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Life insurance distribution optimization

October 16, 2020

“The only constant in life is change.” – Heraclitus (paraphrased)

Now more than ever, consumer behavior at all ages has changed. Most if not all generations are adopting a “Millennial mindset,” in which they increasingly prefer to trust their own research through various channels – primarily digital – to source information and directly purchase insurance products online (source: Capgemini World Insurance Report, 2020). 2020 represents a unique overlap of life insurance distribution “wants” (e.g., improved customer and agent experience) and “needs” (e.g., COVID work from home requirements; selling to Millennials) that can be addressed by the same set of solutions.

Agents are facing changes and challenges every day that they must overcome to remain relevant. Those that are agile and empowered will separate the leaders from the laggards. With distribution already roiled by the ever-increasing average age of an agent (almost 60 years old) and the growing need of insurers to recruit younger ones, the sudden realities of having to embrace digital due to COVID-19 and the associated stay-at-home mandates have handed insurers a multi-pronged challenge. It is useful to start with insurance distribution broadly and then drill down into the complexities of life versus P&C.

Market dynamics in insurance are changing dramatically and many consumers are no longer valuing traditional distribution methods (such as face-to-face or voice-to-voice with captive life insurance agents) as much as they have in the past. Providing and receiving information digitally is the new norm for the expectations of customers and agents of all ages. Many carriers are still focused on deep-rooted legacy insurance models while operating an agency workforce to inefficiently market outdated products and services. Meanwhile, others have now digitalized their distribution channels and are finding new ways to provide unique access to and features in their life insurance products. With the work-from-home challenges of COVID serving as an accelerator, many carriers are looking to begin or accelerate the transformation journey; but history suggests that few will navigate the journey well.

Before embarking on any digital transformation, companies must understand the need to transform their business and the hurdles they will experience. Given inherent organizational momentum and resistance to change, it is essential for all stakeholders to understand and buy in to the purpose of the transformation, and to understand the risk of not adopting a new digital insurance model. As companies evaluate the business case to transform, several challenges are common:

  1. Carriers compete for market share across regional and national markets, as many consumers don’t care or differentiate between national and regional insurers; traditional life insurers are competing with non-traditional companies, including P&C companies, which are offering life products to their existing customer base, and reinsurers who are getting into the primary life insurance business.
  2. Carriers often suffer from high infrastructure and “keeping the lights on” technology costs (typically from technical debt and legacy platforms), which impacts their ability to react quickly to market changes; this is compounded by related technology challenges such as inadequate CRM tools and limited APIs to/from legacy platforms.
  3. Agents and brokers are often working with outdated applications (desktop applications or sometimes applications that need to be run on a virtual machine because they can’t run on modern versions of Windows, less yet in a web browser), compounded by outdated customer communications capabilities. 

As companies look at how to offer products and services in the digital market, technology is not the only hurdle. The distribution model (the customer and agent journeys and expectations, as well as agent readiness, rewards and recognition given the new modes of working) itself can also be outdated, which can lead to missed opportunities. These missed opportunities may consist of the following:

  • Lack of agent enthusiasm to sell new products/services
  • Lack of incentives for agents to sell/cross-sell
  • A lack of relationship building with the customer.

Companies must not embed their core products and services in an outdated distribution model, but instead should focus on how their key drivers and processes will address moments that matter in their customer’s journey (that will, in turn, shape the agent’s journey as well). Aligning goals across the organization, rather than concentrating on departmental objectives will be critical. More specifically, the group that owns distribution should be keenly aware of how their platforms and processes impact not only their distribution partners, but their end customers as well. So what does distribution look like from the outside in? If distribution is considered across three key areas – market segment, distribution model, and direct/indirect – it’s not hard to envision it as a house with the components of distribution as the building blocks:

Figure 1. House of Distribution – a look into various sales channels and the customer acquisition strategy:

Source: Capgemini Financial Services Analysis, 2020

Key drivers/process areas of distribution:

  • Business agility/product innovation
  • Customer centricity
  • Agent empowerment
  • Operational excellence/STP
  • Cost-effectiveness

The key drivers for change are comparable across the industry: companies must focus on customer engagement, distribution strategy, and the competitive landscape. A strategy across these three areas can be measured against retention, close ratio, and the level of differentiation against competitors. The strategy will need to address the changing demographics of customers and agents alike, as well as the changes in how those demographic groups are in turn changing their shopping and buying behaviors (with a major shift towards digital). The most common misperception is that that once the overall strategy is made clear, that change can proceed without a formal plan/approach to execute that strategy, and that business as usual will magically be fixed by having a solid strategy and improved systems. Implementing a formal plan for execution can help to avoid mistakes such as focusing on departmental goals rather than enterprise goals, or focusing on transactional processes rather than a customer/agent journey. Each of these areas requires a more in-depth analysis to help understand the market behavior.

Focusing on the life customer

As today’s market for life insurance continues to grow (albeit slowly), carriers are looking for innovative ways to engage the customer. The agent is often still the front line of delivering the brand’s value to the customer, but the carrier is no longer just the “home office” or the “back office.” The customer journey is no longer the same as it was just five to ten years ago. The customer has new and different expectations in a digital era: instant, 24/7 access, and the ability to get to all information on their own. Some customers still want to work with agents – but only when they want to, not because it is their only option. Forty-four percent of consumers say that hybrid touchpoints, including digital/agent, are “very helpful” according to Capgemini’s research. Engagement with a company representative should be limited to when the customer wants it and should be on the customer’s terms, allowing the customer to have an authentic in-brand experience versus one in which their journey is a necessary transactional step along the path.

Traditional insurance purchasing has been via agent/broker and, depending on the geography, via branch/bank. However, customers today trust their own research, reviews, and other social media research over (or at least in conjunction with) agents’ or brokers’ advice. As technology has extended well past the PC to smartphones, tablets, and digital assistants, the digital divide between generations has diminished. Life and annuity carriers need to assume that most customers and prospects are now digital consumers, and they need to look at how customers’ social behavior and shopping preferences influence their purchasing behavior.

Life and group benefits have their own complexities when compared to P&C. First, distribution almost needs to be looked at as a matrix. On the one hand, you have the various distribution models, such as the fast-growing IMOs/FMOs, brokers (local, regional, and even global), independent agents, captive agents, etc. The other “axis” of the matrix is the go-to-market approach of the agent and carrier. This could include individual policies sold to individuals or at the worksite, true group sold to the employer, voluntary benefits sold to the employer but offered to the individual, etc. Given that a broker could sell almost any combination of these, and the fact that regardless of the relationship between life and group benefits distribution can get exceptionally complex. Of course there are also the direct writers such as Ethos, and direct operations within carriers that have historically relied on agents.

Regardless of distribution channels or the competitive landscape, customer expectations are changing. Based on Capgemini’s 2020 Voice of the Customer Survey and input from clients, a few key areas are impactful and essential to customers’ and prospects’ decision-making process:

  • Product flexibility and elasticity (“Do you have products that meet my individual needs, and can they be tailored for me?”)
  • Relationship and trust (“Do I want to do business with this person/company?”)
  • Service and experience (“Can you service me the way I want to be serviced, whether that’s digital, personal, phone, etc.? Will it be a simple, hassle-free experience?”)
  • Price and coverage (“Can you address all of my insurance needs and do it at the right price?”)

Enablement of these key drivers is vital to whether a client can be won or lost. In the eyes of the customer, the journey should not be a transaction, but rather an experience which creates a positive interaction and impression. The aim for the carrier is to offer such a journey, and to expect and organize around a lasting relationship with the customer.

Figure 2.  Customer journey for life insurance

Source: Capgemini Financial Services Analysis, 2020

One key question that has challenged the industry for decades is that of “Who owns the customer?” Are agents/brokers competing with carriers for digital customers and self-service? Or can the two happily co-exist (or at least get along)? In the case of captive/tied/exclusive agents, these questions should in theory be simple, as the insurer should own the customer with the agent simply serving as an extension of the insurer. However, in reality, few agents are employees anymore, and many “exclusive” agents are not exactly exclusive. Nevertheless, these agents do typically seek to build the insurer’s brand with their core base of customers by utilizing their branded offices, marketing, etc. for their local outreach.

Independent/non-captives/non-exclusive agents have the flexibility to offer various products from various companies with a better compensation model but present a challenge to insurers. They extend a carrier’s reach at little upfront cost, but their loyalty tends to be tied to compensation plans, ease of doing business with a particular carrier, and how a carrier’s underwriting standards match up to their client base. As a result, this is where much of the friction lies with customer ownership – agents who want to own the customer, versus carriers looking to grow their wallet share with those customers.

Distribution management

Figure 3. Life/annuity/group insurer view on the effectiveness of the channel for researching, purchasing, and servicing (%)

Sources: Capgemini Financial Services Analysis, 2020; Capgemini Voice of the Customer Survey, 2020; World Insurance Report 2020 Executive Interviews, 2020

For those insurers that have embarked upon a digital transformation, a revamped model that supports high-volume sales for simpler individual life products is needed, and traditional channels are often no longer the primary method for engaging with customers. Companies that transform must look at the overall sales strategy of both direct vs indirect marketing and selling. They must make investments that can achieve target returns, whether through distribution/brokerage centers, the captive agency market, or independent agents while offering appropriate incentive programs to inspire the workforce (e.g., partial commissions for doing little work around sales and servicing but being available when a customer needs them). Companies must align their product and distribution strategies to achieve optimal business transformation. If departments are implementing their own individual objectives without alignment to enterprise transformation goals, this can lead to critical gaps across the value chain for the customer.

Priorities within the distribution “house” are constantly shifting, and new spaces are always developing. Carriers need to frequently look across the insurance value chain at their priorities, and as they realign there are several issues and opportunities which companies will need to consider:

Competitive compensation, retaining top producers while incentivizing the right mix of products Growth through affiliate channels and other less traditional channels Optimizing brand experience across sales channels Empowerment for exclusive/captive agents: developing a wide range of trust and mutual benefit with the customer, utilizing CRM tools and features to build upon customer relationships. Achieving exclusiveness across the value chain through ease of technology, simplicity, and speed to market, providing the ability for carriers to differentiate themselves within the market, and establish brand uniqueness while delivering quality, reliability, compliance, features, etc.Implementing mechanisms for prospect management Lines of communication: engagement between front and back office (within the distribution “house”) for those channels in which agents need to communicate with underwriting, billing, claims, IT, etc., including defined processes and procedures Management of agent’s book of business through CRM optimization (or other tools, such as a distribution management platform), along with a  focus on front-office capabilities and skills training Tiering benefits to reward or support valued agents, to help the company achieve overall market growth and objectives Up-sell/cross-sell across the value chain to build the sales pipeline

Successful distribution will require striking the right balance: relying solely on a systems transformation or a digital transformation will not be enough. The physical and virtual worlds must feel seamlessly linked for agents and customers/prospects. Insurers must consider how a customer and agent (including those in a call center) will need to engage with the insurance carrier and design their agent and customer journeys accordingly. Employing an omnichannel approach is table stakes, providing customers the right mix of traditional and digital channels and providing agents the right mix of support and self-service.

This blog was co-authored with Chad Hersh. To continue this conversation, connect with me or Chad on social media. You can also write to