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Published in Mint, Written by Kapil Mehta
The business world is replete with ferocious two-sided battles—iOS versus Android, Linux versus Windows, Big versus Small retail, budget versus full-service airlines, and so on. These battles are fought globally and across industries, but have two things in common: at stake is the fundamental principle of how much consumer choice to provide; and the winner will be very rich.
Unknown to many, a similar stormy war is being waged in the insurance world since the early 1970s. This is the fight for dominance between tied and independent distribution.
So what is this war about? Tied distribution refers to insurance sales through a distributor who owns allegiance to the insurer. This distributor sells only one insurer’s products. The insurer recruits, trains and manages the distributor. Tied distribution can be through individuals, companies, banks or insurer’s employees. In 2013, there were 2.1 million life insurance agents in India and 739 corporate agents. A staggering 98.8% of life insurance and 81% of general insurance was distributed through these kinds of tied distribution channels. The advantage of tied distribution is that insurers have the capital to make large investments. This rapidly expands distribution reach. The primary issue is that products can get incorrectly placed: A traditional endowment is sold where a unit-linked insurance plan (Ulip) would have given better returns; a regular-pay product is recommended where a single-premium would have been more cost-effective.
Independent distribution refers to sales where the distributor can work with multiple insurers. The distributor’s loyalty is to customers. Historically, brokers have been the only independent distributors. Instinctively, the regulator and government are expanding independent distribution. Web aggregators have been formalized; banks are being encouraged to turn brokers instead of being agents; and, more importantly, a new distribution entity called the insurance marketing firm has been proposed.
The advantage of independent distribution is that consumers take centre-stage. They can be offered more choice and better options. The issue is high cost of entry and a dearth of talent with the capability to handle multiple products. Consequently, independent distribution expands slowly.
It is in this context that the proposal for an insurance marketing firm is significant. As envisioned, these firms will distribute products of multiple insurers and will operate in a small geographic area. Entry cost has been brought down by reducing the capital and infrastructure requirements. Effectively, these firms will operate like limited-scale brokers. This is an important decision and signals the beginning of the face-off in India.
The tied versus independent distributor face-off was first fought 40 years ago in the US. Within just a decade, the independents had won. Insurers shut tied distribution because the costs of recruiting, training and retaining were just too high. The best performing agents set up independent general agencies that grew rapidly and completely changed the distribution landscape. These general agents would work with multiple insurers and sometimes across financial services products. According to a Wall Street Journal report, the number of tied life agents fell to a third between the 1970s and 2010. The UK market is predominantly independent and most distribution is through Independent Financial Analysts and brokers. But then you have Japan where tied distribution is still the norm. These are three of the largest insurance markets of the world.
In India, tied distributors, particularly of the private sector, are in bad shape. The number of life insurance agents has been reducing, about one-third of agents leave the profession each year. Average agent earnings are less than Rs.5,000 a month. How can you build a healthy practice and provide quality advice with that level of productivity?
Over the next few years, I expect considerable development in independent distribution. If the insurance marketing firm proposal goes through, several successful agents will shift sides from the tied to the independent model. Individuals or small firms with an existing client base will look to set up such firms and expand their service offering. Over 15 of the world’s top 20 insurers operate in India but just three of the top 20 brokers have a deep, meaningful presence here. That will change.
Internationally, independent distributors are comparable in size to insurers. It is just a question of time before they sense the opportunity ahead. Given the rapid pace at which regulations are being developed, the regulator will have to ensure that distributing entities have a level playing field in terms of compensation and selling boundaries. Currently, there is a disparity as insurers can pay the insurance marketing firm more than what brokers or tied agents get. I want independent distributors to thrive. These entities foster product innovation, client service and market development. A non-performing insurer will get replaced by another; an unsettled claim will get rapidly escalated; distributors will build full-time careers in insurance and customers will find a voice—this is the essence of independent distribution.