Distribution: A Rapidly Changing Landscape
The insurance industry’s distribution value chain has changed dramatically over the past couple of decades. The trend today is certainly in favor of separation between the manufacturer (the insurance company) and the distributor (the tied or independent third-party agent, broker, or alternative distribution partner).
Historically, most insurance companies employed their own sales and distribution teams, a direct sales force or DSF, or a variation of the model known as captive agents. While the share of the DSF distribution model still accounts for nearly 50% of some emerging markets’ sales, in more mature markets the distribution model has moved towards independent agency salesforces. These are not tied to any specific insurance company and can sell multiple insurers’ products.
The broker space was the next logical evolutionary step and is now being followed by bank and other forms of affinity distribution channels. And of course, we are deep into the online distribution space today which is causing the entire industry to re-evaluate who does what, when, for whom, how, and at what cost.
The Different Shades of Distributors
Distribution channel diversity is only limited by our imagination and regulatory as well as technological constraints. The wildest example of an innovative distribution method I have come across was travel insurance embedded in sunscreen lotion products sold at Boots pharmacies in London.
Challenge: The person who shares with me the best example and photo of another wildly innovative distribution channel example will have his or her name and picture, as well as the product or channel’s description, in The Insurance Management Playbook’s next edition.
Below is a list of insurance intermediation channels. It is far from exhaustive, as new channels keep popping up every day, but it illustrates just how many ways there are to get our product to market:
> Online aggregators
> Financial institutions and advisors
> Car dealers
> Travel agencies and airlines
> Sports, electronics, and other retailers
> Hotels and beach resorts
> Wedding planners
> Money wire-transfer businesses
> Telecommunications and utility companies
> Real estate agents and title companies
> Freight forwarders and shipping companies
> Structured financial products
> Golf clubs
> Funeral homes
Burgers, Distribution, and Egg Baskets
Distributors represent both an insurer’s lifeblood as well as its biggest threat: You love them when they send business your way and dislike them when they don’t. The situation is even worse when a broker moves business away from you. Has your broker ever moved a EUR 11 million premium deal out of a total portfolio of EUR 25 million? Do you know how much that hurts? What about a EUR 220 million premium affinity deal out of EUR 1 billion portfolio? I have seen this happen and it wasn’t a pretty picture to say the least.
On to burgers. The year 1997 witnessed the largest recall of beef in U.S. history. The ultimate number was around eleven million kilos or twenty-five million pounds. The date: August 17, 1997. The cause? E. coli. The processing plant? Hudson Beef. Its largest customer? Burger King, which accounted for 50 percent of its output. The winner? Tyson Foods. Burger King canceled its contract with Hudson Beef on August 23, 1997. This pretty much forced Hudson to sell itself for $680 million in a cash-and-stock deal – said to be a steep discount. That’s what could happen when you lose one of your biggest customers.
What lessons can we learn from Hudson Beef’s story?
Don’t put most of your “eggs” in one basket. It is very important to diversify your sources of business and make sure that your book is not vulnerable to one or a handful of distributors, relationships, or deals. Of course this prudence needs to be balanced with continuing to value and professionally serve our loyal traditional distribution channels.
It is not an easy task. Insurers’ biggest dilemma today, especially in the personal and small business space, is whether they should support online platforms, increase speed and simplicity, and reduce costs at the risk of upsetting their traditional broker and agent distribution base.
Change, however, is needed PRONTO!
The level of inefficiency that plagues our industry today is not limited to the way insurers and reinsurers operate. The distribution model remains overly product-focused and people-driven (as opposed to customer-focused and technology-driven) at the sales and servicing stages, even for most basic and commoditized products such as auto, home, and package small business commercial solutions.
The level of online sales penetration is rapidly increasing and disrupting traditional distribution channels, although the level of automation still varies significantly across product lines and countries. Take the personal auto space in US and the UK: 25% of US consumers buy their auto insurance online versus a whopping 60+% across the pond in the UK.
This rapid transformation in consumer preferences and behavior is leading insurers and distributors alike to scramble for solutions.
Legacy IT systems and operational processes, insurer and broker/agent resistance to giving up control, and fear of change are a few elements that are causing a disconnect between customer expectations and the industry’s modus operandi.
Back to Basics: Focus on the Customer
As I urged in my first blog on Customer Centricity, the customer must be at the heart of everything we do. What do today’s personal and small to medium size commercial customers want from distributors?
> Better segmentation and profiling
> Deeper understanding of their lifestyle and business risk needs
> More accurate matching of products and services that suit them
> A LOT more connectivity
> Wider self-servicing options
> Greater control and autonomy> More speed and simplicity overall
> Less paper and complexity
Suffice it to say that the industry as a whole is NOWHERE near ready to adapt to the rapidly-changing consumer purchasing behaviors.
Distributors, including some aggregators and other online platforms, who lack scale and don’t optimize technological innovation are slowly losing their edge. They will face stiff competition from leaner and more customer-friendly start-ups that truly put the customer in the driver’s seat through the use of better segmentation and matching technology, predictive modelling, and publicly-available financial consumer data as well as social media.
Our industry remains highly intermediated through traditional channels. Unless the distribution space changes dramatically and quickly it risks being taken over by the future Amazon, H&R Block, Turbo Tax, Zappos, iTunes, or E-Trade of insurance.
As Nassim Taleb argued, just because you haven’t yet seen Black Swans it doesn’t mean they doesn’t exist.