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.

(This is a reprint of a blog posted earlier)

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

  1. Bob – I sold with you when you were with ITT. I agree with much of what you say, but would add some perspective from the other side. First off, companies are also terminating agents “for lack of production” before they can even get the information they need to present the product. It is just ridiculous. If they are not willing to contract for 3 years minimum – then they should not approve the contact. Then the IMO situation is just beyond ridiculous. Training? Not hardly. They hire phone banks to recruit agents – and those calling know not one iota about insurance. Then the “specialist” comes in who bombards you with a bunch of hooey. The days of people listening and responding (because they have experience) are gone. I can count on half a hand the IMO’s I’d give a plug nickel for. And companies that either 1) terminate contracts willy-nilly or 2) throw their product out for every IMO in the country are not worth doing business with either. No integrity, no business. That’s my motto.

  2. Bob what you are saying may be true . However you are overlooking the fact that many agents go to IMO because of the commission structure. Who is going to pay the most for this deal I have at the moment and not the sell after this sell. In light of getting the highest commission structure possible, agents are finding it difficult in these trouble times with all the uncertanity around us to keep the pipe line open with fresh prospects. In essence, agents are paid on the current deal and not every deal that go to the insurance company. Once the agent find the prospect and deliver the application, agent has no more control.

  3. I think your article has left out one very crucial element that did not exist twenty-five years ago. Could it be that changes in the IMO business are happening because the internet allows insurance companies to communicate directly with the agent? I personally find that I get the best training, more often than not, directly from the carrier as an insurance agent (and from third party sources also). I have found that the best training did not come from the IMO.

    Too many IMO’s these days operate on the philosophy of recruiting and collecting bodies and some agents feel that a lot of the IMO’s don’t offer any value to them. If an agent leaves an IMO for a marginal difference in commission, the IMO should be asking themselves,”… what can we do better to offer more value to the agent? “. If an agent leaves an IMO because of a large difference in commission… then that’s a whole different issue.

    Profit margins in many businesses are being flattened because of the increased communication abilities that we have today: the music industry, travel, publishing etc, etc. Your solution is to wish for the good old days of collusion and agent ignorance to keep the IMO machine going. Your threat is that if the IMO’s go away, who’s going to corrall the aimless agents into selling the products. If there is one endangered species in our new electronic world, it is the middle man. An IMO doesn’t create or administer any products. The IMO doesn’t do the dirty work of selling the products in the field. They typically stand in the middle and promise the insurance carriers volume to earn their margin spread, but to keep agents these days they will have to do more than that.

    Agents now have forums where they talk, communicate, discuss products, carriers and commissions earned. The only reason colluding IMO’s were successful years ago was because of the lack of transparency that allowed the ‘price’ fixing to go on unabated. IMO’s need to remember that their agents are their customers and clients and not just the insurance carriers. The IMO’s need to remember that the agents pay a price, in the form of a commission reduction for the services that the IMO performs. The IMO’s deserve to be remunerated for the value of the service they provide, not because they conspire to make it difficult for the agent to find someone else to do a better job.

    In this age of Facebook, Twitter, Youtube, Go-To-Meeting, text-messaging, forums and blogs etc, the agents eventually find out which products are good, which IMO’s are not, which carriers have unfair chargeback policies and who’s paying what. They also receive sales and marketing support from their peers and find out about other third parties that provide good training. Insurance carriers can use the same technology to train, supervise and monitor agents. With devices like the iPad agents, can use e-apps and e-signatures in the field, thus eliminating an IMO’s one remaing responsibility; to scrub and Fedex apps. Also, with GPS-enabled devices the insurance company can verify the location of the agent, providing him or her with the correct forms for the correct state. The proper forms and disclosures for each sales situation in real-time. I could go on and on. It’s impossible to put the genie back in the bottle and send us all back to the dark ages.

    In my opinion IMO’s in the future will not be necessary, for the functions that they provide today. They will have to adapt into the IMO of the future, that provides value to the agent and not just a layer of management that simply stands in the way to get some spread.

    There’s a lot of innovation that could be done that would allow the insurance companies to go direct to the agent without the agent being captive and by eliminating the unnecessary layers, agents could receive top notch remuneration while the insurance companies save money by taking full advantage of the internet technology that other industries are already using.

    The IMO’s could be part of this new landscape too, but only if they are willing to work with agents instead of colluding against then.

  4. Pingback: For Independent Marketing Organizations the Choice is Simple: Live Free or Die!

  5. id like to go back into the businees
    have tremendous past volumes
    presidents club at met life
    large fixed annuity production
    last active in 2006
    fully licensed

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