Life Operation Options: Module I

LIFE GUIDE FOR P/C AGENCIES: MODULE I

LIFE OPERATION OPTIONS

When you decide to establish a Life operation in your P/C agency, you have different financial and personnel arrangements to consider. This module gives you an overview of the five basic options from which you can choose:

1. Use an in-house producer initially subsidized by an insurance carrier.
2. Use the services of an insurance carrier's field representative.
3. Develop a relationship with an independent broker or general agent.
4. Train your existing P/C staff.
5. Establish a separate Life profit center/department (can be established as a separate corporation).

This module covers the advantages and drawbacks of each type of arrangement. You'll analyze the time investment and costs each option requires and your degree of control over the operation. At the end of this section, you'll find a schematic that readily compares all of the options. And, once you've finished reviewing each option, you'll want to look to the 'Marketing Plan' which will help you choose the option that will work in your agency.

This vital decision carries with it many complex considerations-this module should help you sort them out and make the move that helps your agency grow and prosper.

Hundreds of independent agencies have built their Life/Health/Benefit books with the help of producers who may be initially subsidized by one of their carriers. There are companies that will make this type of arrangement with a P/C agency that they believe has the potential to write Life insurance. In return for company assistance, the producer is required to generate specific production levels, in addition to production levels required of the agency.

Usually, under this type of arrangement, the producer is housed in the agency. He or she is recruited by you, with the approval of the subsidizing carrier; trained and supervised by you; encouraged to sell the subsidizing carrier's products; has quotas from the subsidizing carrier; and has compensation arrangements made and agreed upon by you and the subsidizing carrier.

Generally, in this situation, you recruit and interview until you find a candidate in whom you're interested. Once the candidate passes a career profile exam, a second interview is set up so that the company representative can meet the candidate. The third interview, in which the candidate is offered the position, is usually conducted by you and the carrier's representative. You will be responsible for keeping the carrier informed as to the Life producer's progress, providing training schedules, activity targets, and the like. The carrier will have production requirements for the agency and for the Life producer.

Normally, you receive all the commissions, since this type of producer is working on behalf of the carrier and thus is compensated by the carrier. However, the subsidy that producer receives is usually an interest-free loan from the carrier to you, repayable by a schedule after 18 months. Some attempt should be made to negotiate expense reimbursement allowance or overrides based on meeting predetermined production criteria.

Some carriers offer software programs that make possible automated transmissions and proposals, but be aware of the extra time this arrangement would involve for CSRs and/or clerical staff.

ADVANTAGES

1. Initially, the carrier supports the producer. (But you are responsible for recruiting, hiring, and training costs.) You could use the savings from this initial support to expand into other areas.
2. Generating Life production for the carrier may make certain perquisites available to the P/C side in terms of underwriting and capacity.
3. A successful, subsidized producer will strengthen your relationships with your carriers.
4. Training is performed by the agency; however, the carrier usually helps in the training process by providing materials and support from the carrier's field staff.

DISADVANTAGES

1. The carrier's involvement in the sales training process reduces your control over the producer. Your producer will be 'encouraged' to push the carrier's products, a situation not unlike a captive agent program.
2. The program focuses on the carrier's products, which may not be as 'state of the art' as you would like, and may not correspond to your clients' needs.
3. The levels of production set by the carrier may not be realistic, and failure to achieve these levels may have a negative effect on how the carrier treats your P/C book.
4. This type of producer is usually expected to produce both P/C and Life business. He or she is not solely a Life producer.

TIME INVESTMENT

1. You will spend as much time with the producer under this arrangement as you would with producers under any of the other options for a Life operation. However, you will enjoy company materials and support.
2. You will need to conduct additional training as you would with any new producer, so that the producer understands your agency functions. For example, he or she must be familiar with your CSRs' procedures and your methods for processing paperwork.
3. Your supervisional and motivational time under this arrangement will be the same as with the other options.

COSTS

1. Your recruiting and training costs are the same as with most other options.
2. The carrier may finance some or all of the producer's expenses with an interest-free (or low-interest) loan to the agency, which must be paid back.
3. The company may also provide subsidies for advertising and prospect lists at a discount.

DEGREE OF CONTROL

All other things being equal, your degree of control over a subsidized producer will be lower than for a producer that you finance yourself or develop in-house. You will be just as involved in his or her training, but he or she will be heavily encouraged to place business with the subsidizing carrier. You do the same amount of work as you would with the other options, but you trade control and flexibility for a short-term, negotiated, interest-free loan. In addition, this producer will not be totally focused on Life insurance sales since his or her responsibility will be to sell both P/C and Life for that carrier.

Over the years, many major Life insurance companies have sold Life insurance through independent agencies by using a company specialist. Typically, an individual who was an expert in Life insurance, pensions, and estate planning was sent out to the agency and 'turned loose' on the files.

In order for this approach to be successful, you cannot 'turn someone loose.' As knowledgeable as the field representative may be, he or she does not have a background in P/C insurance or agency operations, and doesn't understand how an independent agency functions. In the worstcase scenario, the field representative could alienate and lose some of your clients by coming on too strong or not understanding the unique relationship that exists between client and agent.

There are several ways to avoid this scenario. First, you must spend some time explaining to the field rep what it is you consider important and unique about the agency's selling strategies and client/agency relationship.

Then, agency principals should introduce the field representative to clients. A personal introduction is most effective, but, in some cases, unreasonably time-consuming. In these cases, an introductory letter might be used, in which the agent informs the client that the field rep will be calling, reveals a little about his or her background, and gives the field rep the agency's backing.

When it's time for the rep to conduct appointments, many agencies prefer to have this done in house, so that someone from the agency can introduce the rep to the client and, if possible, sit in on the fact-finding interview, making the client feel comfortable and giving the agency some control over the process.

ADVANTAGES

1. Since the field representative is not housed in your agency, you have no fixed costs or responsibility for salaries, fringe benefits, and so on.
2. This person should be a professional-hence, there are no training, supervisory, or motivational costs.
3. In many cases, as the independent agent, you will receive all commissions-there are usually no splits involved.

DISADVANTAGES

1. You have little or no control over the products the representative offers or the sales methods he or she uses.
2. You can't expect the representative to prospect or to generate referred leads for your agency.
3. Since the rep will be dealing with a number of independent agencies, you will be tied to his or her schedule in setting appointments.
4. You may only have a producer's contract and not a general agent's or preferred-broker's contract. Because the company is paying the field rep, it will in turn not pay you more by also giving you a top contract. In other words, you forfeit a portion of a top contract for the rep's salary.

TIME INVESTMENT

You will invest less time in this option than in some of the others, but you will still need to set up the appointments.

Costs should be negligible-just about everything should be picked up by the carrier. Carriers also may provide assistance if the agency needs cooperative advertising, software assistance, and so on. However, you may give up commission points by not having one of the better contracts.

Since the field representative is an outsider, you have little or no supervisory authority, unless everything is done in the office and/or one of your people is present on interviews.

Another approach to the development of Life and Life-related product sales in the independent agency is for the independent agent to work with an independent Life contractor or broker or a Personal Producing General Agent. The contractor is usually not housed in the independent agency, but maintains a separate office. The agency will set appointments for the broker to meet with agency clients, either alone or jointly with agency producers.

If you're considering this approach, know that you should search for and select a top-flight individual who is presently involved in Life insurance sales. He or she should:

1. have a CLU designation or other professional recognition;
2. have sufficient years of experience to handle most types of Life and Life-related product sales situations;
3. be oriented toward continuing education;
4. work for a company/companies that have a broad product portfolio, including Life, Individual and Group Health products, and other vehicles that are important to your agency's goals; and offer home office specialists in estate planning, pensions, and so on;
5. have a reputation in the business for integrity and professional competence.

Your negotiation should include an arrangement by which you earn a portion of the full agent's commission on the sale and some part of the renewal commission. This renewal commission may range from 20% to 40% of commissionable premium and the same percentage of renewals. If you can develop the arrangement using your general agent contract, all the better. Your responsibilities will change somewhat and will include application handling and policyholder service. If this occurs, your commission arrangements might be modified accordingly.

The points mentioned in the section on company field representatives concerning the rep's meetings with clients also apply to the Life broker or independent contractor. You need to introduce your clients to the contractor and, in the same manner (when possible or feasible), oversee the fact-finding interview and closing to be certain that your clients are being treated in the manner you've established in your agency, particularly with your bigger customers.

ADVANTAGES

1. Provides 'instant expertise' in product lines in which you may be weak.
2. Allows you to offer your clients a more competitive product base than if you were to use company-subsidized producers or field representatives.
3. Eliminates the costs of salary, financing, perquisites, training, and supervision.
4. Eliminates the need to negotiate general agent contracts with carriers (when you use the broker's contract; it is possible for the broker to use agency contracts).

DISADVANTAGES

1. Since this is an arm's length relationship, you may have little or no control over the broker and the cases he or she writes.
2. Often the broker holds the contracts, which means you'll be operating on a split-commission basis.
3. The broker usually writes business through carriers with which he or she is licensed, even if you aren't. This type of relationship offers no incentive for cross-selling or developing referred leads that will produce business for your agency.
4. Unless you've developed a strong, long-term relationship with the broker, you may run the risk that he or she may not show the same degree of commitment to customer service that you have.
5. Because the broker may have his or her own priorities, you may need to schedule your appointments around his or her time.

TIME INVESTMENT

In this case, the time you must invest is reduced to setting up appointments.

These will be negligible, except for the opportunity costs of not doing this job fully in-house with your own general agent contract.

You will have little or no control over managing the independent broker.

Many independent agencies, especially smaller operations, are marketing Life and Life-related coverages using their existing P/C staff. In some cases, the agency principal or a producer may write Life business reactively, responding to a customer's request. Traditionally, these operations have focused on a total account development approach, using producers and/or CSRs with Life licenses to market products from Mortgage Redemption to Term conversions. Most of these sales are of a dominant need nature (where one need is prevalent or obvious) and require minimal qualification.

In most agencies in which the CSR is the primary Life insurance salesperson, the majority of Life insurance sales are Mortgage Redemption Term insurance. This is because the Term sale is a natural addition to the Homeowners sale and is simple. Also, many P/C agencies have affiliations with real estate brokers whereby the agency receives leads from the real estate agency on residential home sales, and the agency approaches that prospect on the basis of selling Mortgage Redemption.

Some agencies mail Universal Life and Term insurance proposals with a Homeowners renewal, asking the policyholder to review the proposals and set up an appointment for further discussion. If this method is to be at all successful, it must be done on every Homeowners renewal and, even so, it will not generate the kind of revenue that a focused, aggressive Life campaign will.

To expand activities beyond Term sales and to generate greater success than that accomplished by mailing proposals and applications, your CSRs and P/C producers must be involved in a defined, well-thought-out training program. If permanent Life insurance, Individual and Group Health insurance, and annuities are to be sold, your staff needs to be taught the delicate process of shifting from a demand sale to a non-demand sale. Refer to the Agent's Guide 'Training' section to learn more about the quickest and most effective approaches to product and sales training.

ADVANTAGES

1. Since your employees are already on board, you don't need to spend time or money recruiting. (However, should your CSRs become very successful in Life selling and thus spend a lot more time doing it, you may have to hire additional staff.)
2. You have total control over training, supervision, and 'expectation levels.'
3. Because you hold the general agent contract, you can set up the compensation structure any way you'd like-and you control the renewals.
4. As an insurance professional, you're obliged (perhaps legally) to offer your clients complete protection. Life insurance is the key to rounding out the account-and a simple Life sale may lead to other products, such as Individual Medical Expense, Disability Income, or Group insurance.
5. Offers a 'career track' for staff members. Those who are motivated self-starters should be rewarded with addtional education and opportunities.

DISADVANTAGES

1. The P/C orientation of your staff means that you may need to 'sell' them on the idea of marketing Life insurance.
2. You'll need to develop training methods to teach your staff the product knowledge and selling techniques they'll need for Life products (but this Agent's Guide will show you how).
3. You'll need to supervise your producers and CSRs throughout the marketing process.
4. Your producers may find it difficult to maintain expertise on both Life insurance and P/C products. Life and benefits products are becoming increasingly sophisticated-if producers do stay knowledgeable in these areas, they might not have the time and energy to market and service P/C products, the core of your agency's revenue.
5. You'll have to expend the time and money to get your staff licensed to sell Life insurance products.

TIME INVESTMENT

You'll need to spend a significant amount of time in motivating, training, and supervising your staff.

There's the opportunity cost of spending time training and supervising, when your staff could be selling. Also, you may have to add clerical staff to free up some of your people's time to conduct Life sales.

You have total control. With no dependence on outside producers or company subsidies, you run the operation in any way you see fit.

Hundreds of independent agencies have prospered by marketing Life and Life-related products through a separate department. While this option requires the most initial outlay in terms of funding and time, it is recommended for those agencies that have the wherewithal to make it work, because it's also likely to bring in the most revenue from Life insurance and offer the agency the most control over the operation.

In many cases, this operation is structured as a separate corporation. Such a structure is usually recommended at some point in time for several reasons. Structuring your Life department as a separate corporation or partnership offers a number of advantages. It provides an incentive for the department manager and producers by giving them a piece of the action, and it keeps the assets of the Life operation separate from those of the P/C operation. Also, it helps you to maintain tight control over the Life operation.

The Life producers should have a piece of the action as an incentive after they have proved themselves. But you, as agency principals, must retain controlling interest. Effective controls eliminate the problems of disappearing referrals and phantom commission, since all business goes into the Life corporation for distribution. P/C agencies have lost thousands of dollars in Life commissions, not to mention commissions from lost P/C accounts, due to lack of commitment and controls.

From an accounting standpoint, you should establish separate accounting for the Life department so that you have a firm grasp on what your efforts are costing and producing. This means that all revenues and expenses should be listed separately; the profit center should have its own accounting and secretarial support, telephone lines, postage meter, and so on; and you must be able to diligently allocate expenses for this department so that you will have a firm grasp on the expenses of running the department and the revenue generated by it. However, all business should be written in the name of the agency so that, in case the person who runs the profit center leaves, control of the business is with the agency.

While the structure you develop for your Life corporation will depend upon your particular situation, there are some guidelines you will want to consider.

1. Ownership: As an agency principal, you should retain a controlling interest in the Life/Benefit corporation's stock, with the rest going to producers under a written formula based on production. You should have first right of refusal of the Life producer's shares. The agreement should also include buy-sell agreements for stock redemption and Disability Income.
2. Distribution of profits: Since money is the best incentive, higher production levels should be rewarded with higher commission levels. The fact that high-performance Life producers may earn a larger percentage of income than P/C producers shouldn't be a problem. Life sales will generate a larger gro