Chapter 8 - Distribution channels

Question 1

Types of distribution channels

Answer 1

• Insurance intermediaries
• Tied agents
• Own salesforce
• Direct marketing via press advertising

Question 2

Insurance intermediaries

Answer 2

• Act independently of any particular insurance company
• Their aim is to find the contract that best meets the needs and situations of the clients
• They get paid a commission by the insurer or a fee from client

Question 3

What is mis-selling

Answer 3

That is when the intermediaries prioritise commission over the needs of the client

Question 4

Tied agents

Answer 4

• These are salespeople who are ‘tied’ to one, or sometimes several, insurance companies
• They are remunerated via commission payments

Question 5

Own salesforce

Answer 5

• Are employees of an insurance company and hence only sell its products
• They may be remunerated by commission or salary or a mixture of both

Question 6

Direct marketing

Answer 6

• Mailshots
• Telephone
• Press advertising
• Internet advertising and comparison websites

Question 7

Worksite marketing

Answer 7

• This is when a broker or insurer representatives obtains permission for the employer to address the entire workforce and sell health and care insurance products

Question 8

Types of commission

Answer 8

• Initial and renewal commission
• Level commission

Question 9

Initial and renewal commission

Answer 9

• Common in the sale of long-term healthcare products

Question 10

Indemnity commission

Answer 10

• Is a form of initial commission. It is a lump sum payment from the insurer to the distributor in respect of new business written
• It is typically expressed as a percentage of the first premium, but may be expressed as a proportion of sum insured
• It is very popular for salespersons to sell

Question 11

Clawback arrangements

Answer 11

If the policy lapses before the commission is fully earned (ie. during the earnings period) then the insurer will clawback the proportion of indemnity commission that deemed not to be earned at the point the policy is lapsed

Question 12

What is the earnings period

Answer 12

It is the period in which the advisor earns indemnity commission( usually stated in months)

Question 13

Renewal commission

Answer 13

Is paid every time the contract is renewed

Question 14

Level commission

Answer 14

• Every premium paid by the policyholder entitles the distributor to a set proportion of that premium

Question 15

The effect on demographic assumptions on pricing

Answer 15

Demographics influence mortality, morbidity & persistency

Question 16

How is having competitive rates or charges not the be-all and end-all for every product, even when selling through more price-sensitive sales channels

Answer 16

• Products may be different from competitors through innovative features or attractive options
• More complex products may be difficult to compare across companies
• Some products may compete on the level of customer service or admin support

Question 17

Why would an employer purchase group cover on behalf of employees

Answer 17

• There are generally both tax and risk-pooling reasons why this is an efficient way of arranging insurance

Question 18

How is the insurer limited by using brokers to sell group business

Answer 18

• No opportunity to build a relationship at first-hand with the purchaser of the insurance
• No opportunity to influence retention of the business
• No opportunity to engage directly with those responsible for the lives insured to improve risk management

Question 19

How an insurance intermediary may assist a client ito selection of cover options for PMI

Answer 19

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• Select cover most appropriate for customer needs and what they can afford
  This will involve assisting the client to consider the following aspects of the various cover options:
• Cover for chronic conditions
• Level of hospital cover: what medical procedures are included or excluded
• Benefit ceilings, co-payments and exclusions
• Range of preventative options (e.g. cover for cholesterol screening)
• Range of treatment protocols and medication covered
• Rate at which medical professionals are paid
• Freedom of choice wrt healthcare provider
• Cover for day-to-day medical expenses

Question 20

What are the advantages and disadvantages of level commission compared with high initial and low renewal commission

Answer 20

Advantages

• 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 for the insurer, so makes the policies more capital efficient
• Matches commission outgo to contribution to profitability more appropriately
• Simpler than other commission structures

Disadvantages

• Discourages the intermediary from actively seeking new clients, which requires considerably more effort than achieving a referral
• The level commission does not reflect the work done to earn the commission – in effect, part of the (higher) renewal commissions represent deferred remuneration for the initial sale of the contract
• This is a significant problem if other companies pay a high initial/ low renewal commission structure. Intermediaries will be encouraged to sell new policies for these other insurers, with the result that the level commission insurer’s business volumes will suffer