3 ways to head off the distribution sales cliff

In the next decade, an advisor shortage is coming that insurance carriers cannot ignore. The average advisor is 56 years old, and while estimates vary, 40%-70% of advisors will retire over the next decade. Coupled with high attrition rates (90% agent attrition in the life and annuity industry over four years), there is not an easy path to avoid the impending distribution sales cliff that insurance carriers are barreling toward.

The impact will differ by product lines – personal lines property/casualty for example is heavily sold (about 50%) through direct channels, but life and annuity personal lines are predominately sold through agents. About 90% of life premium comes through an agent and 75% of annuities are sold through an advisor (non-bank channel).  Life and annuity distribution strategies must adjust accordingly – and there are three ways to do this.

Capitalize on digital/AI innovation

A growing segment of the addressable market is digitally native, providing some opportunity to sell products through direct-to-consumer channels. The concept is not new, but historically, only simple products have been successfully sold through direct channels (e.g., term insurance). The challenge has been leveraging technology to explain concept financial products in simple terms and combining that with human interaction when needed.

Artificial intelligence can significantly enhance consumer educational experience, but recent surveys highlight there are strong biases against chatbots and AI. Some of that is due to hallucination and technical limitations, but consumers also highlight the need for human interaction in making impactful financial decisions. Any AI solution will need to be built alongside human interaction with AI adoption metrics as the key driver of success over the next several years.

Invest in IXP talent and training

Carriers with career agent models have traditionally relied on two recruiting paths – inexperienced hires who are either young and recently out of college, individuals interested in a career change, or experienced agents who are recruited to leave their existing agency. In the former category, recruitment is typically a joint effort between the home office (national recruiting efforts) and local agencies (targeted recruiting) to bring in a large number of potential agents. With high attrition rates, most of these recruits do not last for four years, and the goal is that you can recruit a large enough number to sustain and grow the agency model.

Advances in AI, reduction in entry level roles and large books of business that will need to be serviced create unique incentive opportunities for carriers within their IXP recruitment channels. But IXPs will struggle against experienced agents, and career channels are losing ground to independent sales channels.

Carriers will need to make significant investment in their training and advisor teaming programs to capture growth. There are some AI use cases to support this, from agent/customer matching to developing advanced sales training leveraging AI. That, coupled with various compensation models, could create incentives that help increase agent retention.

Rely on third-party distribution

Sales and distribution trends continue to favor independent agent channels over the career agency model. Indeed, certain products are sold almost exclusively through third-party distribution. For example, nearly 74% of all 2023 fixed indexed annuity sales were done through independent agent or broker-dealer channels. For carriers, it is not a matter of whether you will sell through TPD, it is how.

But the reliance on TPD comes with its own challenges. Primarily, the reliance on TPD gives distributors greater leverage when it comes to compensation. Commission payments are typically higher in the independent channel than in the captive channel, with the assumption that 1) the carrier will not need to cover additional expenses and 2) that the distributor’s strength will allow the carrier greater profitability due to greater policy retention. But increased consolidation in the distribution space threatens carriers to either diversify their distribution model or risk paying greater commission for the same sales.

Carriers will need to invest in distribution performance management to maximize their investment.  For example, carriers must evolve beyond new business sales and product mix – they must evaluate how many different products they have with the average policyholder through each channel to evaluate the strength of the client relationship with a particular carrier.

For carriers, there is no one-size-fits-all solution. A variety of factors - such as product mix, customer profiles and existing sales channels - will drive strategy at the carrier level. But an evolving sales force will require carriers to rethink how products are sold, what role advisors play, and ultimately, how they are recruited. This will likely involve innovating the career agency model, improving TPD partnerships, and beginning a long journey of transitioning customers from advisor-led sales to digitally enabled purchases. Successful mastery of these capabilities with sufficient long-term planning will position carriers to remain relevant as advisors retire.

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Chris Taylor is an established leader in the insurance industry with more than a decade of experience supporting insurance strategy and performance improvement outcomes. Contact him at [email protected].