Insurance Companies Eating Their Young to Save Their Skin

Insurance companies and the executives who run them have often demonstrated a predilection to take actions that are totally contrary to their own best interests, but what they are doing now is the ultimate in self-destructive stupidity.

Put simply, insurance companies seem determined to do all they can to eliminate any semblance of integrity, cohesiveness and coherency in the agent distribution system. If allowed to continue unabated, this will result in the destruction of any resemblance to an organized distribution system and ultimately the very existence of the insurance company itself will be in doubt.

First, a Little History

Life insurance and annuities are products that must be sold; they are not bought. Because of this, the success and survival of an insurance company is totally dependent on its access to, or control over, an effective agent distribution system. For more than a century, insurance companies invested in and benefited from a system of “captive agents.” In exchange for company support and training, agents were contractually required to write business for only one company. In the life insurance and annuity industry there was, for the most part, no concept of an “independent agent.”

This system created distribution stability for the insurance companies and – in effect – allowed the companies to collude together to control agent compensation and career options. Since all companies were selling basically the same products and paying the same commissions, there was little incentive for agents to move from company to company. This captive agent system of distribution worked so well for so long that the companies decided, paradoxically, to destroy it

Insurance companies were for decades the “top dogs” in the financial services industry. Life insurance was considered a virtual necessity and there were few financial or investment options available to the average consumer from banks or investment firms. Then, in the latter part of the 20th century, when the needs of the consumer began to evolve and banks and investment firms began to compete directly against the insurance companies by offering a wide variety of financial options, the success of the life insurance industry began to wane.

From the self-serving and simple-minded perspective of insurance company executives, the culprit causing the decline in industry growth and success was not their own failure to perceive and respond to change, but rather was the fault of the agent “for not selling more policies.” Their solution was just as simple-minded: expenses would be reduced and profits increased if only the companies eliminated the costs and responsibility for building, managing and controlling the captive agent system which they saw as troublesome and inefficient anyway. Almost overnight agents found themselves identified as “independent.” This meant that the agent was free to represent any insurance company and the companies would only have a cost if an agent sold a policy.

Phase II: Enter the IMO

For the past 25 years this system has actually worked quite well for both the companies and the agents. But now, desperate for new business at virtually any cost, companies are allowing or even encouraging actions that could result in the total disintegration of the independent agent system; with no viable alternative.

Understand that if the companies were not going invest in the recruitment, training and supervision of agents someone had to take up the slack. This responsibility ultimately fell to a new type of organization in the industry – the independent marketing organization (IMO). Soon, a cadre of very talented entrepreneurial individuals recognized the opportunity created when insurance companies abdicated control and management of agents. In response to the opportunity, these individuals created organizations (IMOs) designed to recruit, manage and motivate the agents and “give them a home.”

The insurance companies had previously been willing to invest the capital needed to build a distribution system only because the system made the agents “captive” to the company; this created an opportunity for a return on their investment. As they say, “What is good for the goat must be good for the turtle.” Meaning that if the IMO was now going to assume the costs associated with building an agent distribution system, then they must have some assurances that they will have the potential for profit and a return on their investment.

This presented a unique challenge to the companies and the IMOs because the agents were now independent and not contractually tied to either the company or the IMO. They were potentially free to move from company to company and IMO to IMO seeking what they perceived as the “best deal.” If this problem was not solved, it would lead to chaos within the system. The solution turned out to be relatively simple.

Most of the companies employing a strategy of working with IMO’s to build their distribution system implemented two critical policies:

  1. Agents contracted under one IMO were not allowed to move to another IMO representing the same company, without the acquiescence of the first IMO and
  2. The compensation system had to be consistent across the board, from the IMO down to the agent. In short, there could be no “national overrides” and no special deals, because for the IMOs to assume the responsibility of the agent system, they and the agents had to know that everyone had the same deal.

These two policies enabled the IMO and independent agent system to work effectively and efficiently. The IMOs could feel comfortable investing in the recruiting, training and supervising of agents. The IMOs knew they had a potential for a return on their investment, because the agents could not capriciously move from one IMO to another representing the same company since there was no real incentive to do so because the compensation levels at each IMO were identical.

As simple as the solution was, it required integrity and steadfastness on the part of the company in support of the IMO. (It required integrity on the part of the IMO as well.) So long as the integrity of the insurance company executives held firm and committed to these principles, the distribution system would maintain structure and discipline. And it was a win-win-win deal for everyone: the insurance companies, the IMOs and the agents.

The Times, They Are A-Changin’

But times have changed. Over the past few years insurance company executives who lack integrity, do not understand the nuances of the IMO system or are more interested in short-term results than long-term stability, have allowed or even encouraged the decay and elimination of these basic principles.

Today, agents are given virtual free rein to move from IMO to IMO and with little or no discipline regarding compensation levels. Agents can be enticed to move lured solely by higher commissions. In effect, the IMO and independent agent system has become a Wild West, lawless, free-for-all that can lead to disastrous results for all concerned; the companies, IMOs, agents and even the consumer.

The dolts running the insurance companies don’t seem to have enough sense or integrity to recognize the problem. They see their companies paying the same amount of field compensation as always and have little concern as to how it is disbursed. They are more concerned with today than tomorrow and are blind to the fact that their complicity in this free-for-all could lead to the destruction of the very distribution system they depend upon for their own survival.

With the IMOs forced to compete for or keep agents based only on the commission level they are willing to pay, they see their profit margins narrow or even disappear. When they know an agent can easily move from one IMO to another and there is little chance for them to receive a return on their investment, there is disincentive to recruit which is matched by a reduction in capital available to properly train and support the agent. (This problem is compounded when previously independent marketing organizations are now owned or controlled by a company. These “captive” marketing organizations compete directly with independent organizations and with company backing have the ability to offer even higher compensation.)

If this laissez-faire approach to the independent agent distribution system is allowed to continue, it will ultimately lead to the elimination of the IMO and the destruction of the system itself. The irony here is that unless the insurance companies are willing to bring integrity and stability back into the independent agent system, they will end up dealing directly with the agents at a cost that is greater than that of a captive system, with few of its benefits.

And the Moral of the Story …

Life insurance and annuities are products that still need to be sold by a real person. This means that individuals must be recruited, trained, motivated and properly supervised to sell these products. Successful distribution of insurance products calls for investment, structure, discipline and consistency in the system. Twenty-five years ago companies decided they did not want to continue to incur the cost and investment required to build, control and manage such a system. Instead, they allowed independent marketing organizations to assume that role. At first, the new system was structured to protect the investment made by the IMO and to assure the potential for a return on that investment.

Now those protections for the IMO are being dismantled. If the company is unwilling to assume the responsibility for the investment in and management of the agent distribution system and the IMOs can no longer afford to – who will?

If there is no answer there will be no future.

3 responses to “Insurance Companies Eating Their Young to Save Their Skin

  1. Of course they’re sacrificing their young (IMOs) I recall in 06/07 when LUSA went totally under control of the Borg (Allianz) and all the talk was “Silos” and “regional distribution centers”, etc. “Controlling the distribution” was a favored buzzword, but essentially the unguarded talk was of transforming the IMO (FMO) to an empty shell of its former self. Do I sound bitter? Yes, probably- the snake charmers cheated me out of $7K of promised educational reimbursement and terminated me, as I see it, because I was too “old school.” Meaning I voiced my dissent with the way things were being dismantled and the way innovation at the FMO level was being destroyed. Now the office where I used to work is like a mausoleum. I recently visited one of the very few original employees there. The place felt creepy. I miss the old crowd of winners and creative thinkers.

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  3. I just wanted to echo your assessment. For three years until this summer, I worked for an FMO here in Minneapolis, a small shop in the 40M range, contracted with Allianz.
    To be honest, I felt like we were the beaten mules of the industry. My experiences were very similar to what you have talked about above — Agents selling away to other firms with bigger commissions on certain products, churn & burn tactics, no corporate support of any kind, etc..
    In the end, I felt like our biggest liability was the producer. The faces of these insurance companies are “independent representatives,” minimally trained, narrow in overall grasp of the industry, and far too individually important to the customer.
    We’re constantly fighting the ethics and image of our industry, we’re the public scapegoat for the insurance company concerning consumer suitability issues, and we’re completely dependent upon a salesforce who a: doesn’t need us specifically, and b: we cannot effectively regulate.
    Building a brand and long-term stability becomes an afterthought in this atmosphere.
    Other than that, I enjoyed my time there!
    I know this sounds like a ridiculous analogy, but I look at it like this: If I founded Subway, I would feel great about the fact that my customers could buy a sandwich in Minneapolis, and a sandwich in Indianapolis, and they would taste exactly the same. You can’t say that about life insurance in this country today.

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