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Health Insurance Exchange Subsidy Programs - Changing Face Of Distribution

Health Insurance Exchange Subsidy Programs

Life insurance distribution in Asia has long been dominated by the tied-agent model. While we are convinced that this will remain an important channel for the future, we have already seen bancassurance capturing shares of up to 50 percent in some markets. Furthermore, we will continue to see alternative and broker channels grow faster than the market - although from a still very small base.

Revamping The Agency Force

Asian insurers have typically built up large "tied" agency sales forces that rely heavily on relationship-based selling. These agents are often managed in a multilevel marketing, or pyramid, sales-force model. At the bottom of the pyramid are the new agents who have just entered the sales force.

As these agents recruit others to join the sales force and attain some stated standards (usually a minimum number of recruits as well as some level of personal sales), they get promoted to the next level. At this level, their compensation will depend on the sales of their recruited agents, which are often called the override commissions, as well as their own sales. These pyramids can continue to grow up to several layers, with the agency manager at the top of the pyramid managing a sales force of a few hundred agents.

Due to the strong relationships in these sales forces (that is to say, most of the agents are in some way linked to one another), each of these pyramid agencies can take on unique characteristics that are highly dependent on the philosophy and charisma of the agency manager. For example, in a large insurer in China, one of the largest agencies has over 800 agents, occupies a few floors in its own location, has its own internal rules, and even has its own chauffeured vehicles!

These sales forces have been extremely effective in these fast-growing markets, as the local networks of these agents can penetrate all levels of society and geography. However, as one can imagine, the quality of these sales forces varies greatly. Ranging from part-timers to neighborhood housewives to more professional financial advisers, insurance agents come in all sorts and forms. Many of these agents are high-school dropouts, most do not come with a strong financial background, and many have not done sales-related jobs before. 

As such, trial-and-error is the modus operandi for recruiting agents. For example, in rapidly growing sales forces like those in China and India, it is not uncommon to see agent turnover rate of up to 70-80 percent per year, with up to one-third of the agents selling less than one policy per month. Health Insurance Exchange Subsidy Programs

Most of the traditional insurers have begun to revamp their sales forces in one way or another. One of the main themes is the ongoing standardization and upgrading of the agents, and the elimination of part-timers. For example, in Taiwan, the total number of agents dropped from nearly 250,000 in 2001 to 190,000 in 2006. At the same time, the proportion of part-time agents decreased by 4 percent, translating into an increase in first-year premium sales per agent of 3.85 times. 

In South Korea, the largest domestic insurers have been slowly adjusting their housewives model through a process of elimination and upgrading in order to be more competitive with the foreign insurers' younger agents. In Japan, the traditional insurers have been shrinking the size of their sales forces every year over the past seven years.

However, given the size and the history of these sales forces, this revamping process will be long and painful. For many of these large insurers, this upgrading of their sales forces will be their main challenge for the next several years. While those that can adapt quicker will be able to participate in the market growth, there will be many that will see their competitiveness and market share erode as the legacy issues prove too much to overcome. While these large sales forces are still very valuable assets for local insurers, it is imperative that they understand the urgency to revamp this model.

Growth of Alternative Channels and Brokers 

Compared to Western markets, independent financial advisers have not made much of a dent in Asia despite having gradually increased their presence in most markets from a low base. We do not expect this channel to become as significant as it is in many Western markets, where regulation encourages this form of selling. In the more mature Asia markets, such as Japan and Singapore, this channel has been growing fast, but it will take many more years for this channel to have any meaningful share of the overall market.

Other forms of alternative channels, such as direct sales, are also being experimented with. Insurers in South Korea and Japan have been quite innovative in this area, trying out new distribution channels such as home shopping channels. In the Philippines, players have tried selling micro-insurance policies via text message since 2006. In China, companies such as MetLife and Ping An have set up direct outbound call centers, which, although small in size, have had encouraging results. While all these experiments make up interesting case studies, it is unlikely that any of these channels will challenge tied-agency distribution any time soon. They do, however, represent a rapidly growing part of the market.

The Bancassurance Revolution

The one channel that has captured a very significant share from tied agents across Asia is bancassurance, meaning sales of life products by banks. Baacassurance is emerging as a strong distribution channel across all Asian markets after regulators opened this channel for banks to get involved in life insurance. This has been a recent phenomenon: China, Taiwan, and India opened up bancassurance in 2000. Between 2001 and 2007, bancassurance activity increased across all 12 countries studied. In five of these countries bancassurance sales accounted for 30-50 percent of new life premiums sold in 2007. In South Korea, for example, bancassurance sales accounted for 40 percent of new life premiums in 2007. Health Insurance Exchange Subsidy Programs

The success of bancassurance can be attributed to the following factors: 

i) strong credibility of banking institutions; 
ii) extensive branch networks with long customer relationships; and 
iii) products that cater to depositcentric, Asian customers. 

Consumers appear to be quite willing to accept a bank as a credible channel for buying insurance. For example, 33 percent of Asia ex-Japan survey respondents indicated that they "prefer to buy life insurance from the bank." Banks are seen as the bedrock of the financial system, and, even in countries like China, where banks were under stress in the early 2000s due to nonperforming loans, consumers never doubted that the banks would always be backed by the government. 

Compared to the product-oriented agency channel whose agent turnover are extremely high in many Asian markets, the banking channels are perceived to be a more stable and trustworthy channel. Furthermore, in most Asian urban areas, bank branches are plentiful. 

For example, in Taipei, one of the most heavily branched geographies, there are 3.2 bank branches for every 10,000 people, compared to two bank branches per 10,000 Londoners and 0.3 bank branches per 10,000 Sydney residents. The extensive coverage of the bank branches in Asia makes bancassurance a particularly convenient channel. 

Finally, many bancassurance products were designed as deposit substitutes that could be easily sold over the bank counters. As interest rates went down during the initial years of bancassuvance deregulation, these products became quite popular with banking customers looking for a slightly better return on their large deposit holdings. Health Insurance Exchange Subsidy Programs

The vapid growth of bancassurance warrants the question "Will banks eventually crowd out the agent sales forces?" Globally, there are some examples of markets where bancassurance has become the dominant channel, such as Italy and France. At least in the initial phase, this has mainly been driven by tax incentives making simple, single-premium investment products with little or no protection cover more attractive than alternative investments. Banks sell these products as a key component of customers' investment portfolios to optimize from a tax perspective. Consumers have a limit of tax-exempt funds they can contribute on their insurance products, and they usually purchase up to the limit in quite an automatic fashion.

This has created enormous growth in the life insurance market and led to the dominant position of banks as the largest channel in the life industry. However, a closer look reveals that even in these markets agents have continued to grow. Bancassurance has virtually created a new market within life insurance but agents, especially the better qualified ones, keep growing their traditional business which is more focused on protection and recurring premium products. 

In other global markets, where life products are more on a level playing field with other investment products, such as Germany or the UK, bancassurance has also grown but agents - or independent financial advisers in the UK - have very much defended their space, especially the better qualified and independent ones.

Likewise in Asia, while bancassurance took a significant proportion of total market share, the agent channel kept growing. Tax incentives for life products in this part of the world are scarce and the fast growth in bancassurance has been driven primarily by simple investment products. This has effectively been a kind of deposit conversion--fueled by higher interest rates for life products. 

We believe that bancassurance in Asia will remain a key channel but growth rates will soon plateau. Some countries, such as India, will continue to see fast growth, especially where markets are not fully deregulated yet or banks have not all taken up this product, but in general we think that in many markets the banks have captured the lowhanging fruit with simple investment products and will find it much more difficult to sell more complex regular premium and protection products.

For the insurers, bancassurance is both an opportunity and a threat. On the one hand, insurers can extend their reach into previously untapped customers through partnering with banks by providing products and expertise. In particular, for those insurers without a large agency sales force, the banking channels can provide them with a quick way of ramping up volume. On the other hand, bancassurance does pose a threat. Overall, banks have recognized their superior bargaining position vis-a-vis the insurers.

Consequently, they are demanding a much bigger share of income from bancassurance sales. In many markets, profitability of bancassurance products has deteriorated sharply - in some markets, for instance in China, the bancassurance channel barely breakevens for the insurers.

Recently, in some markets where regulation has allowed integration between banking and insurance, banks have actually started their own life insurers, thus shutting out traditional insurance companies from this channel altogether. The global experience of insurance/bank mergers has not been overly positive though, with many large, integrated, financial conglomerates spinning off the insurance entities after a few years (such as Citibank/Travelers, Credit Suisse/Winterthur, and Allianz/Dresdner).

Most of these integrations have failed due to the difference in culture of the insurance and the banking entities, limitation of the cost and revenue synergies beyond the obvious distribution benefits, and different economic models, which are incredibly difficult to communicate to shareholders. To find out more, you can check out Health Insurance Exchange Subsidy Programs.