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

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

Deciding how a farm mutual distributes or sells its products is a critical operational issue. The goal of this three-part series was to provide a high-level overview of insurance sales channels and issues to consider during the strategic planning process. The first article discussed the three sales channels: direct response, captive agent, and independent agency. Last month’s article went into a little more detail on the advantages and disadvantages of the direct response and captive agent systems. For the final article, let’s first discuss strategies to succeed with independent agencies and end with issues to consider when planning for profitable growth.

The independent agency system is the most commonly used sales channel for regional insurance companies. Two key distinctions of independent agencies from the direct response and the captive agency system are: independent agencies represent many different companies; and generally, independent agencies own the rights to policyholder renewals. The ownership of renewals can be a major issue because it means an independent agent has the right and the ability to switch business from one carrier to another without a carrier’s permission. Because independent agents control the policy renewals, companies give up a lot of control in the sales process.

Potentially offsetting the downside of reduced control of policyholder renewals is the fact that it is easy for companies to get up and running quickly and cheaply in multiple locations with multiple independent agencies. The fixed costs of establishing a presence in an independent agency are low as independent agencies staff and maintain their own offices and assume responsibility for all the expenses associated with running those offices. Despite the comparatively low fixed costs, companies sustain higher variable costs (cost per policy sold) in the form of higher commissions paid to independent agents.

Because the process and fixed costs to establish a presence with independent agencies are relatively easy and inexpensive, there are tremendous opportunities for growth. Essentially, the only things companies need to get started with independent agents are a rate manual and a contract; but to have a greater chance of success with an independent agency, a good screening process for potential agents needs to be put in place. The screening process should include a background check to ensure the agent is ethical, and the process should confirm the agent needs the products the company offers. This is often referred to as making sure there is a “good fit” for the company. Also, to help prevent misunderstandings and to clarify expectations, a good agency/company contract is necessary. A potential resource for sample agency/company contracts is the agent’s trade associations’ contracts. In addition to providing samples, many associations will help review the agency/company contracts.

Although it is easy to establish a presence and grow with independent agents by simply appointing a lot of agencies and having the lowest rates, it is important to profit; growth without profitability is not a recipe for long-term success. To grow and prosper, the company needs to be able to articulate its strengths to the agency and determine if the company will “fit” in the independent agent’s lineup of companies.

Because independent agents have access to multiple companies, even the farm mutual with a limited product line can have a “good fit” and an important place in an agency as long as the independent agent truly needs the farm mutual’s particular product or specialty. Generally, if an independent agency has established relationships with other carriers that provide similar products and services, the only thing left to compete on is price, which makes it difficult to establish a presence and be successful with that agent. For long-term profitability and success, a company should seek out an agency for which it can fill holes in the agent’s product lineup and provide services and regional expertise other carriers in the agency might not have.

Before deciding which product distribution channel – direct response, captive agent, or independent agent – makes the most sense, it is important to take time to do some basic planning by answering some simple questions. A good starting point is to ask: “What does the board and management envision the company to look like in three to five years?” From there it is important to ask how much the company wants to grow, if it has the capacity to achieve that growth, and if areas exist where growth might not make sense. Capacity considerations should include: policyholder surplus, infrastructure-computer systems, and personnel.

Question the company’s reinsurance needs as well. Because reinsurance tends to be a large expense, if not properly considered, it could be prohibitive to potential growth. Planning questions should also include what product lines will be sold and what skills underwriters and claims personnel will need in order to support the company’s expansion. From that point, determining which distribution channel makes the most sense for the company should be much easier.

These articles were not intended to be comprehensive; rather, my goal was to provide some points to ponder for a company planning to grow. If there are questions or items I can clarify, please e-mail me. I welcome the opportunity to discuss these topics further.

Posted: Friday, July 18, 2008 12:00:00 AM. Modified: Friday, July 18, 2008 1:45:39 PM.

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