Flashcards in Chapter 8 Distribution Channels Deck (22):
The main distribution channels
-Insurance intermediaries (brokers)
-Brokers should act independent of any individual insurer.
-They should choose a product which best meets the clients needs in terms of premiums and benefits.
-They may be remmunrated via commission by companies' whose products they sold.
-These are sales people tied to either one or a group of insurance companies.
-They sell to their clients products only from these insurers.
-Typically they may be employees of a bank.
-Tied agents are also remmunerated via commission payments by companies the agent is tied to.
-Usually employees of an insurance companies hence will only sell products of this company.
-Remmunerated by commission and/or salary
-salesperson initiates sale using leads
-This takes four main forms:
-internet advertising and comparison websites
-In case of mailshots the insurer initiates the sale.
-In case of telephone selling it could be either prospective policyholder or insurer.
-IN case of press it is arguable who initiate.
-this is a process by which an insurer obtains permission from an employer to access its worksforce and sell its products to them.
-the distributor aims those employees may have cover for only themselves and not dependents or do not have adequate employer-paid cover.
-this form of distribution in unlikely to be undertaken for LTCI products, but already part of health cash plan and simple PMI.
Different types of commission
-Initial & renewal commission
-Alternative commission structures
-A form of Initial commission
-Lump sum paid by insurer to distributor for new business written.
-May be expressed of sum insured or first premium.
-this will involved the insurer in some form new business strain.
-Indemnity commission may be paid to any distributor who needs cash up-front to develop his/her business.
-The adviser earns indemnity commission over a defined period which is normall stated in months.
-if a policy lapse before the commission is fully earned then insurer may clawback a proportion of the commission from distributor, which is deemed unearned.
-commission payable upon policy renewal, usually lower than initial commission.
-this encourages distributors to promote persistency.
-every premium paid by policyholders entitles the distributor to a proportion of premium.
-level commission doesnt involve any new business strain.
-it takes longer for distributor to earn their commission.
Alternative commission structures
-Initial commission may sometimes be spread over a limited number of years.
-commission is sometimes paid as a % of SI.
The effect of different channels
Effect of different channels: Demographic profile
-Different channels are likely to appeal to different people of sophistication and level of income.
-this will be reflected in the experience of lives taking out contracts through each channel.
Effect of different channels:Contract design
-The higher the level of client sophistication the greater the complexity of products sold.
-Different methods of sale will suit different products.
-An insurance using more than one distribution channel may sell more than one version of the same product, varying by channel sold.
Effect of different channels:Contract pricing
1. effect on demographic assumptions, including the effect of underwriting.
2. the effect on the need for competitive terms.
Contract pricing: effect on demographic assumptions
-level of underwriting will be linked to marketing
-the level of underwriting will e reflected in the demographic assumptions used for pricing.
-Persistency rates are likely to be affected by the level of financial sophistication of policyholder.
Contract pricing: effect on need of competitive terms
-Insurance intermediaries will recommend to their clients insurer with most competitive rates, all else being equal.
-a bank will want products sold by its employees to be reasonably competitive or this could damage its name.
-Members of own salesforce will not be in a competitive situation.
-Worksite marketing enables premiums to be reduced because of homogeinity of risks and large pool of risks.
-There may be expense savings especially if employer allows premiums to be deducted from payroll.
-Employer purchases group covers on behlaf of employees.
-there generally both tax and risk-pooling reasons why this is efficient.
-products may be distributed through insurance brokers.
Groups risks: large groups
-The role of the intermediary
-responsible for most communication & data gathering
-may be the conduit for money receipts & payments
-insurer's ability to influence risk attitudes of the employer directly is limited, since relationship is only with the broker.
Benefits to the employer :Group insurance
-Employer is assured good level of service if they deal with a national broker.
-This will include an annual audit of appropriateness of protection levels & structures, comparative analysis in terms of securitym products available & price.