can usually be placed in one of the categories above, although an increasing number of planners work on a fee-only basis (sometimes fulfilling the insurance portion
of the plan with commission-free, or “no-load,” products).

Although there is no agreed-upon definition of financial planners, it is usually understood that they provide clients with a total financial plan that includes everything from investments to insurance, and they usually have a planning-oriented designation (that is, ChFC or CFP).

Super producers
Special kind of producer . . .with sophisticated product knowledge and technical support.

A major segment of this group comprises the “super agents” of life insurance—those with whom we associate producer groups and producer-owned reinsurance companies.

Although all super producers would fall into one of the categories above, they really represent a distribution system within a distribution system because they are different, with their special compensation arrangements, joint case work, country-wide partnerships, equity ownerships,
influence on product development, technical expertise, shared knowledge, and even proprietary software.

Banks
Are a growing presence as more and more financial institutions create, buy, or form a joint alliance with an insurance company or agency to create an insurance and investment presence in the bank.

Structure of the bank agency falls into one of the categories above, although it is possible in some places to buy insurance from a salaried, licensed bank employee.

Banks account for approximately 15% of new annuity considerations, but only about 1% of new life premium.

Worksite marketing
individuals who will go to a work place and, with the endorsement of management, conduct sales interviews with employees on site, with premiums being paid through payroll deduction.

Usually, individual producers from the categories above will make the sale to management in worksite marketing, while a specially-formed unit of salaried or commissioned enrollers will sign up the rank-and-file employees.

Retail establishments
Producers sell either in their own office or in the prospect’s home, office, or an insurance facility in a department or grocery store.

An individual salesperson is usually involved, although
he or she may be salaried rather than paid a commission.

This approach is more popular in Europe than in the United States and is sometimes referred to as “brand assurance” because part of the appeal to prospects is the brand recognition of the retail establishment.

Direct response marketing
2% new life premium income, but LIMRA estimates that 10 percent of new life policies sold in the United States are sold on a direct basis.

Thus, direct sales still meet the needs of a sizable market.
Direct response marketing consists of making sales to consumers through the mail, media advertising, telemarketing, or the Internet.

The process typically includes standardized sales messages made to consumers, orders taken, products delivered, and payments remitted without a face-to-face meeting between prospect and salesperson.

Some insurance companies rely completely on direct
response systems to distribute their products while other companies use direct response as just one of several distribution methods.

As time progresses, direct response marketing is becoming more and more advanced technologically. Direct response firms engage heavily in market research and testing, and they maintain extensive computer-driven information retrieval and telemarketing operations.

The emphasis in such operations is instant access to customers’ records to make sales or provide service. Most products distributed through direct response methods are designed to serve large market segments, are very affordable, and are uncomplicated in design and administration.

Internet selling
Internet selling is the latest channel to be added to the distribution mix.

Just about all insurers have an Internet presence and a
significant proportion of them make it possible to buy over the Internet.

However, the main use of insurance company Internet
sites is for education, service, and information.

In addition, there are a number of Web-based operations (“quoting services” or “aggregators”) that will give online insurance quotes for a number of competing life insurance companies.

In many cases, insurance can be purchased through these sites, effectively making them online brokers.

STRUCTURE OF FIELD ORGANIZATIONS agencies
direct methods of marketing products do exist, their success has been limited, and in reality, the overwhelmingly dominant distribution method is the individual producer who makes face-to-face sales.

Because these producers operate in field offices (typically called agencies) in locales wherever a market for life insurance exists, this method of distribution is called the agency system.

“agency-building,” or “career agency.”
company builds its own agency distribution system by recruiting, financing, training, motivating, housing, and supervising new agents to represent it “exclusively.”
“independent.”
company taps into the existing pool of agents created by the building branch referred to above to create an “instant sales force.”
Agency Building Systems
In the agency-building system, the individual in charge is typically called a manager or general agent, and it is he or she who does the recruiting of new, inexperienced recruits and develops them into a sales force.
the nonbuilding agencies
companies win an established producer’s attention through the use of an intermediary who acts as a sort of manufacturer’s representative”—either as an employee or independent contractor—and convinces established producers to sell their company’s products through one type of arrangement or another.
Agency building—general agent
The goal is to build sales staff, person in charge, usually called a general agent, is an independent contractor and is compensated primarily for building the agency’s staff, although personal production is common.

Instead of the company paying expenses directly, quite often the general agent is given an expense allowance and is then expected to manage his or her own agency expenses.
The ordinary agent is the dominant producer in this structure.

Regional director approach (RDA)
Favored by companies that prefer to have primary-carrier relationships with their PPGAs. Inherent in the evolution of this strategy was the concept of exclusive representation.

However, because of the pressure of competition for qualified PPGAs, exclusive representation or exclusive territorial rights rarely exist today.

Companies that employ this approach hire only experienced producers and are not committed to new agent development in any way. They provide little, if any, continuing generic education or training, some product orientation, and no office facilities or supervision. As the name of this type of structure implies, PPGAs are hired and supervised by regional directors.

Managing general agent approach—personal-producing general agent.
This type of structure originated with independent agents in the casualty insurance business.

There, an independent general agent representing a company in a particular region was authorized to appoint other independents to represent the company.

While wielding more “clout” with the carrier, the managing general agent (MGA) operated essentially as a regional agency for the company and usually had territorial rights as well as certain powers.

Often specialized in a particular product.

Differs from the RDA approach because the MGA is an independent contractor authorized by the company to appoint PPGAs, and there is much less primary company orientation.

Typically is a franchisee who represents one company for a particular product in a particular territory.

Because their producers are already paid the override, MGAs are compensated on a percentage of commissions and assume such administrative expenses as recruiting and mailing costs.

Brokerage supervisor approach
A company employee who solicits business from producers with whom that company has no primary relationships.

Brokerage supervisors are most often associated with agency-building companies—providing them with an additional distribution option—and with life affiliates of property-casualty companies where they primarily target independent property-casualty agencies.

Companies that use this approach tend to offer a full
line of products and rely on their ability to provide technical help to producers whose main business is not life insurance, such as property-casualty agents and stockbrokers.

Because brokerage supervisors are usually housed in the field, they are able to solve local producers’ problems when and where they occur.

Independent brokerage general agent approach.
Provides companies access to a producer through an independent brokerage general agent (BGA) who is authorized to solicit business for the company and to appoint producers on its behalf.

BGA companies offer specialty products, provide process-oriented service, including liberal underwriting and speedy policy issue and commission payment, to producers who often are agents of other companies or full-time life brokers.

BGAs offer some administrative services, usually represent several carriers for the same product, and are paid by overrides on business generated through their efforts while their producers are compensated by basic commissions.

some companies have provided their field forces with a larger number of products to sell or have expanded their distribution capacities without having an impact on their existing field force.

Companies have done so by entering into manufacturer-distributor agreements with non-affiliated companies.

Under these agreements one company distributes products manufactured by the other company. Such agreements offer companies product diversification and the ability to capture outside business.

The manufacturing company gets additional distribution capacity and easier access to producers; the distributing company adds income sources for its producers, enhances its agents’ service capabilities, and has a chance to test market products without the cost and effort required to develop the product itself.

RELATIONSHIP BETWEEN AGENT AND COMPANY
At one time it was common for the agent to contract with the general agent or manager.

Today, however, the common practice is for the agent to contract with the company.

year commission rate for agents selling for companies not licensed in New York is usually higher than for New York companies.

Some of those non-New York companies pay renewal commissions only during the first few policy years (2, 3, 4, 5, 6), and the rate often decreases each year rather than staying at the same percentage.

The variety of commission rates that exist, which depend on the product, age of the insured, location of the sale, condition of the sale, and marketing strategy of the company, means that the figures above are quoted only to provide a very broad guideline as to how commissions are structured.

MARKETING COSTS AND PROFITABILITY
For most companies profitability can be achieved only through the use of superior financial fundamentals.

to illustrate:
In a broad sense, profit equals revenues less expenses.
In other words, profit comes from high revenues and low expenses. Revenues are properly managed by controlling the fundamental factors associated with getting new business:

field productivity,
agent retention
persistency of policies sold.

Productivity
refers to how much business agents write.

One measure of agent productivity that cuts across product lines is first-year commissions.

First-year commission rates generally vary based on the effort involved in selling the contract and the value of that sale to the company.

According to LIMRA surveys, the typical experienced agent
(5 years) in a high-productivity company earns around $60,000 first-year commissions.
Typical agent in a low-productivity company earns in the neighborhood of $15,000-25,000 in first-year commissions.

Retention
how long an agent stays with a company.

Typically, 4 years after contracting 100 new agents, an agency-building company with average retention still has 16 of them under contract. However, in companies with good retention, the 4-year retention rate is about 30 percent.

(These numbers tend to be higher for MLEA companies and lower for home service companies.)

High retention rates direct bearing on profitability in 3 ways:
(1) Company avoids expenses associated with recruiting and training additional new agents,

(2) established agents have higher productivity than
less experienced agents, and

(3) policies written by agents who stay with the company tend to have better persistency than those written by failing agents.

Persistency
How long policies remain in force and the policyowners pay premiums on them.
Average for “13-month persistency” is around 85%

In other words, 85 percent of the time the insured pays the first premium of the second year of the policy; thus, the policy remains in force at least beginning the second year

Control of Marketing Expenses marginal pricing
key to profitability on this side of the ledger is to control marketing expenses.

The principal trap companies fall into that keeps them from managing expenses as well as they could is marginal pricing—allocating less than full fixed costs or less than full overhead costs to a product.

Marginal pricing can be used sometimes, but never over a long time period and never with core products. Too often companies use marginal pricing to gain entry into a market, planning to remedy the situation later.

This rarely works because marginal pricing is aimed at capturing a target market share that seldom materializes, because cost improvement measures that will make a product profitable are only rarely realized, or because competitive conditions force the price to remain low.

While the building branch of the agency system would tend to have higher costs because of its expenses for recruiting and developing agents, these expenses are often offset by the higher commissions and support service costs incurred by companies utilizing independent agents.

LIMRA studies show that when all types of companies are analyzed, there are high-cost companies and low-cost companies in each distribution system, and there is a band of relatively profitable companies that cuts across all distribution systems.

This tends to indicate that with good quality management, any distribution system can be profitable.

How producers were recruited into the business and developed in the performance of their skills is a key to how well they succeed.

RECRUITING, SELECTING, & DEVELOPING PRODUCERS
Field office heads and their second-line managers are responsible for bringing new people into the life insurance business.

It is not the recruiter’s purpose initially to be very selective; that comes later.

The object at this point is to accumulate as many names as possible.

To do this, recruiters use all of the sources at their disposal—personal contacts; referrals from other producers, clients, and friends of the agency; college and personnel placement offices; and newspaper ads.

Selection-Rejection Process
After the recruiter gets an individual’s name and that individual exhibits some interest in a life insurance career, the process becomes very selective
3 Stages of Section/Rejection Process
1. obtaining all facts relating to background, experience, & qualifications

2. Quick preliminary interview to determine if there are any obvious reasons why the candidate should be rejected and to convince the candidate to take aptitude test

3. Administration of aptitude test that accurately predicts the chances of an individual’s likelihood of success in the job of producer (and conforms to all equal opportunity rules and regulations)

• completion of application form
• evaluation interview (gain further information about candidate & they can learn about job)
• interviews with other people, i.e. spouses, other producers, and references
• follow-up interview to clear up any questions on the part of either the recruiter or candidate

2 more steps to see if candidate is right for job.
1. Pre-contract training—candidate actually do parts of job before making a commitment.

2. Give candidate complete, honest, and realistic description of the job, including both the good and the bad aspects of the position.

5 Area – Training Recruits
1. life insurance basics
2. Sales techniques & use of computer software
3. Company & agency procedures
4. Product knowledge
5. Company history, goals, plans, and policies

Common to all agents is
1. Formulation of quota
2. Construct plans to achieve quota
3. Periodic reviews to measure progress

Administrative, Technical, & Sales Support
Often, the amount of administrative support—secretarial help, proposal generation, and mailings—given to a producer depends on his or her production level, with top producing agents earning secretary or administrative assistant.
Educational Support
Agency managers and directors usually support professional educational programs such as LUTC, CLU, and ChFC
FUTURE OF LIFE INSURANCE MARKETING
There have been major revolutions in life insurance marketing, most notably the introduction of soliciting agents in the 1840s, the rise of the debit agent in the 1880s, the advent of group insurance in the 1930s, and the growth of nonexclusive producer companies since the end of World War II.

Radical change, therefore, is common in life insurance marketing, and it might happen again.

Evolution is more likely than revolution, and that evolution will be triggered by forces already in place that are sure to have some impact on how life insurance will be marketed in the future.

Increased Competition
Bank holding companies & brokerage firms can own insurers and, instead of just distributing someone else’s product, can sell their own insurance product.

To compete mergers & acquisitions are creating huge financial services conglomerates with aim of cross-selling each other’s products.

Some industry observers suggest that companies in the future will fall into one of two types:

1. Huge multinational financial services giants
2. Niche players, both large and small

Globalization
Many foreign insurers bring with them a different marketing orientation, and their approach, especially their historic relationship with banks in other countries, could force United States insurers to modify their distribution methods, especially in light of GLB.
Demographic Shifts
Work force will grow more slowly than at any time since 1930 and the average age of the work force will rise, meaning that the pool of younger workers entering the labor market will shrink.

More women will continue to enter the work force and minorities will be a larger share of new entrants into the work force.

Immigrants will represent the largest percentage increase in the work force since World War I.

Such changes are bound to affect how life insurance is sold in the future.

More focus on Living Benefits
Focus of life insurance companies is turning more toward living benefits than death benefits

The business will be selling more annuities and other
retirement and savings-oriented products than life insurance.

These carry lower margins/commissions so some concern that may not be able to support cost of existing distribution systems.

Another result of aging population is increased interest in long-term care (LTC) products.
The public does not know much about these products yet, but they have enjoyed double-digit growth as individually sold products.

Changes in Distribution Systems
The life insurance industry finds itself in a financial squeeze.

As a result of competition from outside the business, the loss of comfortable product margins, and the rise of giant financial services companies, insurers need to increase surplus, compete on the basis of price, and operate under tighter financial controls.

Distribution system pluralism
many different distribution systems described earlier have been implemented across individual companies rather than just across the entire industry.