Chapter 8 - Distribution channels Flashcards
Types of distribution channels
- Insurance intermediaries
- Tied agents
- Own salesforce
- Direct marketing via press advertising
Insurance intermediaries
- 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
What is mis-selling
That is when the intermediaries prioritise commission over the needs of the client
Tied agents
- These are salespeople who are ‘tied’ to one, or sometimes several, insurance companies
- They are remunerated via commission payments
Own salesforce
- 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
Direct marketing
- Mailshots
- Telephone
- Press advertising
- Internet advertising and comparison websites
Worksite marketing
- 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
Types of commission
- Initial and renewal commission
- Level commission
Initial and renewal commission
- Common in the sale of long-term healthcare products
Indemnity commission
- 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
Clawback arrangements
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
What is the earnings period
It is the period in which the advisor earns indemnity commission( usually stated in months)
Renewal commission
Is paid every time the contract is renewed
Level commission
- Every premium paid by the policyholder entitles the distributor to a set proportion of that premium
The effect on demographic assumptions on pricing
Demographics influence mortality, morbidity & persistency
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
- 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
Why would an employer purchase group cover on behalf of employees
- There are generally both tax and risk-pooling reasons why this is an efficient way of arranging insurance
How is the insurer limited by using brokers to sell group business
- 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
How an insurance intermediary may assist a client ito selection of cover options for PMI
Some Cat Love BRRR FC
- 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
What are the advantages and disadvantages of level commission compared with high initial and low renewal commission
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
