Whether it is life, health, hospital, dental, vision, accident, property, casualty, auto, renters, homeowners, mortgage, credit, or liability, insurance is a part of everybody’s life. So, like it or not, you are an insurance policy customer, and you should know how the insurance distribution process works. It will save you money. Here is a brief overview for you.
When renewing an insurance policy or buying a new insurance policy, there is a channel of distribution embedded in the process. This process applies to any insurance coverage. First, determine the type and level of coverage you need and read the actual policy contract, endorsements, and after the completed sale, read the Declarations page as well. As stated in previous Tip-of-the-Month articles, make your insurance coverage review a standard part of your practice administrative support tasks.
Here is what you should be aware of and how the distribution channel works to be an informed shopper. The world of insurance is complicated. It is centered around shifting risk from the policyholder to the insurance carrier. Frequently the insurance carrier who insures you transfers part of their risk to a reinsurer. That is a supply-side matter and beyond the scope of this article.
As the customer, you are directly involved with the various insurance carriers and their distribution partners, all of whom are insurance licensed. Licensing is a critical tool used by state governments. In some cases, the federal government regulates insurance sales processes, administration, standards, policy contracts, communications, policy rates, money, coverages, and disciplinary action. The purpose is to make sure that the public is protected using a set of very high standards.
There are currently several types of licensed intermediaries selling insurance, such as a producer working as an independent agent, an insurance agency, a master general agency, a wholesaler, or a broker. In all cases, the interaction is in a fiduciary capacity since the law requires honest and faithful performance. Every two years, the producer agent or distribution participant must complete training and a series of rigorous exams to earn insurance license renewal.
Here is when the distribution system gets complicated. Suppose you want to buy a Professional Liability policy or “PLI” policy. Very wise indeed. Whether or not a PLI policy is mandatory in your state, and if you are self-employed or an employee, it is certainly worth the money to buy a PLI policy. Legal defense costs are about $250 to $800 per hour compared to the average PLI policy annual premium for an individual that starts as low as $55 annually for a claims-made policy and averages about $240 annually for an individual.
When shopping for a PLI insurance policy or other policy, for example, you will most likely deal with three categories of sellers:
- the independent agent,
- the captive agent in-person or online, or
- the online aggregator.
First and foremost, the more parties involved with the insurance policy sale in the channel of distribution, the more costly the premium will be to you. That is because commissions and policy fees are applied.
Moreover, when salespeople work on commission, they will naturally flock to selling the higher premium insurance products, which are also the more complex insurance products. They will also focus on large cases or large customers since that drives up premium and the associated sales commission.
For example, a large business may buy a fleet policy, general liability, workers compensation policy, and maybe life insurance for key employees, so the total annual premium from the case perhaps $30,000 with a sales commission of $4,000.
On the other hand, commodity-based products made for individuals have much lower annual premiums, such as an auto insurance policy premium that averages $1,500 annually and yields a sales commission of about $75. Moreover, a $55 annual claims-made premium PLI policy would produce a commission of about $5, which is not worth the sales producer’s time.
Typically, the small individual insurance shopper’s lowest cost is to buy online, providing the shopper knows and informed about the insurance coverage. Insurance is complicated, online platforms do not answer all questions and do not provide the shopper with the detailed knowledge that a producer agent offers. That is why it is essential when buying insurance online to utilize all available information sources and recommendations, including telephone-sourced customer service, where licensed insurance agents are available on the telephone to answer questions.
The Independent Agent
The insurance carrier is considered the “manufacturer,” wants maximum distribution, but cannot have a distribution contract with each independent producer agent because there are 1.2 million them in the United States. As a result, many independent producer agents work out of their own small office or home and distribute through an MGA or Managing General Agency or Wholesaler appointed by the insurance carrier and perform all administrative duties.
In contrast, the independent producer agent sells insurance policies. The MGA contracts with the insurance company to distribute the insurance products and receive a commission on new and renewal policy sales. The MGA pays the independent producer a smaller commission. There are situations where an insurance carrier will contract with a group or association either directly or through an MGA for permission by contract to distribute to an entire membership base. Usually, an “endorsed” or “affinity” group arrangement with exclusivity for a particular line(s) of insurance. Group members receive premium discounts embedded in these affinity arrangements.
The Captive Agent
The captive agent is exclusive to a particular insurance carrier. The captive agent is typically an independent producer agent, but still commission-based, who only sells one insurance product line, such as workers’ compensation or a specialty insurance product made by one carrier. These are more complex products with high premiums designed for large cases, and the commission is high.
Sometimes, the captive agent is lumped into the “direct writing agent “category, an employee of the carrier, and usually paid by salary, so customer service is higher quality. This arrangement is particularly useful for large cases and complex policy coverages.
The online aggregator works efficiently in the distribution channel for low priced to moderate insurance policies across all insurance lines. The focus is on individuals, small businesses, and small practices. The online aggregator is an MGA who contracts with many insurance carriers to distribute their products. Some act as MGAs doing administration. Other MGAs simply mass-market the insurance products and sell the policies for a commission. The online aggregator brings together many carriers for comparative rating. They also inventory products that fill gaps.
In other words, some carriers only cover certain occupations with PLI, so by recruiting many PLI carriers on the MGA’s platform, there is a wide choice of PLI coverage solutions and occupational coverages. Eliminating the intermediary agent producers from the distribution channel keeps premium pricing and their commissions and fees lower.
However, the information service side is lacking. For example, it is almost impossible to be intimately knowledgeable about 15 different PLI policies and carriers across 90 occupations and to be able to answer detailed questions immediately. Some insurance carriers utilize multiple distribution channels such as their websites to sell their insurance policies, MGAs to distribute through their producer agent networks, and affinity partners.
The insurance distribution network across the nation is widespread, highly flexible, and very fluid. Insurance carriers most often utilize Multi-channel distribution, and there are channel conflict and variability in insurance policy pricing.
We see many insurance policy individuals or small business shoppers approach their buying decision the following way. Initially, they determine what their coverage needs are. Next, they use reference groups, literature searches, and many use the NASW and ASI websites to learn more from this credible source. They then seek out quotes from insurance carriers, mostly from website-based quoting engines, since the case sizes are small. Many wisely call the customer service licensed representatives for more clarification, the most complex and time-consuming part of the shopping process. We have found that the NASW endorsement brings overwhelming support and shopping interest because the NASW RRG products have already been vetted and approved and rated by A.M. Best as “Excellent.”
Online comparative rated auto insurance shopping is much more comfortable and efficient because auto insurance is a commodity with only a few extra benefits to consider. That is why it is essential to obtain auto insurance quotes every year because auto insurance carriers frequently change their premium pricing. The causes of premium pricing changes include frequency and severity loss experience, the composition of drivers in each carrier’s portfolio, and the collision side of the equation based on new vehicle models and features on the market cause this change in pricing.
Again, as stated in previous Tip-of-the-Month articles, make sure that you understand how your insurance policies operate. Check the policy limits and the sub-limits by peril type. Check the frequency and sub-limit for each type of peril. Verify what the deductibles are. Also check the insurance policy exclusions. You will need all of this information to properly select your insurance coverage and compare insurance carriers’ policy coverages and premiums.
Thank you for all that you do! Your profession is genuinely noble and needed now more than ever. Good luck, and stay healthy!