Insurance Marketing Systems
In order to become successful, an insurance company must have many customers, since the basic idea of insurance is that the premiums of many will cover the losses of the few. Hence, an insurance company must have an effective marketing system to survive as a going concern. The agency department (a.k.a. production department) of the insurance company is its marketing division, hiring sales agents and providing assistance to their sales efforts. Often, a special agent serves as the intermediary between the agency department and the sales agent.
Life Insurance Marketing Systems
There are a variety of different life insurance policies available, with different objectives, benefits, and costs, and different ways of marketing these policies.
With simple products, such as term life insurance, the direct response system is the most cost effective for the consumer, because the marketing of such products is much cheaper than using an agency network and the competition is much greater. Direct response marketing solicits business through advertising through traditional media, by telemarketing, or by the use of the Internet. The Internet makes its especially easy for consumers to compare policy benefits and prices, especially at the many sites devoted to comparing insurance prices.
For the insurer, the direct response model allows the insurer to sell to a much larger population than would be feasible using agents, and for much less money.
The nonbuilding agency system uses independent agents who are already selling life insurance, sometimes referred to as personal-producing general agents. The insurance company hires the agents as independent contractors through contract and pays the agent above average commissions in exchange for a stipulated minimum of business. These agents are not required to hire and train new agents for the insurer so they can focus specifically on selling. If the insurance company wants to expand the number of agents, it simply hires more independent agents.
The nonbuilding agency system depends on agents who are able to manage their own affairs without supervision, and who pay most of their own expenses. Thus, the insurance company does not have to pay for retail space, and other expenses, and can quickly establish a market in a geographic region where it is legally permissible for the company to sell insurance.
The agency building system involves hiring and training new agents that represent only the insurer. The insurer can expand sales by hiring and training more new agents. The agency building system has evolved into 2 different kinds of systems that differ by the amount of financial support that the insurer provides.
- With the general agency system, the insurer hires an experienced, independent insurance salesperson who will represent only the insurer. The salesperson is responsible for a territory, and for hiring and training new agents. The salesperson receives a commission based on the amount of sales generated by her sales team. The insurer generally pays for most or all of the expenses of hiring and training new agents, and pays some office and other miscellaneous expenses.
- The managerial system is the most expensive for the insurer. In most cases, the insurer opens a branch office and hires a manager, who is an employee for the insurer and represents only the insurer, for the branch office. The manager's main duty is to hire, train, and manage new agents, and to run the branch office. The manager usually does no selling, but is paid a salary and a commission on the business generated by his sales team. The insurer pays all of the expenses for the branch office.
Property and Liability Insurance Marketing Systems
Property and liability (P & L) insurance companies use basically the same sales techniques that life insurance companies use: direct response and agents. Many insurers are using multiple distribution systems that employ multiple methods of selling to increase market share.
The direct response system of selling is more limited when selling property and liability (P & L) insurance because of the complexity of most policies. Just about the only P & L insurance that is sold by direct response are personal lines, including homeowner's and auto insurance. Almost all commercial insurance is sold through the use of agents.
Another direct method of selling personal P & L insurance is through the use of mass merchandising where the insurance company sells to a group of people affiliated for a purpose other than for insurance—most commonly to employees of a particular company. A single policy is offered at reduced rates—typically 5 to 15% below what they could get on their own—and the premiums can be paid through payroll deductions. However, the employees usually pay the entire premium; there is no contribution from the employer. And while the insurance is offered to the group, anyone that wants to buy the insurance must satisfy the underwriting requirements of the insurer.
Similar to marketing life insurance, there are several categories of agency systems used to market P & L insurance. The simplest is the direct writer who is an employee of the insurer, and, therefore, only represents the insurer. The insurer pays all of the expenses of the employee, and the direct writers are usually compensated by a basic salary plus commission or a bonus.
The independent agency system (aka American agency system) consists of independent agents who can represent multiple insurers and multiple lines of insurance. The agents are paid a commission that varies by the line of insurance, and additional compensation is usually paid as a contingent or profit-sharing commission, if the loss experience of the insurer is favorable.
The agency owns the expiration rights or renewal rights of the policies, and if the insured renews the policy, the agent can select another insurer for the renewal. For this reason, independent agents get paid the same commission for renewals as they do for selling the policy, because otherwise the agency can place the renewal business with another insurer.
Independent agents also may adjust small claims or provide loss control services to the insured. In some cases, they may even bill the customer and collect the premium, although most insurers use direct billing.
Agents, as independent contractors, in the exclusive agency system represent only 1 insurer or group of insurers by contract, and are forbidden to represent any other insurance companies. Consequently, they do not own the renewal business of the insurance policies. In some cases, they may have some rights in the renewal business, but those rights terminate when the agency relationship with the insurer terminates. Generally, exclusive agents are paid the largest commissions on new business, and smaller amounts for renewals. This motivates the agents to sell new business, which expands the insurer's market.
The exclusive agent's main duty is to sell insurance. The agent may also, in some cases, adjust small claims, but the insurer always bills the customer directly and issues the policy.