By Sheryl Moore
Are you sticking it to your clients? You might be and not even know it.
The key to illuminating whether you are unknowingly putting your life insurance and annuity clients in a bad position with the products that you sell them is to identify what type of contract you have with the insurance company you are appointed with. For the purposes of this article, we will focus solely on career and independent agent contracts. After our discussion, I will let you decide if you are among those unknowingly sticking it to your clients.
The Career Contract
When life insurance and annuities were first developed, the insurance companies that manufactured the products began selling them through a career agent distribution. Career agents are sometimes referred to as “captive” agents. This is because these agents are confined to selling the products that are offered by the insurance company that they have a contract with, with very few exceptions. One such exception may occur when the insurance agent identifies a need for his client, which cannot be met by the products that are offered by the insurance company he is contracted with. For example, assume that the agent and client have identified that an indexed annuity best meets the client’s risk tolerance and needs for retirement. This becomes problematic when the insurance company the agent is contracted with does not sell indexed annuities. The insurance company that employs the agent in this example will likely grant an exception, when asked, for the agent to sell an indexed annuity that is offered by different insurance company, despite the agent’s “captive” status.
The Career Conundrum
Making the decision to sign a career contract with an insurance company is something that should not be taken lightly, however. Assuring the competitiveness of the products that are available to clients is key. Unfortunately, the career agent is often put into competitive situations where he may lose sales due to other companies’ products offering more competitive/less costly/more attractive features than the company that he sells insurance for. After all, no insurance company is dedicated to offering the most competitive product for all lines of business. Most insurance companies choose one or two key markets that they intend to be competitive in. Any ancillary products offered by the company are merely intended to ensure that their agents don’t sell products, which they do not offer, with a competing insurance company. In fact, I have worked at insurance companies where my superiors have been quoted (of their captive distribution and the products they develop), “They’ll sell what we give them because they have to!” Career agents need to demand competitiveness in the life insurance and annuity products that are available for new sales to their clients.
The Charismatic Side of Career
Don’t let me mislead you; being “captive” has its benefits. As a captive insurance agent, the agent is considered an employee of the insurance company he is contracted with. Because of this, career agents receive numerous benefits such as health insurance, dental coverage and office allowances. These benefits are typically provided for in the career contract at the time the insurance agent gets appointed with the insurance company. Also consider the high level of training that is provided to career agents, and it may be hard to argue against this contract, particularly for those that are new to the insurance business.
The Independent Contract
Over the past fifteen years, the insurance industry has changed. Insurance companies have found more efficient, less costly ways to conduct business. One of the solutions in this quest for maximum efficiency has been the transition from selling insurance products through a career agent distribution, to using an independent agent distribution for sales. The independent agent distribution is largely defined by marketing organizations (sometimes referred to as IMOs, FMOs, NMOs, etc), who act as third-party intermediaries between the insurance company home office and the insurance agent. The marketing organization performs numerous tasks that ordinarily would be performed by the home office in a career distribution arrangement; agent contracting, agent licensing, training, continuing education, marketing support and sales assistance -- just to name a few responsibilities. In exchange for administering these functions, the marketing organization is paid an override commission on all sales that their contracted agents submit through them. There may be more parties to the transaction than in a captive distribution, but overall the cost to the insurance company is less by using the marketing organization model. This is because the marketing organization gets to do what it does best on a regular basis, and on a large scale: recruiting agents and distributing products. Insurance companies are left to focus on what they do best: manufacturing products.
The Incredible Side of Independent
The beauty of being an independent insurance agent is that the agent can contract with any and all of the insurance companies they want. There is no restriction on whose products the independent agent can sell; he always has access to the most attractive and competitive products. If the marketing organization he is appointed with doesn’t offer a contract with the insurance company that he wants to sell products for, no problem. He simply contracts with a second marketing organization that does offer the contract in question.
The Issue with Independent
It may sound as if I’m saying that independent contracts are superior to career. Not the case, necessarily. There is an unintended consequence of the independent agent distribution, which we have yet to discuss: life insurance and annuities on steroids.
How does an insurance company attract the attention of life insurance agents when those agents have hundreds of insurance companies’ products to sell? One way is to inflate credited rates, so that they are ultra-aggressive, relative to their peers’ rates. Yes, (sadly), there are some insurance companies that make unrealistic assumptions in order to ensure a higher first-year rate. All insurance agents need to be aware that there are only so many pieces in the pie: an attractive first-year crediting rate typically translates to lower credited rates in years two-plus. Playing bait and switch with inforce renewal rates has unfortunately become the norm on annuity AND life insurance products that are distributed in the independent agent distribution.
So independent agents, beware. You may have the ability to select the most attractive products, with the most competitive rates. However, you must now do your due diligence in investigating the renewal rate integrity of the insurance companies you work with. If you cannot get an insurance company to commit to putting their inforce renewal rates in writing, perhaps there is a reason why. You can avoid an uncomfortable conversation with your client next year, and ensure that you are not opening up your business to replacement, by double-checking the insurance company’s renewal rate history. Independent agents need to demand integrity in the treatment of inforce clients’ interest rates, caps, spreads and participation rates.
Which Contract is Best?
There are pluses and minuses to every type of agent contract. No distribution is going to take home “best in show” in the insurance market (not even the PPGA and bank distributors that I didn’t mention!). It is also worth mentioning that product competitiveness does not plague all career distribution-oriented insurers and paltry renewal rates are not a curse for all independent distribution-oriented companies. Likewise, some career distribution-oriented insurers drop their renewal rates and some independent distribution-oriented insurers don’t offer very competitive products. The dilemmas described in this article are merely trends that affect these distributions in general. Ultimately, the best way to ensure that you are not unknowingly sticking to your clients is to carefully consider your contracts, the insurance companies that you do business with, and the products these companies sell. Always assume that you are the potential client, assume that if it looks too good to be true, it probably is and never hesitate to ask those difficult questions. Happy selling!
Sheryl Moore is President and CEO of Moore Market Intelligence, an indexed product resources in Des Moines, Iowa. She has over a decade of experience working with indexed products and provides competitive intelligence, market research, product development, consulting services and insight to select financial services companies. She may be reached at email@example.com.
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