The Future of Independent Life Insurance Distribution

by C. Bayne Northern, MSM, CLU®, ChFC® for the Winter 2012 issue of The Wealth Channel Magazine

How historical trends, future threats and opportunities are shaping the life insurance industry.

This research paper provides an insightful and comprehensive review of the evolution of the consumer, the profile of the independent producer, the impact of the financial crisis of 2008, as well as the historical trends, future threats and opportunities for the life insurance industry.

The evolving consumer presents future opportunities and potential threats resulting from increased diversity, changing family structures and the erosion of industry trust.

Key research findings include:

• Hispanic, Asian and African American ethnic groups are growing at an accelerated rate.

• Basic family structures are evolving toward multigenerational households.

 • Women are the primary decision-makers in African American and single households. • Generational differences influence the propensity to purchase life insurance, the preferred delivery method and product preference.

• The middle market determined to be an under-served segment for pure protection products and the wealthy with upside market potential for investment-related life insurance products for wealth transfer and estate planning purposes. Research regarding the independent producer reveals key differentiators among producer segments, provides an overview of behavioral trends and identifies critical sales support issues.

• Producers in the independent channel are differentiated by affiliation, type of firm if affiliated, compensation structure and the product mix of their book of business.

• Troubling behavioral trends include the aging of the life insurance sales force, the lower productivity of experienced producers, the discontinuation of securities registrations, and the agent turnover and exodus from the industry.

• Four critical sales support areas that facilitate growth, efficiency, productivity and proficiency of a producers practice are defined as: marketing and business development, technology, back office support and professional development.

The study of the financial crisis of 2008 provides a discerning overview of its significant, negative impact on the life insurance industry including the erosion of earnings, decrease in capital and surplus, forced bankruptcies, necessitated government bailouts, stimulation of rigorous regulation and the damage to the industry’s reputation.

The analysis of historical performance in the life insurance industry addresses the industry’s shrinking capacity, past sales trends, market share by product type and the recent consumer “flight to safety.”

• Historical trends in the life Insurance industry reflect a decline in the number of insurers as a result of economic factors, regulatory environment, and industry competition and consolidation.

• The number of independent agents is projected to continue to decline.

• Life insurance sales had been demonstrating steady sales growth peaking at $14.3 billion in 2007 (influenced by STOLI and IOLI purchases) and then dropping precipitously by 18 percent to $11.8 billion in 2009, with fixed universal life dominating market share from 2004 to the present.

This research paper concludes by identifying and examining threats and opportunities and their implications for the future of independent life insurance distribution. An overview of a LIMRA scenario-planning article provides an insightful, futuristic view of four unique scenarios based on assumed, predictable trends and unpredictable uncertainties. Under all four scenarios with varying, underlying, environmental circumstances, there were common themes: the consumers’ view about the need for life insurance as pivotal to the future of the life insurance industry; government regulation as important and influential in driving or discouraging competition and/or consolidation; the three ethnic groups, Hispanic, Asian and African American, as important demographic segments on which to focus; face-to-face, producer-driven life insurance sales dominating distribution; and fixed universal life insurance maintaining the largest market share.

Opportunities and threats are defined for the consumer market, the independent distribution channel, and product design and pricing; the influence of different but possible economic and regulatory environments is also contemplated.

Consumer opportunities are identified in the:

• Three ethnic groups, Hispanic, Asian and African American, with the Hispanics making up the largest segment and the African Americans with the greatest probability of market penetration.

• Aging Gen X and Gen Y with increasing income and accumulated assets are providing life insurance sales opportunity with the development and implementation of technology and online tools.

• Middle market and wealthy household segments presenting pure protection and investment-related life insurance product sales potential, respectively.

• Evolving, multigenerational family structure indicating the need for revising contract structuring and titling.

• Women’s market representing a unique opportunity for future life insurance sales due to their high level of engagement in the workforce and their position as the primary decision maker in single and African American households.

Insurers will attract independent producers through “best practice” sales and service desks and a broker-dealer platform that provide optimal sales support for prospecting, technology to increase efficiency, back office support and professional development. The insurer of tomorrow must be able to attract and support multilingual producers and understand broad cultural differences. Unique product design and pricing opportunities are presented by the ethnic groups, middle market and the wealthy. A sluggish economy may influence consumer concerns and raise awareness of the need for life insurance, and a steady, stable regulatory environment will support and sustain life insurance sales growth.

Threats include the inability of the insurance industry to reach important ethnic groups, recruit and retain talent, provide adequate producer practice management support, curtail the expansion of online distribution and maintain product profit margins, which could individually and/or collectively have serious implications for the future of life insurance distribution. The backdrop of a peaceful and prosperous economic climate coupled with either a restrictive or relaxed regulatory environment could potentially create an untenable situation for the future of independent life insurance distribution.

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