Chapter 8 Distribution Channels

Question 1

The main distribution channels

Answer 1

• Insurance intermediaries (brokers)
• Tied agents
• Own salesforce
• Direct marketing

Question 2

Insurance intermediaries

Answer 2

• 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.

Question 3

Tied agents

Answer 3

• 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.

Question 4

Own salesforce

Answer 4

• 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

Question 5

Direct marketing

Answer 5

• This takes four main forms:
• mailshots
• telephone selling
• press advertising
• 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.

Question 6

Worksite marketing

Answer 6

• 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.

Question 7

Different types of commission

Answer 7

• Initial & renewal commission
• Level commission
• Alternative commission structures

Question 8

Indemnity commission

Answer 8

• 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.

Question 9

Clawback arrangements

Answer 9

• 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.

Question 10

Renewal commission

Answer 10

• commission payable upon policy renewal, usually lower than initial commission.
• this encourages distributors to promote persistency.

Question 11

Level commission

Answer 11

• 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.

Question 12

Alternative commission structures

Answer 12

• Initial commission may sometimes be spread over a limited number of years.
• commission is sometimes paid as a % of SI.

Question 13

The effect of different channels

Answer 13

• Demographic profile
• Contract design
• Contract pricing

Question 14

Effect of different channels: Demographic profile

Answer 14

• 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.

Question 15

Effect of different channels:Contract design

Answer 15

• 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.

Question 16

Effect of different channels:Contract pricing

Answer 16

• Two aspects
  1. effect on demographic assumptions, including the effect of underwriting.
  2. the effect on the need for competitive terms.

Question 17

Contract pricing: effect on demographic assumptions

Answer 17

• 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.

Question 18

Contract pricing: effect on need of competitive terms

Answer 18

-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.
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Question 19

Group risks

Answer 19

• Employer purchases group covers on behlaf of employees.
• there generally both tax and risk-pooling reasons why this is efficient.

Smaller groups
-products may be distributed through insurance brokers.

Question 20

Groups risks: large groups

Answer 20

• 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.

Question 21

Benefits to the employer :Group insurance

Answer 21

• 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.

Question 22

Benefits to insurer: Group insurance

Answer 22

• achieve of legal contract with minimum administrative expenses.
• However insurer may be limited in other ways:
• opportunity to build relationship firsthand with purchaser of insurance.
• chance to influence retention of this business
• opportunity to engage directly with responsible for the lives insured