STRATEGIC ISSUES IN
INSURANCE DISTRIBUTION
MANAGEMENT

Karlyn Carnahan
May 2015



CONTENTS
Executive Summary ............................................................................................................ 1
Key Research Questions ................................................................................................. 1
Key Findings .................................................................................................................... 1
Introduction.......................................................................................................................... 3
About this Survey ............................................................................................................ 3
Key Research Questions ................................................................................................. 4
Organizational and Strategic Issues ................................................................................... 5
Responsibility for Distribution Management .................................................................... 5
Importance of Issues in Distribution Management .......................................................... 6
Agency Segmentation ..................................................................................................... 7
Compensation ..................................................................................................................... 8
Strategic View of Compensation ..................................................................................... 8
Types of Compensation Utilized ...................................................................................... 9
Effectiveness of Compensation Techniques ................................................................. 10
Technologies and Challenges ........................................................................................... 11
Licensing and Appointments ......................................................................................... 11
Technologies Used ........................................................................................................ 12
Challenges in Managing Compensation ........................................................................ 13
Conclusion......................................................................................................................... 15
Leveraging Celent’s Expertise .......................................................................................... 16
Support for Financial Institutions ................................................................................... 16
Support for Vendors ...................................................................................................... 16
Related Celent Research .................................................................................................. 17






EXECUTIVE SUMMARY
In a recent survey of insurance executives, more than 80% of carriers reported that
growth was driving IT investments (see the Celent report Property/Casualty Insurance
CIO Pressures and Practices 2015: North American Edition, January 2015). However, in
a competitive market, organic growth is difficult. Simply having terrific products is not
enough to grow the book or keep customers. There is always a competitor around the
corner with better products, better prices, or a better customer experience.
Carriers use a variety of techniques for growing the book, and most consider distribution
management a key component of their strategy. They are expanding channels, adding
distributors, moving into new territories, and working to optimize their existing channel to
improve customer acquisition and retention. Some carriers are investing in improving the
servicing of distribution channels. Others are focused on managing the compliance
aspects of distribution management — assuring the distributors have the right licenses,
and that state appointments are made in a timely manner. Many carriers are
concentrating on using compensation tools and techniques to more effectively stimulate
production.
To understand what top carriers are doing in this area, Celent conducted a survey around
this topic. The goal was to understand how the carriers are organized to manage the
distribution channel, what types of techniques they use, and what challenges they face.
KEY RESEARCH QUESTIONS
1
Who is responsible
for distribution
management, and
what kind of
challenges do they
face?
2
What types of
compensation are
used, and how
effective are they?
3
What technologies
are used to manage
compensation, and
what key
challenges do
carriers face?


KEY FINDINGS
 Primary responsibility for distribution management tends to be concentrated in a
single department. In most organizations, a formal distribution management
organization has primary responsibility for channel management. However, there are
significant differences between life carriers and property & casualty carriers in who
owns distribution management. Property & casualty carriers have primary
responsibility split between distribution management and field underwriting. Life
carriers generally split responsibility between distribution management and
marketing.

Issues in distribution management fall into four buckets.
– Managing the day-to-day relationships with agents is seen as the most important
issue, followed by compliance-related issues.
– Managing compensation is also seen as extremely important by a majority of
carriers — although carriers report that it is more important to calculate
compensation accurately than to assure it is effective at driving desired business.
Compensation is often seen as a basic requirement, and many carriers see little
ability to differentiate themselves.

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– Expanding the channel and adding agents is also seen as important, although
9% of carriers state that expanding channels is unimportant.
 A wide variety of compensation techniques are used by carriers, and most say they
get value from those programs. Commission is universal. Other techniques such as
incentive comp and contests may only be available to top tier or qualifying agents,
but receive mixed reviews on their effectiveness. Only 25% of those offering incentive
compensation programs see them as effective. “Having an incentive compensation
program isn’t highly effective, but not having one would be even worse.”

Technology enables compliance, a critical process for carriers. However, automating
the licensing and appointment process is not ubiquitous. Fewer than half of carriers
have automated any of the major processes (validating licenses, processing an
appointment, or providing self-service to distributors). Those that have automated the
processes generally report them as delivering value.

The ability to administer a compensation program efficiently is highly dependent on
the technologies utilized. A wide variety of technologies are utilized, ranging from
core systems such as policy admin or billing solutions; solutions that were built or
purchased specifically to handle a particular compensation program, or manual tools
such as Excel. Forty percent have at least one homegrown application that is used to
process commissions, and 37.5% use a vended package. Surprisingly, more than
33% of carriers use Excel or other manual tools as part of their commission
management architecture. This use of manual systems may be part of the reason
that so many carriers report accurate calculations as a significant challenge. Manual
processes are always prone to error.

For many, the ability to administer a compensation program easily is the key driver as
to whether the program will be offered. While they may wish to utilize a particular
technique, their technologies create barriers. The biggest challenges of managing
compensation are the basic ability to deploy the programs on a day-to-day basis:
efficiently calculating the compensation owed, and distributing payment. Carriers
facing these basic challenges often do not have the basic tools necessary for
handling common programs and so shy away from offering more targeted
compensation options. Compensation management is also an issue as carriers report
difficulty in forecasting compensation and assuring they are in compliance. When it
comes to specific types of programs, non-monetary compensation is seen as the
most difficult to manage.
 Sixty-seven percent of carriers using a purchased distribution management system
report no significant challenges with any aspect of compensation management. While
33% of carriers that have a purchased distribution management system report
significant challenges with fragmented data, forecasting, and modeling plans, they do
not report significant problems with any other aspects of compensation management.
The use of vended products seems to be correlated with fewer problems in managing
compensation.

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INTRODUCTION
In a recent survey of insurance executives, more than 80% of carriers reported that
growth was driving IT investments. (See the Celent report Property/Casualty Insurance
CIO Pressures and Practices 2015: North American Edition, January 2015.) However, in
a competitive market organic growth is difficult. Simply having terrific products is not
enough to grow the book or keep customers. There is always a competitor around the
corner with better products, better prices, or a better customer experience.
Carriers use a variety of techniques for growing the book, and most consider distribution
management a key component of their strategy. Carriers are expanding channels, adding
distributors, moving into new territories, and working to optimize their existing channel to
improve customer acquisition and retention. Some carriers focus their investments on
servicing distribution channels and improving service to distributors, increasingly using
producer service excellence as a way to retain and grow business. Others are focused on
managing the compliance aspects of distribution management — assuring the
distributors have the right licenses, and that state appointments are made in a timely
manner. Many carriers are concentrating on using compensation tools and techniques to
more effectively stimulate production.
Regardless of what techniques are being used, designing, developing, maintaining, and
managing productive channel relationships can create a sustainable competitive
advantage.
ABOUT THIS SURVEY
To understand what top carriers are doing in this area, Celent conducted a survey of 11
carriers. All respondents are members of the Celent Research Panel, a group of senior
insurance IT executives. Members, each representing a different insurer, participated in
an online survey in April 2015.
Table 1: Participants

UNDER $1 BILLION
OVER $1 BILLION
TOTAL
Property and Casualty
40%
60%
55%
Life and Annuities
20%
80%
45%
Total
30%
70%
100%
Source: Celent Strategic Issues in Distribution Management Survey April 2015
The goal of the survey was to understand how the carriers are organized to manage the
distribution channel, what types of techniques they use, and what challenges they face.

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KEY RESEARCH QUESTIONS
1
Who is responsible
for distribution
management, and
what kind of
challenges do they
face?
2
What types of
compensation are
used, and how
effective are they?
3
What technologies
are used to manage
compensation, and
what key
challenges do
carriers face?


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ORGANIZATIONAL AND STRATEGIC ISSUES
RESPONSIBILITY FOR DISTRIBUTION MANAGEMENT
Primary responsibility for distribution management tends to be concentrated in a single
department. Life and property/casualty carriers have significant differences in who owns
distribution management. In life carriers, distribution management is either owned by
marketing or by a centralized department whose primary responsibility is distribution
management. Property/casualty carriers have responsibility split between distribution
management and field underwriting.

Figure 1: Organizational Responsibilities

Source: Celent

 Sixty-six percent of carriers have a corporate distribution management organization
that is primarily responsibility for managing the distribution channel; 22% of carriers
do not have this type of organization.

Life carriers place responsibility for field execution with the IT department, while PC
carriers place responsibility with underwriters in the field.

Life carriers state that marketing and IT have shared responsibility for distribution
management. PC carriers say responsibility is shared between distribution
management, marketing, and corporate underwriting.
 PC carriers show finance and IT as support functions. Life carriers also place
marketing, field underwriting, and corporate underwriting as supporting the process of
distribution management.




0%
20%
40%
60%
80%
100%
PC Support
Life Support
PC Field Execution
Life Field Execution
PC Shared
Life Shared
PC Primary
Life Primary
Responsibility for Distribution Management
Distribution Mgmt Marketing Field UW Finance
IT Corp UW

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IMPORTANCE OF ISSUES IN DISTRIBUTION MANAGEMENT
Issues in distribution management fall into four buckets. Those related to managing the
day-to-day relationships with agents are seen as the most important, followed by
compliance. Agency segmentation is not seen as particularly important by over one-third
of carriers, although this is an area that a number of carriers are investing in. Managing
compensation is also seen as extremely important by a majority of carriers — although
carriers report that it is more important to calculate compensation accurately than to
assure it is effective at driving desired business. Compensation is often seen as a basic
requirement, and many carriers see little ability to differentiate themselves. Expanding the
channel and adding agents is also seen as important, although 9% of carriers state that
expanding channels is unimportant.
Figure 2: Issues in Distribution Management

Source: Celent Strategic Issues in Distribution Management Survey April 2015

 Ninety-one percent of carriers said relationship management is extremely
important, although 36% do not see segmentation as particularly important.
 Compliance issues (validating licenses and assuring all documentation is filed
appropriately with the DOI) is seen as extremely important by 72.7% of all
carriers.
 Carriers see accurate compensation as more important than effective
compensation; 36% of carriers said effective compensation was neither important
nor unimportant.
 Although more than 80% of carriers see adding agents and channels as
important, 9% are not focused on adding new distribution channels.





0%
20%
40%
60%
80%
100%
Expanding channels
Adding agents
Effective compensation
Accurate compensation
Multiple contracts
Verifying licenses
Compliance
Agency Segmentation
Managing efficiently
Managing relationships
Importance of Issues in Distribution Management
5 - Extremely important
4
3 - Neither important nor unimportant
2
1 - Unimportant

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AGENCY SEGMENTATION
Agent segmentation is key to identifying the needs of agents and supporting the
development of their activities. Carriers are shifting from broad-based segmentation tiers
based on size and profitability to more complex tiers. Many segmentation dimensions are
being considered, from business performance to size, business mix, and location. The
segmentation leads to tailored support structures and service offerings.
Figure 3: Segmentation Strategies

Source: Celent










Hunters
Old Boys
Futures
Beginners
Losers
Champions
• Secure success
E.g. Support from sales specialist, administration
relief
• Exploit potential in the stock
E.g. Assistance in evaluation of social networks,
website of the agencies, etc.
• Skills development, e.g. customer acquisition,
scheduling, technically qualification, product
knowledge
Promote / support sales activities, e.g. digital
support in the sales process, ensure standard
procedures deployed
Example
Specific challenges of the individual segments
N
e
w
b
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p
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it
y
In-force business
Ø
Ø
below Ø
above Ø
b
e
lo
w
Ø
a
b
o
v
e
Ø
Champions
(5%)
Hunters
(15%)
Old Boys
(20%)
Futures
(22%)
Losers
(22%)
Beginners
(16%)
Individual agent profiles clustering
• Central control
• Minimum support
• Separation
• Central management, support (only) on request,
where possible, reduce stocks
Key
Research
Question
1

Who is responsible for distribution management, and what
kind of challenges do they face?
In most organizations, a formal distribution
management organization has primary responsibility
for channel management. Managing relationships
and compliance are seen as the biggest issues they
face.

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COMPENSATION
STRATEGIC VIEW OF COMPENSATION
Compensation is a critical component of agency management. The compatibility and
alignment of the compensation program with the company’s strategic goals are central to
assuring the effectiveness of the compensation program. Carriers that translate their
strategic goals into tangible requirements as well as remuneration are more successful at
driving behavior. Different compensation programs may be used if the carrier is focused
more on growth than on profitability or on cross-selling more than customer acquisition.
Figure 4: Strategic Compensation Strategies

Source: Celent


Target goal hierarchy of compensation
Compensation intentions – examples
Transformation in holistic technical system
Strategic company
goals
Compensation system
(components, mechanics)
Distribution goals
Requirements at distribution
Incentives / Compensation intention
Cross-
Selling
Customer
Value
Growth
Profitability
Volume
New customer
acquisition

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TYPES OF COMPENSATION UTILIZED
Carriers use a variety of compensation tools when creating compensation programs.
Commission is ubiquitous. However, wide varieties of other techniques are available —
although not for every agent. Some carriers offer additional types of compensation only to
top tier agents or to those that qualify in other areas.
Figure 5: Compensation Mechanisms Utilized

Source: Celent Strategic Issues in Distribution Management Survey April 2015

Forty percent of carriers require that agents meet a minimum qualifying level of
production before they are eligible for incentive compensation, and 9% of carriers
restrict incentive comp to their top tier agents; 36% do not offer incentive comp and
have no plans to do so.

Thirty percent offer contests to all agents, while 40% only offer contests to those who
qualify; 30% have no plans to offer contests. In some cases, this is due to the
difficulty of managing the contest across multiple products, regions, and agency
types. Carriers that primarily utilize their core system to manage compensation have
a harder time with non-monetary compensation programs. Those that have stand-
alone systems are more likely to offer contests.
 Production overrides are used by 70% of carriers, but 40% require that agents meet
a minimum level of qualification before they are eligible for overrides.
 Special programs such as funding marketing campaigns, providing leads, or
providing other support are generally only available to top tier agents or those who
meet other minimum qualifications. Forty percent of carriers do not have any special
programs available for their agents.



0%
20%
40%
60%
80%
100%
Commission
Contests
Production Overrides
Incentive Comp
Special Programs
Other
Types of Compensation Utilized
Yes. All Agents
Yes. Qualifying Agents
Yes. Top Tier Agents
Planning to Use
No and No Plans

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EFFECTIVENESS OF COMPENSATION TECHNIQUES
Regardless of the types of compensation offered, the bigger question is how effective
they are at driving behavior. Carriers look to compensation mechanisms as the incentive
for submitting, writing, and keeping good business with a carrier. Different techniques
have different purposes. Carriers looking to drive solid returns from these programs focus
on aligning the programs with their strategic goals, and automating them to provide
efficient and accurate implementation.
Figure 6: Effectiveness of Compensation Techniques

Source: Celent Strategic Issues in Distribution Management Survey April 2015
 Carriers report mixed success when it comes to the effectiveness of the
compensation techniques.
 Commission overrides are seen as the most effective. More than half of those who
offer this type of program say that they are very effective, although more than 25%
rate them only average on their effectiveness.
 Straight commission is also seen as highly effective by most, although 10% of those
offering commission see it as only slightly effective in driving their goals.
 Only 25% of those offering incentive compensation programs see them as effective.
“Having an incentive compensation program isn’t highly effective, but not having one
would be even worse.”
 Contests and special programs are most likely to be seen as only slightly effective.










0%
20%
40%
60%
80%
100%
Contests
Special Programs
Other
Incentive Comp
Commission
Overrides
Effectiveness of Compensation Techniques
5 - Very effective
4
3
2
1 - Ineffective
Key
Research
Question
2
What types of compensation are used, and how effective are
they?
A wide variety of techniques are used by carriers,
and most say they get value from those programs.
Some techniques such as incentive comp and
contests may only be available to top tier or
qualifying agents, but receive mixed reviews on
their effectiveness.

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TECHNOLOGIES AND CHALLENGES
LICENSING AND APPOINTMENTS
Technology enables compliance, a critical process for carriers. Automating the licensing
and appointment process is certainly not ubiquitous. Fewer than half of carriers have
automated any of the major processes (validating licenses, processing an appointment,
or providing self-service to distributors). Those that have automated the processes
generally report them as delivering value.
Figure 7: Automation Capabilities

Source: Celent Strategic Issues in Distribution Management Survey April 2015

Twenty-five percent of carriers offer just in time appointment processing with the DOI.
Almost 70% of those say they are getting significant value. The remaining 30% say it
is too early to tell. Almost 30% of carriers are thinking about enabling this feature.

Fewer than 20% of carriers have automated electronic funds transfer with the DOI;
50% say they are getting significant value, and the other 50% say they are getting
some value.
 More than 40% offer automated appointments with the DOI; 40% say they are getting
significant value, 20% say some value, and 40% say it is too early to tell.

Fewer than 10% of respondents offer self-service capabilities to the agents. All say
that it is too early to tell if this is generating value. More than 70% of carries are
thinking about offering this capability.


0%
20%
40%
60%
80%
100%
Self Service
Real-time FINRA
Real-time DTCC
EFT With DOI
Real-time NIPR (PDB)
Just In Time Appt With DOI
Automated appts with DOI
Managing Licenses and Appointments
Significant Value
Some Value
Not sure
Too early to tell
Definite plans
Thinking About it
No and No plans

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TECHNOLOGIES USED
The ability to administer a compensation program efficiently is highly aligned with the
technologies available. A wide variety of technologies are available ranging from core
systems such as policy admin or billing solutions; solutions that were built or purchased
specifically to handle a particular program, or manual tools such as Excel.
Figure 8: Compensation Technologies

Source: Celent Strategic Issues in Distribution Management Survey April 2015

 Ninety percent of carriers say that the policy admin system is part of their commission
management architecture. More than 40% utilize their billing system to manage
transactional commissions; 40% have at least one homegrown application that is
used to process commissions, and 37.5% use a vended package. Surprisingly, more
than 33% of carriers use Excel or other manual tools as part of their commission
management architecture. This use of manual systems may be part of the reason
that so many carriers report accurate calculations as a significant challenge. Manual
processes are always prone to error.

The most common tool used to manage incentive compensation is a homegrown
solution, followed by a vended solution and augmented with Excel or other manual
processes.
 Contests are most often handled in Excel, but a small number of carriers are using a
gamification platform to manage these contests.



0.0%
20.0%
40.0%
60.0%
80.0% 100.0%
Special Programs
Production Overrides
Contests
Incentive Comp
Commission
Technologies Used to Manage Compensation
PAS
Billing
HomeGrown
Purchased system
Excel/Manual
Gamification

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CHALLENGES IN MANAGING COMPENSATION
For many, the ability to administer a compensation program easily is the principal driver
as to whether the program will be offered. While they may wish to utilize a particular
technique, their technologies create barriers. The biggest challenges of managing
compensation are the basic ability to deploy the programs on a day-to-day basis —
efficiently calculating the compensation owed, and distributing payment. Carriers facing
these challenges often do not have the basic tools necessary for handling common
programs and so shy away from offering more targeted compensation options.
Compensation management is also an issue with carriers reporting difficulty in
forecasting compensation and assuring they are in compliance. When it comes to specific
types of programs, non-monetary compensation is seen as the most difficult to manage.
Figure 9: Compensation Challenges

Source: Celent Strategic Issues in Distribution Management Survey April 2015

Fifty percent of carriers find efficient calculation and distribution of commission
extremely or fairly challenging. Given that this is a basic requirement of a
compensation program, many carriers are focusing their technology investments
here. Another 33% do not have any difficulty with this. Those who describe this as
difficult are more likely to have a homegrown system or rely on Excel.

Fragmented data is also seen as challenging by more than 40% of the reporting
carriers. This may well be a root cause for difficulties in forecasting, modeling, and
creating accurate calculations.
 Most carriers do not see the internal tasks of managing the cost of compensation as
a challenge; 73% say forecasting and modeling are not particularly challenging.
Staying in compliance is seen as slightly more difficult, with 45% reporting
compliance as a challenge.
 Although most carriers see flexible bonuses and flexible commissions as not
particularly challenging, aligning compensation to the strategic goals is seen as more
difficult. Non-monetary compensation is also seen as challenging by more than half
the carriers.
 While 33% of carriers that have a purchased distribution management system report
significant challenges with fragmented data, forecasting, and modeling plans, they do
not report significant problems with any other aspects of compensation management.
The remaining 67% report no significant challenges with any aspect of compensation
0%
20%
40%
60%
80%
100%
Flexible bonuses
Aligning compensation
Flexible commissions
Non Monetary
What if modeling
Compliance
Forecasting
Accurate calculations
Automate Bonuses
Fragmented data
Efficient calculation…
Biggest Challenges in Managing Compensation
5 - Extremely challenging
4 3 2 1 - Not challenging at all
NA

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management. The use of vended products seems to be correlated with fewer
problems in managing compensation.




Key
Research
Question
3
What technologies are used to manage compensation, and
what key challenges do carriers face?
Most carriers rely on a variety of systems to
manage compensation (including Excel) and find
efficient calculation and distribution of compensation
to be quite challenging. Compliance is another
challenging area, with many carriers in the early
phase of considering additional automation.

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CONCLUSION
Managing the distribution channel requires discipline in a number of areas from
managing the day-to-day relationship, assuring the distributor is in compliance with the
licenses and appointments, and strategically managing compensation. Many carriers are
investing heavily in processes to hone these capabilities in order to differentiate
themselves in the agents’ eyes beyond the product and price offered. However, carriers
face significant challenges in performing these tasks efficiently. Fragmented data and old
technologies cause inefficiencies
Carriers looking to improve distribution effectiveness use technology as a strategic
differentiator. Consistency in assuring licensing and appointment compliance can help
avoid market conduct fines. Simple, accurate processing of commissions and incentive
programs can save internal time and provide an easy way of motivating producers to
place more business with a carrier. Moreover, providing access to these tools via self-
service capabilities meets a growing request by agency principals. Without easy access
to clean data, it is hard to manage agents strategically instead of transaction by
transaction.
Managing agents well requires a focus on both the use of clean data and consistent
delivery of processes. Carriers looking to improve their capabilities in these areas should
focus on five major initiatives:
 Utilize data to more effectively segment agents and create specific programs for
them. These programs may include unique compensation programs or specialized
processes designed to build a stronger relationship.
 Automate the processes of compliance. Those who do automate compliance report
value from doing so. Look to automating the appointment process with the DOIs and
investigate just in time appointments.
 Align compensation programs with strategic goals. Move beyond a traditional
transactional commission and an incentive plan based on volume and profit. Create
targeted programs that focus on specific growth initiatives.

Invest in tools to administer compensation programs seamlessly. Those who do so
report few issues with effectively administering compensation programs accurately
and are able to utilize more compensation techniques. Spreadsheets add sources of
error and delay calculations.
 Use automated workflow tools to more consistently deliver the processes associated
with agency relationships.


Was this report useful to you? Please send any comments, questions, or suggestions for
upcoming research topics to info@celent.com.


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LEVERAGING CELENT’S EXPERTISE
If you found this report valuable, you might consider engaging with Celent for custom
analysis and research. Our collective experience and the knowledge we gained while
working on this report can help you streamline the creation, refinement, or execution of
your strategies.
SUPPORT FOR FINANCIAL INSTITUTIONS
Typical projects we support related to distribution management include:
Vendor short listing and selection. We perform discovery specific to you and your
business to better understand your unique needs. We then create and administer a
custom RFI to selected vendors to assist you in making rapid and accurate vendor
choices.
Business practice evaluations. We spend time evaluating your business processes.
Based on our knowledge of the market, we identify potential process or technology
constraints and provide clear insights that will help you implement industry best practices.
IT and business strategy creation. We collect perspectives from your executive team,
your front line business and IT staff, and your customers. We then analyze your current
position, institutional capabilities, and technology against your goals. If necessary, we
help you reformulate your technology and business plans to address short-term and long-
term needs.
SUPPORT FOR VENDORS
We provide services that help you refine your product and service offerings.
Examples include:
Product and service strategy evaluation. We help you assess your market position in
terms of functionality, technology, and services. Our strategy workshops will help you
target the right customers and map your offerings to their needs.
Market messaging and collateral review. Based on our extensive experience with your
potential clients, we assess your marketing and sales materials—including your website
and any collateral.

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RELATED CELENT RESEARCH
Distribution Management System Vendors: North American Insurance 2015
January 2015
Property/Casualty Insurance CIO Pressures and Practices 2015: North American Edition
January 2015
Game Revolution: Gamification in the Insurance Industry
May 2014




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