Chapter 8 Distribution Channels Flashcards
Discuss the operating environments in which health & care insurance products are traded.
List 4 distribution channels used by life insurance companies
- Insurance intermediaries/independant financial advisors (aka brokers)
- Tied agents
- Own salesforce
- Direct marketing
Main distribution channels, examples of risks of miss-selling
State 2 main risks to a life insurer if a policy is sold which does not meet agreed policyholder needs (3)
- Reputational risk
- Persistency risk
- consquent financial loss, inculding possibility of compensation
Describe insurance intermediaries (5)
How they work (3)
How they are remunerated (2)
Who initiates the sale (1)
- Salespeople act indpendantly of any insurer
- Searches for contract that best meets clients’ situation/needs (premium and benefits)
- AKA: independant financial advisors and insurance brokers
- Remunerated via
- commission pmts from companies whose products they sell
- fee from clients
- Sales often client-initiated, however, can also promote themselves e.g. initiating periodic reviews
Describe tied agents
How they work (3)
How they are remunerated (1)
Who initiates the sale (1)
- Work solely on behalf of one or several insurers i.e. offer clients only products of those companies
- Where tie is to multiple companies, sometimes product ranges are mutual exclusive, but often overlap
- Typically employees of bank or other similar financial institution
- Remunerated via commission pmts or salary plus bonuses by companies to which they’re tied
- Sales often client-initiated, but tied agents may actively engage in selling.
Describe an insurer’s own salesforce
How they work (1)
How they are remunerated (1)
Who initiates the sale (1)
- Usually employees of insurer and only sell products of that company
- Remunerated by commission and salary or mixture of both
- Usually the salesperson initiates the sale, making use of client lists or purchased leads (however, client my initiate any further sales)
List and describe 4 forms of direct marketing (4)
Who initates the sale in each case? (3)
- Internet selling
- useful for without profits contract (simple)
- quote online
- apply online
- Press advertising
- short application form
- give telephone number or address
- it is arguable who initiates sale
- Telephone selling
- either prospective policyholder or insurer could initiate sale
- Mailshots (promotional/advertising letters sent in batches)
- insurer initiates sale
Worksite marketing
Describe worksite marketing (4)
- This is a process by which an insurer obtains permission from an employer to access/address the employer’s worksforce en masse and sell its health and care products to them
- The complexity of the products sold in this way depends on the level of sophistication of the staff.
- Usually only simple products are sold to those who haven’t already made provision.
- This form of distribution in unlikely to be undertaken for LTCI products (due to complexity), but is already used for distribution of health cash plan and simple PMI.
Effect of different distribution channels, intro
State 3 features of health insurance contracts that will be affected by the distribution channel used (3)
- Demographic profile
- Contract design
- Contract pricing
Effect of different distribution channels: demographic profile
How might choice of distribution channel used affect the demographic profile of contracts sold? (5)
Comment specifically on the target market reached for:
Independant intermediaries (3)
Tied agents (3)
Direct marketing (2)
Different distribution channels will attract/appeal to diffferent demographic profiles differing by
- financial sophistication and income which will…
- …reflect in the experience of lives buying contracts in terms of
- morbidity experience
- persistency experience
Target market will impact experience, affecting mortality, sickness, and withdrawal experience
- independent intermediaries
- more sophisticated customers, wealthier on average than public, will tend to seek out advice to managing more complex financial affiars
- tied agents
- variety of people differeing incomes/financial sophistications, certain minimum level implied by having bank account (seeing as tied agents are often banks which sell insurance)
- direct marketing e.g. downmarket tabloid newspaper
- leas financially sophisticated, relatively low income levels
Effect of different distribution channels: contract design
State how the choice of distribution channel can affect contract design (3)
- The higher the level of clients’ financial sophistication, the greater possible complexity which can be used on contract design
- Different products will be suited to different methods of sale eg products sold via direct marketing may be less complicated than products sold face to face
- The contract design may create/lead to different versions of the same product for an insurer using multiple/different distribution channels; the verson of the contract sold may vary by channel
Effect of different channels: contract pricing
Give 3 important aspects of contract pricing that will be influenced by the choice of distribution channel used (3)
- effect on demographic assumptions, including the effect of underwriting
- effect on other assumptions
- the effect on the need for competitive terms
Effect of different distribution channels: contract pricing, impact on demographic assumptions including impact of underwriting
Describe the role of distirbution channel marketing strategies on the level of underwriting used (1), consider intermediaries (3) and direct marketing (2)
How does this distribution channel marketing strategy and level of underwriting then feed into pricing assumptions? (2)
How might persistency rates/withdrawal rates be factor in terms of contract pricing? (7)
In terms of distribution channels, the level of underwriting depends on to marketing strategy
- intermediaries/brokers usually underwrite the most
- intermediaries represent client’s best interests, may thus encourage anti-selection
- customers likely high net worth => higher insurance cover => need for higher underwriting
- direct marketing underwrites the least
- as usually benefit is quite low and underwriting would be a barrier to sales)
Link between underwrting and demographic assumptions:
- based on the marketing strategy, the level of underwriting will then be reflected in the demographic assumptions used for pricing
Withdrawal/persistency also likely to be affected by
- financial sophistication and who initiated the sale
- consider customers having buyer’s guilt and lapsing:
- sophisticated customers less likely to lapse due to buyers’ remorse because
- they would’ve done more research before purchase
- better able to afford policies
- lower likelihood of mis-selling
- sophisticated customers less likely to lapse due to buyers’ remorse because
Effect of different distribution channels: contract pricing, impact of worksite marketing and impact on other assumptions
Describe how the use of worksite marketing might affect contract pricing (3)
Give examples of other assumptions in contract pricing which may be affected by choice of distribution channel (2)
Impact of worksite marketing on contract pricing
- For worksite marketing, engaging a large group of similar policyholders enables lower premiums through lower risk premium due to credibility.
- May also be expense savings if employer allows payroll deduction of premiums, however….
- …counterbalanced by administration costs on low premium size
Effect on other assumptions
- morbidity assumptions
- expense assumptions
Effect of different distribution channels: contract pricing, impact of the need for competitive terms
Need for competitive pricing of contracts (5)
Other aspects impacting competitive terms (5)
Effect of need for competitive terms wrt price of contract
- Competitive of premium rates is broadly highest at brokers and lowest at direct marketing
For different distribution channels
- intermediaries recommend most competitive option with lowest rates
- other things being equal, commission may be distinguishing factor, if market unregulated, offer more of this
- tied agents
- products should be reasonably competitive, or this could damage its name
- however there’s no direct comparison (as they are tied to a particular company’s prods)
- own salesforce not usually in competitive position as direct selling
- e.g salesperson correctly recommends 15 yr-term assurance, but client may not shop around for better/best deal
- worksite marketing
- enables premiums to be reduced because of homogeinity of risks and large pool of risks
- direct marketing depends on target market
- for financially sophisticated (e. financial paper) terms will need to be compeitive, less so for less financially unsophisticated
Competitive terms don’t only relate to price, other factors/examples:
- innovative feature
- attractive options
- complex prods difficult to compare
- unit-linked products also compete on investment performance
- competition on customer service/admin support
Group risks/insurance: large groups, intermediary responsibilities
Describe the roles that may be fulfilled by intermediaries who sell group risks for larger groups (4)
The role of the intermediary
- responsible for most communication
- data gathering
- may also be the conduit/responsible for
- money receipts, and
- money payments
