For as long as there have been insurance companies seeking to offer life insurance or annuity policies to the consumer, the insurance agent has been a ubiquitous stalwart in the process. Evolving from individuals traipsing door-to-door carrying a “debit book” and collecting 10 cents a week for small industrial policies to the modern-day agents offering sophisticated estate and financial planning, the agent has always been at the center of the insurance selling-buying process. Ironically, for all the agent has contributed and for as long as the agency system has been the backbone of insurance distribution there have been those either predicting or actually promoting its demise.
As incongruous as it might seem, most of the attacks on the agency system have come from those who stand to benefit the most from the efforts of the agent – the insurance companies. During my 40-plus years working as an agent or with agents, the one constancy has been a desire on the part of the industry to discover an “alternative” to the agent distribution system. From the perspective of the companies, that alternative could be anything, just so long as it does not involve the use of agents. The insurance industry’s attitude towards agents has always been, “Agents are okay, but if we could find another way to sell our products, we would do it faster than an automatic bank draft.” It is not for lack of effort that companies have failed to rid themselves of agents, but because insurance remains a product that is not ordered and must be sold.
Insurance companies have been dissatisfied with the agent system because it is viewed as expensive and inefficient. Expensive because companies are required to recruit, train, support and supervise agents even though the vast majority of them survive only a short time in the insurance business. The agent system is judged inefficient because even the best agents barely average one sale per week.
Frankly, for most of the 20th century, when the insurance industry faced little direct competition and high margin products were the norm, the expense and inefficiency of the agent system could be tolerated. However, as the century drew to a close, internal industry competition stiffened while simultaneously banks and investment firms began to encroach on what had been the insurance industry’s exclusive territory.
Shifting Consumer Needs Put the Insurance Industry Out of Touch
Coincidently, the rapid extension of human longevity achieved during the 20th century caused the needs of the consumer to shift dramatically away from the industry’s traditional products. Long-established life insurance products designed to protect against the economic costs associated with dying young lost their appeal as consumers became more concerned with the economic costs of living longer. The convergence of these challenges resulted in declining sales of traditional high-margin life insurance products causing profit margins to erode and the costs inherent in operating an agency system to become more obvious and challenging for the companies.
The insurance industry reaction to the situation was predictable and typical of the way institutions respond to change. Especially change that impacts the very core of an institution’s market and operating business model. The initial response is to deny the change, then to lay low and hope it will go away. Next the institution seeks to blame others for the failing performance. The final step is to take short-term actions that may appear to provide some immediate relief, but will in reality cause long-term systemic damage that may cause the ultimate failure of the institution.
Life insurance companies became the poster children for this type of reaction to change. After almost a century of benefiting from life insurance being the first and often only financial product owned by individuals, the companies simply could not comprehend that the consumer could possibly view life insurance as anything other than a necessity. The belief among companies was that as long as they “stuck to the basics,” everything would be okay. That’s a great philosophy provided the basics have not changed. However, in this case the basics of consumer needs had indeed changed.
Ignorance is Never Bliss
When ignoring the problem failed to stem the tide of declining sales the companies slipped easily into the typical bureaucratic approach that says, “If you make a mistake, blame someone!” In this case, that someone to be blamed was the agent and the system under which the agent operated. Once it had been firmly established in the minds of insurance company executives that the genesis of their problems rested with the high cost and inefficiency of the agency system it was a short step to taking short-term actions that seemed to provide some immediate remedial relief. However these short term decisions set in motion long term industry changes that today threaten not only the insurance agency system but even the future of the companies.
What happened was simple. After decades and millions of dollars invested in building, owning and controlling what had become arguably the most powerful sales force in any industry (after all, the agents were selling products that few wanted to buy) the companies decided the solution to their current problems was to “set the agents free.” The insurance company executives viewed the agency system as a fixed expense and under pressure to reduce expenses saw the agents as an easy target. The theory was to convert the fixed expenses of the agency system into variable expenses. This was to be achieved by giving up the control and exclusivity of the agent system so that there would no longer be a requirement to recruit, train, house and supervise agents. The belief was that if high fixed expenses could be reduced then the companies would return to the old level of profits.
Success at an Excessive Cost
The insurance industry was successful in achieving this result – to a point. The old system of captive agents with its incumbent expense to recruit, house, train and supervise the agents rapidly faded away. Existing agents were given their “independence” and the cost of dealing with these agents became variable because the only expense occurred if and when the agent sold something. For a couple of decades this approach to insurance distribution was actually quite effective. With most distribution costs in direct proportion to the amount of business sold, insurance company fixed marketing expenses were reduced substantially and profits increased. Agents and consumers benefited as well. Released from the requirement to sell only the products of one company, agents were now free to sell the products of any company, thus affording their clients more choice and the opportunity to offer better service to clients created the potential for more sales.
The primary reason the change from captive to independent agents worked so well for all involved was the large pool of experienced agents who had previously been recruited trained and supported by the companies. These experienced, well trained agents did not go away; they just changed how they operated. However, this effort to reduce costs has not turned out to be a long term panacea for industry problems.
Along with pushing the agents out the door, insurance companies also ceased to recruit, develop, supervise and train new agents. What the companies did was to trade reduced distribution expenses for loss of direct control and access to the distribution system. (In and of itself, the strategy of giving up access and control of distribution is a fatal action that ultimately threatens the very existence of a company.)
The IMO is Born
To fill the gap left by the companies in dealing directly with agents there emerged a new type of organization – the independent marketing company. In order to receive access to product and support, many of the newly-independent experienced agents joined these organizations. However, by their nature as pure marketing companies, many of these independent marketing companies had neither the temperament nor the resources needed to develop, train and supervise new agents. As a result, the new agents recruited into the business often received only a shadow of the training and supervision their predecessors had received.
These actions did reduce insurance company marketing expenses and improve profitability, but the crisis emerging in the agency distribution system today can be tied directly to these changes. What is happening now is that those well trained and experienced agents who were “set free” by the companies 25 years ago are now reaching retirement age. And unlike generations before them, there is not a stream of younger, well trained agents to take their place. This problem is compounded by the fact that at the same time agents have been receiving less training and supervision, the complexity of products offered by the insurance industry has dramatically increased.
The impact of this convergence of complicated products being sold by poorly supervised and trained agents is already having a negative impact on agents and companies. During the last few years there has been an explosion of consumer complaints, regulatory investigations and class-action law suits. This environment has eroded both the reputation and credibility of the entire insurance industry.
Unfortunately, the reaction of insurance executives to this situation is shortsighted and misses the point. Rather than making the investment to properly train the agent in product knowledge and appropriate sales techniques many companies have adopted a “police-state” mentality. These companies have implemented a “post-sales” supervisory process instead of the more expensive and time consuming “pre-sales” training program. Under this approach the companies have some “compliance clerk” (who has never made a sale of any type) make direct phone contact with the policy applicant.
This activity can be disconcerting and confusing to the potential policyholder and does little to instill policyholder confidence in the agent who has made the sale. The irony is that, despite reduced formal training for the agent, only a very small percentage of sales are improper. Yet the approach taken by companies to weed out a few bad seeds tars even the very best agents and results in a significant loss of business that had been properly sold. Insurance companies have taken this knee-jerk approach to “sales supervision” because it seems easier and less expensive than proper pre-sale training. Using this approach virtually everyone one – the customer, the agent and the company – end up losers.
To make matters worse for insurance companies the competitors in the investment community have pounced on the current regulatory and legal problems of the industry in an attempt to take control of the distribution system; not only for investment products but for insurance products as well. Of course, like always, this is not about better customer service but about money.
After the burst of the stock market bubble in 2000, broker dealer organizations began to lose revenue as their registered representatives (who are tied to the broker dealer for the sale of investment products) began to sell more and more of the new annuity products being offered by the insurance companies. This was good for the insurance companies but bad for broker dealers.
Smartly leveraging the self-inflicted weakness of the insurance industry’s lack of direct control over the agent distribution system and capitalizing on the negative publicity of consumer complaints, regulatory investigations and class-action law suits the broker dealer community set itself up as the best group to eliminate these “abuses.” This was accomplished by lobbying their association the Financial Industry Regulatory Authority (FINA) to implement a regulation (05-50) that basically prohibited any registered representative from selling insurance products, without the approval of their broker dealer.
For broker dealers this meant not only tighter control of their distribution system, but increased revenue. For insurance companies the result was even less access to individuals who sold their products and to be placed at the mercy of their competitors who could now decide which financial and insurance products registered representatives would be allowed to sell. Since most of the top insurance producers were also licensed as registered representatives for broker dealers, insurance companies lost access to as many as one-third of their very best agents. The resulting decline in insurance product sales was a natural result.
Of course the agents are always blamed, but the fact is insurance company executives have no one to blame for their current problems than themselves. An initial failure to recognize and respond positively to changed consumer needs combined with shortsighted actions to reduce distribution expenses has finally brought about the potential demise of the pure insurance agent distribution system. So where does this lead us?
The Road to a Brighter Future
To extricate themselves from the current decline in sales and the distribution morass the executives of insurance companies and the leaders of the industry have three options: 1) return to the traditional structure of the captive agent distribution system, 2) accept the broker dealer system as the de facto distribution system and seek “selling arrangements” with these firms or 3) view the broker-dealer system as a competitor and threat to their future and decide to “beat” the broker dealers on their own turf.
The return to the traditional structure of the captive agent distribution is, at best, wishful thinking. The genie is out of the bottle and insurance companies do not have the commitment, patience or resources to rebuild this system.
Most companies seem resigned to succumbing to the new power of the broker dealers to control access to distribution. This certainly appears to be the easiest way to solve the distribution conundrum. The theory is basically to substitute the structure of the broker dealer for that of the independent marketing company. In exchange for control of virtually all distribution of financial products the broker dealer assumes the responsibility for recruiting, training and supervising both existing and new producers. Insurance executives see the apparent high regulatory environment of the broker dealers as a buffer between the sale and the producer. The reasoning is that since it is the broker dealer who has the responsibility for recruiting, training and supervising the producer and the insurance company has no direct access or control over the actions of the representative selling the product then the company cannot be held accountable for any inappropriate sales. In addition, this approach maintains the current structure of variable rather fixed marketing expenses. The insurance company pays commissions directly to the broker dealer and only when sales are completed.
The Risks of Broker-Dealer System
Of course, this approach does have its downside risks since insurance companies have absolutely no power to initiate or control the sale of their products. That means an insurance company could be completely cut out of the distribution process and has no alternative way to sell its products. It could be argued that this was the case with independent marketing companies; however the relationship between the insurance company and the independent insurance marketing company was much more symbiotic and natural. The broker-dealer network is not part of or loyal to the insurance industry and has access to revenues from other products not available to the independent insurance marketing company and thus can be less responsive to and more demanding of the insurance company.
In essence, by adopting the strategy of transferring the access and control of product distribution to the broker dealer network the insurance company places itself at the mercy of what is, in reality, a competitor in the financial services industry. With no viable alternative the insurance company must go hat in hand to the broker-dealer community in order to sell product. The insurance company can be held hostage and “held up” if they wish to sell product. The irony is that expenses could increase and profit margins shrink to a level that is worse than when insurance companies first sought to distance themselves from the captive agent distribution system.
The final option available to insurance company leaders is to view the broker dealer network as the competition – an enemy. The insurance companies could adopt the attitude that control and access to distribution is critical to their future and beat the broker dealer at their own game. This can be accomplished in a number of ways.
First, companies could begin to develop creative and innovative products that clearly differentiate from other products on the market. Unfortunately insurance companies have a better record of “copying” rather than creating new products, but the potential is certainly available. If companies can differentiate products based on value and benefits as opposed to bells and whistles they can create a demand for the product among broker dealer representatives. With enough demand for the product coming from registered representatives the broker dealers will come to the companies and seek the product. In short, success by attraction. Motivated by the demands of their producers the broker dealers will be more likely to accept the product on insurance company terms. Unfortunately, industry history tells us there is very little likelihood insurance companies can effectively implement this strategy.
The more likely possibility is for insurance companies to begin to develop their own broker dealer network that competes for registered representatives. Superior support, benefits and product variation offered through an insurance company controlled broker dealer network could become strong competition for the existing broker dealer network. The result would be a new system under which the insurance company has assured access and control over the distribution of product.
The reality is that by competing directly with broker dealers for control of distribution the insurance companies will return to a new form of the captive distribution system they abandoned in the 1980s. This will require the increased investment and commitment to supervise and control the sales process, but the alternative is bleak.
Some will argue that this approach will “offend” the broker dealers because they will see this action as competing directly with what they do and as a result they will shut out the insurance company’s products completely. So what? Even if that is the case, so be it. Insurance companies have to realize it is okay not to try to be all things to all people. The reality is simple: this is competition. It is a competition for control over distribution and the sale of product.
The New Paradigm
What insurance companies must come to grips with is that if they do develop their own robust controlled broker dealer system using top-flight service, support and creative products they will completely reverse the leverage of the playing field. In order to maintain the relationship with their current registered representatives, independent broker-dealers will be forced to come to the insurance company hat in hand to gain access to product.
So what does all this mean for today’s independent insurance agent and the agent distribution system?
Despite the current turmoil and threats to the agent system it means that the individual sales person remains the linchpin in the sale of all financial products.
Fortunately, the battle is over which segment of the financial services industry – insurance companies, broker dealers or even banks – will ultimately control access to distribution, not the elimination of the individual producer. The good news is that the future and opportunity for those individuals who can sell financial products – insurance, investments or a mix – is brighter than ever. The key is for the individual producer to put themselves in the best position to take advantage of this opportunity.
No matter what the ultimate outcome of this distribution battle may be, there will always be a cadre of pure insurance agents selling product. However, this group will be more of an adjunct to the mainstream of production. There is already an obvious blurring and convergence of pure insurance and investment type products. Very soon it will be difficult to tell the difference and fewer and fewer pure insurance or pure investment products will be developed. This is neither a good or bad thing, but a reality and individual producers need to recognize and prepare for as they plan their future.
For those of us who have been in the insurance industry, the best scenario would be for insurance company executives and leaders of the industry to come to their senses and recognize that not just the future of the agent is at stake, but their very own survival as viable institutions is at risk. Companies should once and for all accept and recognize that nothing gets sold unless someone (not some thing) sells it. Company executives don’t even have to care about individual agent producers, but if they care about their own future they do need to recognize that those who control the access and exert control over distribution will be the winners.
This all bodes well for the professional individual producer who can operate with either group – broker dealer or insurance company – that wins the battle over access to the producer. It will mean better training, support, supervision and access to wider product options.
So where have all the agents gone? Well, they are still here and are still critical to the sales process but they have just gone to a different place.