Getting Your Product Out There: Issues to Consider When Distributing Your Product

By Christopher Shipe, AIT, CPCU, president/CEO, Loudoun Mutual Insurance Company

New business is very important to a company’s long-term success. Even if a company does an outstanding job retaining existing policyholders, through normal attrition a company’s business will decline over time. Because of the importance of choosing the right way to sell products to generate new business, this month let’s take a more in-depth look at what to consider when evaluating the direct and captive distribution channels.

Selling the product directly to the public, or the direct model, has the lowest variable sales cost (cost per policy). But the trade-off is the potentially high fixed cost of putting all the systems in place. Once the proper infrastructure/automation is in place, the variable cost to sell additional policies is relatively small because salaried customer service representatives generally handle the sales.

There are issues to consider during the strategic planning process to implement the direct model. These issues include whether enough premium volume is generated to adequately cover the costs of installing computers, paying customer service representatives, and advertising products; and if the proper screening systems are in place to get qualified prospects. Because farm mutuals tend to have limited product lines and/or operate in limited geographic areas, if the proper screening systems are not in place much of the website traffic or many of the phone calls may not be qualified leads.

Along with the issues to consider when using the direct model, farm mutuals need to think about strategies to mitigate associated risks. Strategies a company might want to consider include looking at outsourcing call centers and business processing functions; working with Internet aggregators that allow potential customers to comparison shop for insurance and then, for a fee, forward the leads to the company; and/or forming joint ventures with other companies.

It isn’t uncommon to work out arrangements with outsourcing vendors to price services based on premium volume. These arrangements have the potential to allow companies to pay only for the amount of services used, avoiding large, upfront fixed costs generally needed to implement the direct model.

The captive agent model is quite a bit different from the direct model, but it also has issues and strategies to consider. Companies that use the captive model rely on agents rather than employees to sell their products. Variable costs are higher compared with the direct model because of the commissions paid to captive agents; and because captive agents only sell for one company, the company is responsible for providing the majority of the training and support to the agents; and to ensure that the agents succeed, the company needs to have a fairly broad product line available. If having a limited product line is an issue, it can be remedied by forming alliances with other companies or reinsurers that can write the products the farm mutual may not be able to offer. Companies could also create managing general agencies, or home office agencies. By starting a managing general agency, the home office creates a centrally administered agency that contracts other insurance companies to sell the products the home office doesn’t offer. If executed properly, a managing general agency can generate commissions that can turn into an additional profit center for the farm mutual and additional income for captive agents.

When planning for new captive agents, provisions need to be made to allow the new agents adequate time to build books of business large enough to be financially stable. Many times, agreements are made to provide the new agents with some type of base salary or, at a minimum, increased commission until the company gets properly established. Allowances will also need to be made to assist the agents with getting offices up and running.

For smaller farm mutuals, particularly ones that write in a limited geographic area, part-time captive agents may be a workable concept. Recruiting the local crop farmer to sell insurance to other farmers in the offseason could be a win-win situation. Many farm mutuals have also utilized director/agents. While these director/agents are generally very loyal to their companies and knowledgeable about the products offered, there are inherent conflicts of interest when they sell the policies and participate in the oversight of the company at the same time.

Despite the issues involved with these models, with proper planning and execution, both the direct and captive agent models can provide additional opportunities for new business and growth, which help ensure a company’s longevity and success. When planning, companies need to be aware of the costs and work associated with administering both models; however, major advantages exist for those that use these systems, including the degree of control over the sales process and the ownership of rights to the renewal business.

For the final article in this series, we will discuss the independent agent system and some other issues to consider when planning for growth.

Posted: Friday, June 20, 2008 12:00:00 AM. Modified: Friday, June 20, 2008 4:18:22 PM.

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