The insurance distribution landscape is strewn with opportunities and challenges.

Obviously, to make the most of the opportunities, insurance companies will first have to overcome the challenges. Lets take a quick look at the opportunities.

The emergence of new distribution channels:

There was a time when captive agents wrote the bulk of an insurance companys business. But increasingly people are buying insurance products from independent producers and institutional channels such as banks, broker-dealers, IFAs and wire houses. In a way, this is good news for insurance companies. Managing a captive agency force is an expensive business. Studies estimate that insurance companies invest anywhere between $65,000 and $200,000 in training each agent. This investment often does not deliver the desired return because there is a great deal of attrition among agents. Besides training, there are huge operational overheads attached to maintaining a captive force. Independent producers and institutional channels are likely to bring new efficiencies into the distribution framework and corner a larger percentage of the policies written. For instance, banks and large broker-dealers already have huge networks in place, existing relationships with customers and brand equity. If insurance companies are able to position themselves as preferred partners with these channels, they could quickly increase their market share and at the same time bring down their cost per business acquisition.

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The consumer is evolving and so are his needs:

The way consumers look at insurance products today is completely different from how they looked at them a few years ago. Insurance products are no longer about just covering risks and lives. Since the 1980s insurance in many markets has increasingly become a wealth-management product. Consumers are seeking variety and customizability in their investment portfolios. The demographics are also in favor of insurance companies. The average lifespan is increasing and so are standards of living. This is creating demand for products that not only offer protection but also double up as investments. Insurance companies have an opportunity to bring innovation into their product mix. They can gain a competitive advantage by quickly launching innovative products that are aligned with evolving consumer needs. To do this, insurance companies must be able to understand consumer needs better and have agile systems that let them launch products quickly. To capitalize on these opportunities, however, insurance companies must get closer to the customer by expanding their distribution network. They have to incorporate new and alternative channels, arm the sales forces with effective sales tools and position themselves as preferred partners with their channels. In most markets, except Asia, insurance carriers generate more than 80% of their business through alternative distribution channels such as bancassurance, broker-dealers, wire houses and IFAs. The key challenge for insurers is to attract and retain these distribution channels by: Making it easy for channels to do business with them Providing good and quick underwriting support Delivering differentiated service to top performers Providing proactive service Launching incentive plans and contests Managing commissions in a more efficient manner

In a marketplace where products are increasingly becoming commoditized, the big differentiator that insurers can offer their channels is ease of doing business. Insurance companies can position themselves as preferred providers by delivering on key areas such as: New business and underwriting support Marketing and sales support Underwriting speed Client services Commission rate

In this white paper, we will look at how insurance companies can streamline their distribution networks, address the business and technological challenges and capitalize on the opportunities.

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The burden of legacy

One of the biggest stumbling blocks for insurance companies in mature markets is their legacy sytems. The IT systems of many insurance companies have evolved in an ad-hoc manner over the last 30 years. These legacy systems were built around product silos. Each product came with its own policy admin platforms. Today, insurance companies are saddled with a disparate set of platforms that are extremely complex to integrate. Maintaining so many platforms is expensive and operationally inefficient. For instance, if there is any change in calculations, it will have to be replicated across multiple platforms. But the biggest impact is on the distribution landscape. The existing systems were adequate when insurance products were simple, consumers were less demanding and they were sold through a large network of captive agents. Today, insurance products have become a lot more complex, customers are demanding better service and customized products, and non-traditional channels such as banks, broker-dealers, IFAs and retail outlets are seeking better support through out the sales cycle. In a recent survey, agents were asked to rank the various factors that made it attractive for them to do business with an insurer. If you thought that the answer would be the percentage of commission, you couldnt be more wrong. The most attractive thing about an insurer, they felt, was the ease with which they could do business with the company. As independent channels, which sell competing products, become the norm in the distribution landscape, carriers clearly have their work cut out. They must make it simpler and more attractive for the channels to sell their products over those of their competitors.

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Ease of doing business

There is very little differentiation among the products of insurance companies. So, a producer will typically recommend those products that are easier to sell to maximize their commissions. Take for example the case of brokers A and B. Lets assume that both are paid the same commission rate. If broker A can convert a prospect to a policy in two days, and broker B can do it in ten days, it doesnt take a math wizard to figure out who will make more commission. So, how can insurance companies encourage producers to sell more of their products? Carriers must provide channels with tools and services that can help the latter improve sales efficiency. Lets take a look at some of them Quick closure of sales: To begin with, agents need tools and calculators to produce accurate quotations on the fly. They also need tools that can help them perform a financial need analysis of the customer and suggest suitable products based on the customers profile. To further speed up the process, it would help if agents can perform basic suitability tests and underwriting at source. Reduction in proposal turnaround time: Insurers must aim to reduce the time it takes to turnaround proposals. They must give agents the ability to submit applications online through a portal, which is seamlessly integrated with the back office. An underwriting engine, which is based on pre-defined rules, can automatically handle many of the proposals, flagging only those proposals that do not meet the basic criteria for manual underwriting. In such a system, insurers can also use straight through processing (STP) to greatly reduce the turnaround times. Proactive service: A good system will allow insurers to be proactive in the kind of service they deliver to their distribution partners. For instance, they can provide alerts to agents on policies that are likely to lapse or about defaults on premiums through producer-defined or system alerts. When it comes to wealth management products, an insurer must be able to provide its channels with portfolio management tools such as tools to generate simulated what if scenarios or perform financial need analysis. These tools can help agents maximize the asset value of their customers and, since commissions are based on asset value, their income as well. Enhanced service: Once agents submit a proposal, they are keen to know the status of the proposal. Insurers can enable their agents to directly communicate with underwriters through chat sessions. Insurers can also provide agents with access to a transaction portal, where they can perform basic changes to policies and submit and manage claims. Value-added services: An important service that insurers can render channels is lead generation. If insurers can get a single view or a household-centric of the customer, they can alert agents about cross-selling and up-selling opportunities. Insurers can help agents identify profitable customers and segment their customer base, thus giving them the ability to provide differentiated service. For many transactions such as withdrawals, surrender etc, insurance companies can enable straight through processing (STP), thereby increasing transaction throughput and operational efficiency.

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Innovative commission and incentive packaging

Agents sell insurance products so that they can maximize their commissions. To become a preferred partner with profitable producers, insurers must be able to pay differentiated commission rates based on performance and disburse these commissions at different frequencies. For instance, a platinum producer could be given commissions fortnightly, whereas a gold producer could get it once a month. Insurers also need the ability to define a team beyond conventional hierarchies. Unlike in the past where one agent belonged to just one hierarchy, today a single agent could belong to multiple hierarchies. So insurers need the flexibility to assign compensation to and manage agents across multiple hierarchies. Many insurers also find it difficult to manage the different types of exceptional commissions like clawback/ chargeback, annualization, commission sacrifice, split commission, adjustments against loans and advances, etc on their legacy systems. This could lead to inaccurate calculations and a lot of reconciliation efforts, resulting in agent dissatisfaction. A good system can help insurers simplify the calculation and management of these commissions, reduce reconciliation and increase accuracy of payouts. Besides commissions, insurance companies frequently launch incentive plans (around once or twice a year) and contests (as often as once a month) to motivate agents. These incentive plans and contests can come in a variety of configurations and flavors. For instance, an insurer may want to launch a contest to reward top performers in a particular location during a given period. Or they may want to have a contest for a particular channel across all products. So insurers need a great deal of flexibility in the way they configure their incentive plans and contests. Once a contest is launched, insurers must be able to track performance of producers during the contest period so that they can disburse rewards to the performers in a timely manner. As with commissions, insurers need to provide different incentive rates to different channels and even pay these incentives at different frequencies based on profitability and performance. Insurers therefore need the ability to map incentives and benefit schemes across products to individual producers, with eligibility alerts so rewards can be handed out quickly But as most insurers have multiple policy admin systems, their flexibility to configure incentive plans and contests and ability to launch them quickly are severely hampered. Besides, to determine eligibility for incentives and contest rewards, insurers will need to get a consolidated view of transactions across channels, locations and products. But, as this data scattered in multiple silos, calculating eligibility can be a difficult task. This is a critical challenge, because if they are unable to process incentives quickly or accurately, it could breed dissatisfaction among producers and lead to a lot of time being spent on reconciliation

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Managing licensing of doing business

Every representative who sells insurance products needs to have a license. In some countries, licensing regulation can be quite complex. For example, a broker or representative who wants to sell insurance products in the USA will need separate licenses for each state and for different products. If a representative wants to sell a variable annuity product in New York or any other state, he has to get two licenses one from the Securities Commission and another from the insurance authority. While channels have to ensure that their representatives have the required licenses, the liability for misrepresentation is with the insurance company. So it becomes the insurance companys responsibility to see that representatives have unexpired licenses. A typical insurance company would have hundreds of thousands of agents across a host of channels selling its products. It has not only to ensure that its agents have the proper license, but it must also be able to alert them when it is about to expire so that they can renew them. This can be a big challenge even when an insurance company launches a new product, because it is the carriers responsibility to ensure that all those who sell the products are authorized to do so. Ideally, carriers need a system that can keep track of all agents and their licensing requirements and alert them when the licenses are due to expire. The problem is that legacy systems dont have such functionality built into them. In fact, many cases of misrepresentations are regularly reported. Also, agents are often expected to undergo continuing training and take examinations or get certifications before their licenses are renewed. Insurance companies can take the lead in helping these agents get the required certifications through online continuing education programs.

Evaluating performance

A critical aspect of managing the insurance distribution network is evaluating performance. Because performance data is what will help insurers offer differentiated service to their channels and design better products. For instance, a channel may be writing a large number of policies, but its lapse rate may be high. Or an agent may be very successful in booking business, but the claims rate on his/her policies may be higher than average. What senior managers need is a dashboard that gives them personalized and customized snapshots of performance across the distribution chain. They should have the ability to drill down from the summary views and make deeper analyses of all performance data.

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The framework

So what would it take for insurance companies to build all this functionality into their systems? What would the framework look like?

Distribution Framework An ideal channel-facing and customer-centric IT system would have three critical components, all of which must be seamlessly integrated with the back-office platforms. The components are 1) Point of Sale, 2) Channel Portal and 3) Channel Management

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Point of Sale

When a prospect approaches an agent for an insurance product, what are the things an agent needs to make a quick sale? To recommend a product that is best suited to a customers needs, the agent should have financial tools to perform need and cost-benefit analyses. The agent should be able to simulate and demo a variety of investment scenarios and share with the customer information about the product such as past performance, bonus record etc. If a prospect shows interest in a product, the agent must get an accurate quote in real-time and be able to generate a proposal on the fly. After the customer has accepted the proposal, he has to fill the proposal form. If a paper form is used, there will be a delay in the proposal being converted into a policy. Agents would generally prefer to recommend products of those companies that have quicker proposal to policy conversion. So, carriers must provide agents with the ability to submit the forms online. Of course, agents are not always online when they are with their customers. So, the point of sale system must provide the agent with the flexibility to fill up the form offline and later synchronize it when he is online. Once a proposal is submitted, channel partners should be able to track the status of the proposal through an online portal. This will help reduce call-center costs because agents do not need to keep calling up to check on the proposal status. To enable channels to deliver better service to customers, insurers must provide them with access to relevant customer information such as life events, household information, past transactions, policy and premium status, etc. This information can help agents recommend the right products, cross-sell and up-sell products, inform customers about premiums due, etc.

Portals

A major servicing cost for insurance companies is call centers to support agents. Heres where a portal can be particularly handy. Lets take an example. Today, a large insurance company may get as many as 20,000-30,000 calls a month from agents. On average, each call costs $10 and thats just the manpower costs; add communication charges and it is much higher. In a year an insurance company would get around 400,000 such calls, which would, at $10 a call, would cost the insurance company $4 million. A portal that provides information at the click of a mouse to those who want it will lead to a drastic reduction in such calls. Even if it reduces the number of calls by 10%, it means a substantial cost saving for the company. A portal will also reduce the cost an insurance company spends in producing marketing collateral. Companies keep sending collateral to channels. Each agent may get as many as 100 brochures a month, whether he wants it or not. Insurers can provide these collaterals as downloads or even have a system in place that enables such brochures to be sent on request. The result: big savings in printing and postage costs. In addition to providing information and service, portals are increasingly being used for straight through transactions. There are many transactions that do not need manual intervention and can be made completely online. Transaction-based portals can increase turnaround times of transactions and reduce operational and back-office costs substantially.

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Channel Management

An ideal channel management system will provide insurers with the ability to quickly configure new channels whether it is bancassurance, IFAs or broker-dealers, and add new partners. The system must be flexible enough to accommodate a particular channels hierarchical needs and manage each channel through a set of comprehensive business rules. The system should help insurance companies and its channels evaluate producer performance across products, channels and locations. For instance, the system could help them perform KPI evaluation on multiple parameters or persistency measurements on premium and number of policies. Channels must be able to get internal hierarchy-wise performance evaluation. The channel management component should allow insurers and channels to perform a variety of analyses such as target vs variance, KPI evaluation, performance evaluation of producers for promotion, demotion or transfer and channel performance evaluation. Insurers should be able to manage different types of commissions across products, channels, producers and regions. They should also be able to launch incentive schemes in a jiffy and then be able to calculate and distribute the benefits to individual producers. To do this, the system should be able to do formula-driven benefit calculations. A good system will also allow insurers to help channels manage their own producers, provide automated commission and benefits calculations, and maintain test and exam records. To provide this kind of functionality, the channel management system needs to be seamlessly integrated with the multiple back-office platforms.

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Conclusion

It is clear that the only way in which insurance companies can address the challenges and capitalize on the opportunities is by investing in systems that are customizable, open, flexible and can be easily integrated with legacy and other back-office platforms. Such a system will help them make their distribution chain more effective and efficient, push new products through the distribution pipeline at a faster pace, reduce operational costs and inefficiency and position themselves as a preferred partner with channels.

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Mastek Profile

Mastek is a $ 131 million company founded in 1982 employing over 3000 people worldwide. Mastek is committed to long-term partnerships and to providing value to its customers by reducing time-to-market and ensuring a high level of predictability in the time, cost and quality of its projects. Masteks client relationships are driven by shared values and goals and are not rigid lock-in contracts that limit flexibility. Mastek specializes in Insurance industry-specific solutions combining deep business understanding and years of global experience to provide proven application frameworks in Distribution Management, Claims Processing, Underwriting and Policy Administration. Masteks modular solutions approach coupled with component libraries result in software that works seamlessly with existing legacy applications yet providing adaptability to the rapidly evolving business environment. Masteks suite of application frameworks are supported with over 1000 consultants dedicated to the Insurance sector with industry certifications such as CPCU and LOMA. Mastek is working with some of the top insurance companies world-wide and has over 70 Insurance engagements in the US, UK and the Asia Pacific region. About the Author A 21-year industry veteran, Vijay has been instrumental in building Masteks insurance practice line, and guiding its strategic development on a global scale. The visionary behind Masteks component-based solution framework, he is responsible for conceptualizing solutions that reflect current market needs and deliver tangible business value. In his current role, Vijay heads the Worldwide Insurance and Financial Services business at Mastek. E-mail: vijayc@mastek.com

To receive more information on Masteks channel management solution please email us on marketing@mastek.com. Our insurance experts will soon get in touch with you.

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