Chapter 8 - distribution channels Flashcards
Types of distribution channels
- insurance intermediaries: select products for their clients from all or most of those available on the market
- tied agents: offer the products of one insurance company or a small number of insurance companies
- own salesforce: usually employed by a particular company to sell its products directly to the public
- direct marketing via press advertising, over the telephone, internet or via mailshots
Main forms of direct marketing
- mailshots (insurance company initiates sale)
- telephone selling (could be either initiating)
- press advertising (debatable)
- internet advertising and comparison websites
Worksite marketing
This is a process whereby a broker or insurance representative obtains permission from the employer to address the entire workforce and sell health and care insurance products
Different types of commission
- initial and renewal commission
- level commission
- spread of initial commission over a limited number of years
Initial and renewal commission
Two levels of payments: a high initial level, paid for a certain initial period from the start of the policy, followed by a much lower renewal level paid thereafter. Generally expressed as percentages of the premiums payable during the same period.
Indemnity commission
- involves payment of the initial commission immediately (lump sum) when the product has been sold.
- It represents advanced remuneration to the intermediary for premiums that are expected to be paid in the future, as well as for the premium paid on day one of the policy
- discounted value of initial commission that would have otherwise been paid
- involves insurer is new business strain
- may be paid to any distributor who needs cash up-front to develop their business
- insurer will make some form of credit check
Clawback period
If a policy lapses before the commission is fully earned, then the insurer will clawback the proportion of indemnity commission that is deemed not to be earned at the point the policy is lapsed
Renewal commission
- where the commission paid is a large initial amount, there is often a lesser amount payable as renewal commission for the balance of the policy term to encourage the distributor to promote persistency.
Advantages of level commission
- Encourages persistency, which results in greater profit for the insurer, so more closely relates to the profit earned by the insurer
- produces less new business strain, so makes the policies more capital efficient
- matches commission outgo to profitability more appropriately
- simpler than other commission types
Disadvantages of level commission
- discourages intermediary from actively seeking new clients, which requires more effort
- level of commission doesn’t match work done to earn commission
- significant problem if other companies do pay high initial commission as intermediaries will be encouraged to sell new policies for these other insurers
Effects of distribution channels on contract pricing
- the effect on demographic assumptions, including the effect of underwriting
- the effect of the need for competitive terms
The effect on demographic assumptions
- the level of underwriting exercised will be linked to the marketing strategy used
- business from intermediaries is likely to be subject to the most underwriting because sales through e.g. direct marketing may have low benefits on offer (also complex application forms act as a barrier to sales)
- level of underwriting will be reflected in demographic assumptions
- underlying health of applicants may vary by distribution channel
Why is business from intermediaries likely to be subject to the most underwriting
- act in the interest of the client (may encourage anti-selection)
- it is the customer who is initiating the sale
- clients are likely high net worth with need for higher insurance cover
- prices will need to be competitive as intermediaries have access to the whole market (may only be possible through careful selection of good risks)
The competitiveness of premium rates needed
- intermediary (most)
will recommend to their clients the companies with the most competitive rates, other things being equal - tied agent
a bank will want product sold by its employees to be reasonably competitive or they could damage their reputation but there won’t be direct comparison like with intermediaries - own sales force
- direct marketing (not always though)
How can products compete aside from price?
- innovative features or attractive options
- more complex products are more difficult to compare across companies
- unit-linked products may compere as much on past investment performance
- some products may compete on the level of customer service or admin support
