Asia Insurance Review - Consultants Roundtable 
In March, Asia Insurance Review held a Roundtable with the leading consultants in the market to look at why Asian insurers are not quick to jump on the bandwagon in embracing innovative distribution channels, and came out with quite a few surprising as well as motherhood findings.
Including that:
- No matter how strong the agents' hold on the company, insurers must embrace alternative distribution channels not in competition but both as complementary and supplementary efforts to give the customer the priority choice they desire;
- There is a serious need to review the agency management structure, both the structure itself, remuneration and their roles and responsibilities to ensure that this channel meets the revised needs being placed upon it by insurers and consumers;
- Some companies in Asia, especially in South Korea, are leading the pack in innovative multi-channel and direct marketing techniques with real results;
- Distribution is a vital driver of the business but needs to be properly monitored and controlled;
- Contrary to popular belief, bancassurance can be a more expensive channel, where insurers actually bear the cost of the whole distribution exercise;
- In bancassurance, success is about a strong partnership and deep trust, not necessarily the right "model";
- Channel conflict is more perceived than real; and
- Regulators have a big say in distribution patterns in a market and must regulate with the vision of the future and not pass rules to patch up the loopholes of the past.
We deliberately kept the knights of the Roundtable limited to consultants so that there could be free-ranging discussions among experts talking about a cross section of the experiences across markets and companies. The Consulting Knights were:
- Mr Ben McDermott, Markets & Distribution Practice Leader, Asia, Tillinghast-Towers Perrin;
- Mr Bruce Moore, Partner Actuarial Services, Ernst & Young;
Mr John O'Rorke, Director, Distribution Consulting Practice, Watson Wyatt; - Mr Raphael Young, Senior Consultant, Headstrong;
- Mr Raymond Li, Director, Actuarial Services, KPMG; and
- Mr Stephen Clark, Distribution Practice Leader, NMG Financial Services Consulting.
South Korea - Hats Off
The consensus view at the Roundtable was that South Korea is the latest country to embrace alternative distribution channels. This is as a direct result of recent deregulation in respect of banks and insurance companies working together, paving the way for the launch of bancassurance from 1 August 2003. Hong Kong and Singapore were singled out as markets that had seen a multitude of channels from agents to bancassurance, to brokers and direct marketing, including credit cards, telemarketing, shop assurance and brand assurance. Mr McDermott added that both these markets had evidenced massive change over the past five years, from both being dominated by agency distribution then to now having new business being spread over a range of channels.
Mr McDermott said South Korea, with its amazingly high level of Internet adoption, is an exciting market for alternative distribution, with retail financial services institutions seeing rapid growth in the adoption of their remote channels by consumers to both buy and service their financial products. Mr O'Rorke added that South Korea is, indeed, one of the most sophisticated markets that has transformed from domination by the female housewife solicitors with poor persistency and high turnover just four years ago to one now demonstrating true multi-channel distribution with sophisticated professional sales, direct marketing and even cyber-marketing being introduced by many companies. Mr Young said South Korea has also struck a good balance where insurance companies are able to offer a multiple suit of channels, including the Internet, self-service channel and agency portals to meet the clients' needs in order to close a sale. Mr Clark of NMG said many Korean insurers using various marketing aids, including imaginative insurance "riders", are very skilled at "triggering" insurance needs from a consumer's perspective.
Agents Certainly Needed
Mr Li of KPMG noted that the Internet in Asia has yet to take off as an alternative sales channel as insurance is still very much a product that is sold and not bought. There was agreement that the Internet is still very much a facilitating medium rather than a forum to conclude actual sales transactions. However, Mr McDermott added that we have seen some early success, both in sales to customers and in agency support. Mr Young said that it could serve a very fundamental purpose in arming agents with the right tools to enable them to be self-sufficient in making the sales at any time, any place. The CRM (customer relationship management) tools, used by insurers to serve their agents, can help the insurers to identify their top agents as priority customers and therefore give them superior service, he added. Mr Bruce Moore noted that despite the massive amounts of money spent in the dotcom heydays, the Internet and direct marketing has had minimal impact on insurance sales.
Mr Clark said agents tend to drive the type of products sold in agent-dominated markets. Hence, in these markets, traditional with-profit products with an element of guarantee are likely to be very popular, with newer unit-linked products being slower to take off. This has not been helped by the state of the global equity market.
All About Commissions
Given that insurance still very much needs to be sold, insurance companies need sales people to push their products even in this day and age. There was also the feeling that the agency system will be around for some time yet as many senior managers within life insurance companies in the region came through the agency route and, while having gone through and are continuing to go through change, firmly believe in the benefits of this channel. The Roundtable agreed that the agency system is still, relatively speaking, the most expensive form of distribution.
Commission itself is not pariah, they said, although the commission rates ranging from 40% to 80% on first-year premium for a regular premium savings contract is, indeed, high, caused largely by the pyramid agency structure that rewards not just the agent but his managers through overriding commissions and other benefits. Combining this with the poaching of agents which causes increased cost to insurers and loss of business, many companies are reviewing the structure of agent compensation schemes, Mr O'Rorke commented. It is also noticeable that many agents themselves are questioning the "value" of agency management in terms of the overrides they receive.
Calling for the unbundling of the distribution value chain, Mr Clark said that some companies are already developing platforms which enable the outsourcing of each component of this chain - allowing customers to interact with insurers and distribution channels in their preferred way. The most effective suppliers within the chain, including information providers, distribution channels, insurance and investment providers, will be the ones to benefit from this new trend. The owners of these platforms will be the real controllers of distribution.
Mr O'Rorke, who stressed that while the importance of the agent in the distribution process should not be underestimated, especially given that it was not easy being an agent, said the system often fell apart due to auto-promotion of good agents who were not necessarily good managers, leading to agency management incompetencies. Manulife was cited as a successful company with a flatter model of agency management that was producing above-average results.
Mr Young suggested that insurers should invest in CRM to see how they can serve and use the thousands of agents they have to optimise their sales production, including segmenting them for better servicing and support to achieve higher returns.
Multi-Channel Conflict
The Roundtable had an extensive discussion on whether any company has been particularly exemplary in handling multi-channels with remarkable success. There was no obvious winner in this category although various companies are trying out different channels and the mixes with varying degrees of success. Mr McDermott stated that we are seeing a breed of companies that are very successful in one or two types of distribution, such as CIGNA in telemarketing. The Roundtable then focused on channel conflict which Mr Clark stressed that, in many cases, was one of "perception rather than in reality". Every channel can contribute to customer understanding and assist in the sales process by going that extra mile to reach out to customers.
Bancassurance: Boon Or Bane?
On bancassurance, the views were different although many saw it as an exciting avenue with some companies reporting that some successful bank-based sellers are selling up to 30 cases a month compared to some agents who sell three to four cases a month. The most crucial element in bancassurance is that at the end of the day, the majority of banks still owns the client data and can change insurance partners to work with a competitor insurer.
Mr Clark said bancassurance has been around long enough for some cracks to show and insurers are beginning to realise that banks, in many situations, have the balance of power and that some bancassurance partnerships are not as cost-effective as previously expected. Much depend on how readily the bank managers at the branches are willing to push the insurance products over and above the other services offered by the bank. Mr McDermott stated that through Tillinghast's extensive mystery shopping of bancassurers in Asia, there is still some way to go for some bancassurers to deliver a high-quality customer experience with the view that bancassurers deliver better customer experiences being mainly still one of perception, not reality. Banks still need to develop better advice models.
It Is All About Trust
Mr McDermott stressed that bancassurance takes time to succeed as you have to build strong relationships built on trust. This can be a particular challenge in South Korea where the "unique" regulation requires that banks are needed to work with several insurers under the new rules coming into effect on 1 August. The Roundtable agreed that this will be a new era to be watched closely.
In China, the bancassurance that is quickly taking root with all the domestic insurers working with the local banks to sell insurance is actually appointing the banks as their agents. It is just an "agency arrangement", said Mr Li.
Adding that the cost associated with bancassurance distribution is invariably borne by insurers, he said that, for insurers, selling through the bank provides the main advantage of reaching as many hot or warmed prospects as possible. Mr Young also said that for the customers, bancassurance is just a matter of sheer convenience. It is simple to deal with their trusted bank with which they park their money. On the corporate side, with the mortgage loans offered, banks can sell fire policies and, with the letters of credit, they can sell marine cargo policies, both of which generate very high penetration rates, he added. The main weakness of banks is that it is limited to the opening hours of the banks whereas with the agents or online it can be a round-the-clock activity, said Mr Li. In Internet sales, the key weakness is after-sales service even with after-sales call centres.
Make It A Joint Venture
In looking at the hidden traps in bancassurance, some members of the Roundtable felt a joint venture between the bank and the insurer will usually be the best mode in ensuring an equitable partnership structured to reward and incentivise both parties to the deal. But the joint venture is only for the partnership of distributing the product to be manufactured by the insurer. Mr McDermott believed that it is not as clear cut as this and the best model depends on the needs of both the bank and insurer, with some partnerships preferring a distribution agreement. Mr McDermott evidenced this by saying that in Hong Kong alone there are a number of significant bancassurers using different business models.
Profitability As An Issue
The Roundtable lamented that most insurers do not seem to be as much bothered with the issue of underwriting profitability as they are with premium growth because of the past years of good investment income. Mr Li said the focus seems to be on premium and very little attention is paid to profitability, with the actuary having very little room to play with the figures. In some markets, even the mortality data is not available, or because of the fixed tariff market and the loading features, no real actuarial expertise is applied. Mr Clark said the economic downturn has forced insurers to look more closely at how each $1 of premium income is being allocated.
Importance Of Regulation
Agreeing that despite some of the best CEOs and best practices in the market, the regulations have a large influence on the pace of development and professionalism in the market. Mr McDermott introduced the concept of "disruptive innovation" where companies identify and take advantage of discontinuities, either those price, service, regulation or distribution in the market. He added that the companies that adopt this moving forward will be the movers and shakers of tomorrow.
Mr Clark said: "The importance of effective regulations cannot be underestimated. A single piece of legislation can change the whole market." Hence, the view was that regulators need to be well-informed of global trends and best practices and have to consult with the local insurance market more closely while bearing in mind the clear vision they have for the growth and development of the industry they have oversight of.
Mr Clark said: "There is a need for regulations. A better regulator is one which understands and can read future market trends and not one which passes rules based on historical practices and abuses." The Roundtable did a quick overview of the regulators in the region and singled out Singapore and Hong Kong as being most responsive to the changing times. Malaysia was commended for its national initiative in trying to educate the whole population on financial education. Some of the North Asian markets were noted as being slow to respond to the new appeals in unit-linked products to pass the risk of investments to the policyholders. The UK regulatory regime, despite being accused in some quarters of being overly harsh, was cited for its innovations, particularly with consumer education.
Product Innovation
On product innovation, the Roundtable felt the industry is generally held back by regulations. But where the regulations are silent, as in the area of riders, insurers in Asia lead the pack. Mr McDermott added that a vast array of riders is not necessarily in the best interest of the customer, stating the Australian experience of simple unbundled products being more customer-focused.
Mr McDermott said innovation is not just about good ideas but also getting the processes in place so that these ideas can be successfully implemented. He stated that few companies have a lack of good ideas. The issues for insurers are the processes and delivery methods used to implement these ideas, and approaches utilised to manage these ideas following implementation. Mr Clark said it depends on the degree of confidence of the firm and the courage of its chief executive to take on the challenge of the change. They urged companies to think beyond the box to come out with leading-edge products and processes. Mr O'Rorke also stressed the need to train the sales force to understand the need for the new product and its unique customer value proposition. He also suggested adopting a better process for new product development which includes customer and sales force research rather than simply copying the competitors. Mr Young said that in coming up with the unique value proposition, the insurer may have to form strategic alliances to bridge the capability gap in order to meet the various needs of the customer.
Principal Consultant, NMG Hong Kong
Based in Hong Kong, Mr Clark is part of the NMG Financial Services Consulting Regional Executive and has responsibility for running NMG's Distribution Practice. Originally joining NMG's UK practice in 1996 (TBOi UK), he subsequently also spent three years with one of the "Big Four" global accounting firms based in London, building and leading the company's distribution consulting service line. He is primarily involved in developing and delivering marketing and distribution solutions for a wide range of clients.
Mr Raymond Li
Director of Actuarial Service, & Head Actuarial Practice, KPMG
Based in Hong Kong, Mr Li heads the actuarial practice of KPMG in Asia. He is responsible for actuarial audit and actuarial consulting projects and is also currently leading a number of due diligence, audit review, and merger-and-acquisition activities in the region. Mr Li has a broad range of international regulatory experience that includes his role as adviser to the China Insurance Regulatory Commission.
Mr Ben McDermott
Head of Markets & Distribution Practice, Asia, Tillinghast-Towers Perrin
Mr McDermott also acts as Consultant to the firm's financial consulting practice in Asia. Since joining Tillinghast in Asia, he has worked on various distribution and strategy-type assignments. Prior to joining Tillinghast, he spent four years as one of the first members to join the project team that designed Egg, the UK's leading Internet bank, majority-owned by Prudential UK.
Mr Bruce Moore
Partner, Ernst & Young
The Partner in Charge of Ernst & Young Actuarial Services Ltd, Mr Moore has over 25 years of experience in the insurance industry, both as Senior Executive and an Actuarial Consultant. His current responsibilities include bringing modern financial management techniques to financial services clients in Asia. Based in Hong Kong now, he has worked in Tokyo and Beijing, where he was charged with developing the firm's financial services practice in China, and overseeing the Asian actuarial practice outside of Japan.
Mr John O'Rorke
Director of Watson Wyatt Distribution Consulting
Mr O'Rorke is a Sales and Marketing Specialist with over 30 years in the international financial services industry, having worked with life insurers and financial marketing agencies. In his past seven years in Asia, he has been involved in a number of distribution projects, including an external review of agent distribution channels in Thailand and Hong Kong and the development of regional "Model Agency" for top five multinationals, including core processes and practices, operating ratios and compensation principles.
Mr Raphael P Young
Senior Consultant with Headstrong's Asia Pacific Consulting Practice
Specialising in helping insurance clients on issues related to strategy and performance improvement, Mr Young has managed and worked in various projects for insurance companies in Asia, including market assessment, strategic alliance, e-business and systems evaluation. His line experience includes working with a number of multinationals in Asia and Europe such as Standard Chartered Bank, HSBC and AIG.