Chapter 8 Distribution Channels Flashcards
Discuss the operating environments in which health & care insurance products are traded.
The main distribution channels
- Insurance intermediaries (brokers)
- Tied agents
- Own salesforce
- Direct marketing
Insurance intermediaries
- Brokers should act independent of any individual insurer.
- They should choose a product which best meets the clients needs in terms of premiums and benefits.
- They may be remmunrated via commission by companies’ whose products they sold.
Tied agents
- These are sales people tied to either one or a group of insurance companies.
- They sell to their clients products only from these insurers.
- Typically they may be employees of a bank.
- Tied agents are also remmunerated via commission payments by companies the agent is tied to.
Own salesforce
- Usually employees of an insurance companies hence will only sell products of this company.
- Remmunerated by commission and/or salary
- salesperson initiates sale using leads
Direct marketing
- This takes four main forms:
- mailshots
- telephone selling
- press advertising
- internet advertising and comparison websites
- In case of mailshots the insurer initiates the sale.
- In case of telephone selling it could be either prospective policyholder or insurer.
- IN case of press it is arguable who initiate.
Worksite marketing
- this is a process by which an insurer obtains permission from an employer to access its worksforce and sell its products to them.
- the distributor aims those employees may have cover for only themselves and not dependents or do not have adequate employer-paid cover.
- this form of distribution in unlikely to be undertaken for LTCI products, but already part of health cash plan and simple PMI.
Different types of commission
- Initial & renewal commission
- Level commission
- Alternative commission structures
Indemnity commission
- A form of Initial commission
- Lump sum paid by insurer to distributor for new business written.
- May be expressed of sum insured or first premium.
- this will involved the insurer in some form new business strain.
- Indemnity commission may be paid to any distributor who needs cash up-front to develop his/her business.
Clawback arrangements
- The adviser earns indemnity commission over a defined period which is normall stated in months.
- if a policy lapse before the commission is fully earned then insurer may clawback a proportion of the commission from distributor, which is deemed unearned.
Renewal commission
- commission payable upon policy renewal, usually lower than initial commission.
- this encourages distributors to promote persistency.
Level commission
- every premium paid by policyholders entitles the distributor to a proportion of premium.
- level commission doesnt involve any new business strain.
- it takes longer for distributor to earn their commission.
Alternative commission structures
- Initial commission may sometimes be spread over a limited number of years.
- commission is sometimes paid as a % of SI.
The effect of different channels
- Demographic profile
- Contract design
- Contract pricing
Effect of different channels: Demographic profile
- Different channels are likely to appeal to different people of sophistication and level of income.
- this will be reflected in the experience of lives taking out contracts through each channel.
Effect of different channels:Contract design
- The higher the level of client sophistication the greater the complexity of products sold.
- Different methods of sale will suit different products.
- An insurance using more than one distribution channel may sell more than one version of the same product, varying by channel sold.
Effect of different channels:Contract pricing
- Two aspects
1. effect on demographic assumptions, including the effect of underwriting.
2. the effect on the need for competitive terms.
Contract pricing: effect on demographic assumptions
- level of underwriting will be linked to marketing
- the level of underwriting will e reflected in the demographic assumptions used for pricing.
- Persistency rates are likely to be affected by the level of financial sophistication of policyholder.
Contract pricing: effect on need of competitive terms
-Insurance intermediaries will recommend to their clients insurer with most competitive rates, all else being equal.
-a bank will want products sold by its employees to be reasonably competitive or this could damage its name.
-Members of own salesforce will not be in a competitive situation.
-Worksite marketing enables premiums to be reduced because of homogeinity of risks and large pool of risks.
-There may be expense savings especially if employer allows premiums to be deducted from payroll.
-
Group risks
- Employer purchases group covers on behlaf of employees.
- there generally both tax and risk-pooling reasons why this is efficient.
Smaller groups
-products may be distributed through insurance brokers.
Groups risks: large groups
- The role of the intermediary
- responsible for most communication & data gathering
- may be the conduit for money receipts & payments
- insurer’s ability to influence risk attitudes of the employer directly is limited, since relationship is only with the broker.
Benefits to the employer :Group insurance
- Employer is assured good level of service if they deal with a national broker.
- This will include an annual audit of appropriateness of protection levels & structures, comparative analysis in terms of securitym products available & price.
Benefits to insurer: Group insurance
- achieve of legal contract with minimum administrative expenses.
- However insurer may be limited in other ways:
- opportunity to build relationship firsthand with purchaser of insurance.
- chance to influence retention of this business
- opportunity to engage directly with responsible for the lives insured
