Insuring a Competitive Edge
By Allyson Shear
October 15, 2003

Summary: Insurance companies seeking to leverage incentive compensation to drive performance and productivity should consider enterprise incentive management software as an alternative to their legacy systems. By Allyson Shear.

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Insurance companies are increasingly turning to diversification and expansion of their distribution network as they look to gain market share. And, in an environment of heightened competition, new distribution models are continually being implemented - with varying degrees of success. As carriers explore new distribution models, they are also examining ways to incorporate improvements to their current agent populations to stem the steady decline in agent loyalty and high attrition rates. Many insurance companies see attracting and maintaining premier producers across traditional and new distribution channels as the key to sustainable channel dominance. 

The prevailing performance driver for producers, regardless of channel, is money - specifically, commission payments. Most carriers naturally look to solve agent attrition and loyalty issues through compensation programs. Make no mistake, commissions are king - but compensation programs that worked for career agents won't necessarily work with independent producers. The proliferation of distribution channels has sparked a transformation in how insurance companies approach the design and deployment of incentive compensation programs. 

Traditional compensation programs, as well as the roles and responsibilities of the field force, are rapidly being redefined to better meet the needs of diverse distribution channels. Insurers now recognize there is no 'one-size fits all' compensation solution for all their channels. Transforming to a multi-channel, multi-product business model requires the creation of many complex compensation programs - each with unique requirements. As carriers attempt to respond to the requirements of new compensation structures, they are faced with the age-old technology dilemma - their ability to support complex compensation initiatives is significantly impaired by their own technical infrastructure. Lumbering legacy systems and sprawling one-off database farms dominate commission processing for most insurers, whose systems are ill equipped to keep pace with the growing demands of a changing distribution network.

Compensation programs originally developed for the captive field force follow the traditional method of compensating producers on a per transaction basis, where every premium transaction received has a commission rate applied based on the product sold. The development of these compensation plans is the result of tight integration of commissions processing with a carrier's product administration system, as well as the practice of deriving commission rates as a measure of product. Product based commission models do not allow for any real differentiator between over- and under- achieving producers; premier producers are paid at the same rate as poor performers. Worse yet, these contracts often encourage the wrong type of behavior, motivating agents to sell products that have the best commission rate as opposed to products that best serve the customer. This type of inequity is fueling retention issues, as agents bounce from carrier to carrier looking to get the best contract they can with the best product rates.

The desire to optimize and revitalize channel performance and further increase market dominance has necessitated carriers to augment an agent's portfolio with a rich variety of products that fully support customer needs. Carriers have responded by supporting cross selling between traditional lines of business, developing or acquiring alternative financial services product offerings (such as mutual funds or banking products) and better aligning product offerings with customer segments and economic trends. This shift away from a traditional 'sales agent' and towards a 'financial consultant' who is capable of servicing all customer investment requirements highlights the necessity to better train, manage and compensate the field force to retain them as long-term producers.