New distribution methods will unlock markets for the life industry

According to Gerling’s latest Market Evaluation of Individual Risk Products, life insurance companies will increasingly focus on building robust distribution strategies to help drive profitability over the next five years.

The senior life insurance executives who participated in the study are anticipating that the ability to manage multi-channel distribution, develop technologically advanced delivery systems and support distribution branded products, will be the key factors in determining the success of their businesses in the future.

“It’s a major change facing the industry,” Gerling Global marketing assistant general manager Steve Vincent says.

“It’s clear that past distribution models are not appropriate for the future — if you’re a single distribution channel organisation, your prospects for growth are limited. To survive in the longer term, life companies must work out how to manage and support distribution across the whole market.”

But according to the study’s findings, life companies have work to do if they are to take advantage of this trend. Only 50 per cent of respondents currently think they have a core competency in distribution (see Table 1.)

Gerling Global general manager Brian Sussman believes that “for a life company to survive in the long-term, a multiple distribution strategy will be a necessity”.

“Life companies might not need to own all the channels, but they will need to provide high quality support to all sectors of the market.”

It is a market experiencing fundamental change.

Of the major changes executives believe will impact the market over the next five years, 50 per cent said distribution will become more powerful, 43 per cent nominated distribution branded products, 57 per cent picked multi-channel distribution and 36 per cent nominated increased emphasis on direct sales (see Table 2).

Importantly, the Financial Services Reform Bill (FSRB) has been and will continue to be the major force driving these changes, with a result that it will force more life companies to concentrate on their core competencies.

In addition, given the added responsibility it will place on them, it’s expected financial planners in particular will respond to the FSRB by targeting customers with higher premium potential, leaving the lower-end of the market to be serviced in other ways.

In Sussman’s words: “Life insurance companies can’t afford to ignore clients with a lower premium potential and are responding by building alternative distribution mechanisms.”

To better support this sector of the market, partnerships are already being formed between financial services organisations that have access to a large customer database and life companies with a product rather than distribution focus. This is happening, even though the Privacy Act has some implications regarding the transfer of data between such organisations.

Sussman thinks the trend for partnerships and new distribution companies will continue. This in turn will create a strong likelihood the new environment will result in a clear delineation between major distribution groups, ie those that are adviser or institutionally owned.

It is no longer enough to simply manufacture a product without providing additional support.

Gerling’s survey found that the ability to provide quality support to distributors across a number of channels will be a key challenge for the industry in the years ahead.

However, according to the evaluation survey, only 14 per cent of life companies currently think they have a competitive advantage in distribution support, indicating that this is an area that many life companies need to pay closer attention to.

Sussman says that if life companies don’t own a particular distribution function, they must be able to service one instead.

“Life companies need to find ways to become a more attractive option to financial planners. It won’t be through price, it’ll be through service. And not just product support, it’ll be through helping them to win more business,” Sussman says.

In the future, it is likely the capacity to offer add-on services, such as marketing and product support, will start to differentiate market players and have an increasing impact on the profitability of life companies.

Any information life companies can supply to financial planners to enable them to more accurately segment the market will be of high value.

Therefore, independent advisers are likely to increasingly favour companies that can provide data mining and data profiling services to allow them to develop more sophisticated marketing initiatives, which identify high-end customers.

The ability of life companies to provide these sort of services will not only impact sales through independent advisers, it will also impact sales through salaried advisers.

This will happen, as the capacity to provide the salaried sales force with details on the right type of client for a particular product, will likely lead to greater sales conversion rates.

The survey results acknowledge that companies do not currently perceive themselves as being good at building the infrastructure necessary to provide the support services valued by advisers.

However, given the importance of distribution support in determining the profitability of life companies in the future, many companies are increasingly devoting more resources to this area. Gerling’s survey found that distribution management rated second only to actuarial functions in terms of where companies are allocating resources.

One of the major ways life companies can increase the support they provide to financial planners is through a high technology platform.

“Our findings indicate that technology will increasingly assist advisers in delivering products and services, and help provide ongoing client support,” Vincent says.

The ability to deliver services through technology has come out the clear winner among the factors executives expect to be major forces for change in the industry over the next five years, with 79 per cent naming it as the most influential change agent within the industry.

“Technology will bring the product to the planner — it’s not about cutting out the adviser. It will mainly be used to support sales, not drive sales.”

Indeed, Gerling’s survey found that sales of life insurance products through the Internet are expected to remain low in the short-term. Fifty per cent of the senior executives who responded to the survey anticipate that the Internet will generate between only five and 10 per cent of sales. This is good news for adviser-based distributors and traditional direct marketers.

It is also a global trend which, according to Vincent, can be attributed to the fact that “risk products are still sold rather than bought”.

Overall, it is clear that life companies are recognising and responding to the changes being wrought by the FSRB. Gerling is expecting that findings from its 2002 survey will more strongly reflect the fundamental changes impacting upon the distribution structure of the life insurance industry.