11. The general business environment I

Question 1

Why might consumers avoid buying life insurance products?

Answer 1

• May seem like distant need
• Death may be taboo subject
• People unaware of products
• Products difficult to understand
• Too many options
• Need advice before buying - time consuming

Question 2

What are the effects of consumers’ propensity to buy insurance on a company

Answer 2

1. Mis-selling which could lead&raquo_space; more risks to profit
2. Changing propensity to buy certain products can lead to new buness risk

Question 3

What are the risks of selling a policy that don’t meet needs of customers

Answer 3

• Persistency and consequent financial losses - incl possibility of compensation
• Reputational risk
• Poor new business sales

Question 4

How can you minimise the risk of mis-selling?

Answer 4

• Clear documentation of the main elements of the sales process
• Policy literature is clearly explained and legally sound
• Insurers and salespeople being fully professional when making sales

Question 5

What is meant by new-business risk?

Answer 5

• New business volumes being different than assumed
• Business mix being different than assumed

Question 6

What are the main distribution channels?

Answer 6

• Independent intermediaries
• Tied agents
• Own sales force
• Direct marketing

Question 7

Describe how an “Independent intermediaries” distribution channel works

Answer 7

• AKA brokers/ independent fincancial advisors
• Select products for their clients from all
  those available in market
• Remunerated via commission from insurer or fee from clients
• Client usually initiates sale
• Broker may initiate sale via regular financial reviews

Question 8

Describe how a “Tied agents” distribution channel works

Answer 8

• Offer products of only 1/few life insurance companies
• Remunerated by company to which they are tied
• Remuneration can be commision or bonuses
• Client usually initiates sale
• Agent may initiate sale

Question 9

Describe how a “Own sales force” distribution channel works

Answer 9

• Employee of life company
• Remunerated by salary and/or commission
• Salesperson initiates sale using client lists
• If salesperson has rapport with client, client may initiate sale

Question 10

Direct marketing

Answer 10

• Mailshots
• Telephone selling
• Press advertising
• Internet selling

Question 11

In what ways does the distribution channel affect the company?

Answer 11

• Demographic profile
• Contract design
• Contract pricing
  - competitive terms
  - demographic assumptions

Question 12

Effect of distribution channel on demographic profile

Answer 12

• Diff channels appeal to diff people according to level of financial sophistication and income = class selection

Question 13

Effect of distribution channel on contract design

Answer 13

*Higher level of financial sophistication&raquo_space; more complex products can be sold
* Products sold via telephone or press advertising likely to be simple

Question 14

Effect of distribution channels on demographic assumptions used in contract pricing

Answer 14

• Level of underwriting depends on marketing strategy used
• Most uw: intermediaries&raquo_space; tied agents&raquo_space; salesforce&raquo_space; direct marketing
• Level of underwriting is reflected in demographic assumptions used in pricing
• Withdrawal rates depend on financial sophistication and who initiated sale

Question 15

Effect of distribution channel on competitive terms in contract pricing

Answer 15

• Most competitive: intermediaries&raquo_space; tied agents&raquo_space; salesforce&raquo_space; direct marketing

Question 16

In what other ways can a company compete beyond premium rates

Answer 16

• Innovation
• Complex products that can’t be compared
• Past investment performance for savings products
• Level of customer service or admin support

Question 17

How can the control cycle influence the management of a life insurer’s sales distribution at a macro level?

Answer 17

Specify the problem
* Company must decide which channel(s) to use
* Must choose distribution strategy that helps meets it profit targets within risk appetite

General business environment
* Analyse possible channels in market
* Analyse competitors

Solution:
* Choice will affect important assumptions in company’s projection models:
- Volume, type and mix of business to be sold incl contract design, pricing
and policy size
- Mortality, morbidity, withdrawal
* Best strategy will be one that best achieves aimsusing models
* Costs and risks of making changes to distribution channel must be accounted for in model.
* Scenario and sensitivity test.

Monitoring:
* Continually analyse impact of distribution channel used
* Compare AvE
* If experience is different to assumed, might change assumptions and future decisions

Professionalism:
* Consumers’ interests must be considered
* Avoid unethical sales methods
* Identify and fix individual examples of poor practice
* Foster good practice

Question 19

How can the control cycle influence the management of a life insurer’s sales distribution at a micro level?

Answer 19

• Aim to improve current sales strategu
• Analyse experience for each sales outlets can point out good and poor performance
• Can improve poor performence by:
  
  • Training
  • Better administration
  • Providing better sales info
• Same professionalism points as at micro-level

Question 20

What are the relative advantages of selling through the bank vs direct selling

Answer 20

• May be good source of new business.
• It should provide access to a large (and “warm”) customer base of individuals with bank accounts.
• By selling to appropriate individuals persistency should be fairly good.
• Assumptions should be easier to estimate if selling through a known distribution channel (with additional information) compared to a new one.
• Systems for writing new business should be set up and working well. With a new direct marketing channel this would still need to be put in place.
• Sales costs could be relatively low, as marketing costs are low, leads are “warm” and the bank may carry out much of the initial administration.
• Sales costs will be largely commission-based relating to the volume sold, whereas direct marketing may have a large component of fixed (and set-up) costs.
• Theoretically the product does not have to be so competitive when sold through a bank.
• Persistency may be high, as the payment method is likely to use debit orders and the bank has information on the suitability of its clients.
• May be less anti-selection as sales are initiated by the bank, unlike in direct marketing (depending on the model of direct marketing used).

Question 21

What are the relative disadvantages of selling through the bank vs direct selling

Answer 21

• The bank may place constraints on the product design and price.
• Many individuals in the low income sector may not be in the formal banking market, hence the bank may not reach the target market.
• The direct marketing route may have lower costs in the long run.
• There will be less control over how the product is sold through the bank than would be the case with direct marketing.
• Policy information may be captured inaccurately by the bank staff.
• Bank staff may sell inappropriately to the low-income market, and sales may be higher pressured than with direct marketing, leading to low persistency.
• If the parent sells this company there will be a large reduction in new business volumes.