Back to Basics: Distribution Channel Overview

By Tiana Zhao

NewsDirect, April 2024

Distribution channels matter because they impact how products reach the clients, client experience with the company, and are a key driver in total company performance. Think about this, the pricing actuaries could design innovative products that meet client needs, but without distribution channels communicating the right messages to the clients and addressing their questions, the products probably would not sell.

How to Choose Distribution Channels?

In my opinion, the choice of distribution channels can have several implications:

1. Reach and market access: Different distribution channels reach different customer segments. An example would be the high-net-worth (HNW) market. There are existing brokerage firms and agents who have established relationships with high-net-worth individuals in the region. It would be difficult for an insurance company to launch their own distribution channels and directly compete with them. In that case, it makes more sense to work with the existing brokers. It is important to choose the right channels to tap into specific markets and demographics more effectively.
2. Costs and efficiency: The costs and efficiencies could vary significantly across distribution channels. Digital platforms have lower costs compared to using intermediaries like agents and bancassurance. They may be more efficient when it comes to selling products to the millennials but are less efficient if the target customer segment is retired individuals. Balancing costs and efficiency in choosing distribution channels helps lower operating costs and improve market competitiveness.
3. Customer experience: The process of selecting distribution channels should be a careful process as it is a key driver in customer experience. Distribution channels are usually the first thing the customers interact with and can be a key deciding factor for which product they purchase and which company they purchase it from.
4. Product customization: Some distribution channels are more suitable for selling complicated products or working with the clients and the insurance companies to design customized products. Some might be more suitable for selling standardized products. For example, it would be difficult for digital platforms to sell complicated products due to the lack of personalized advice.
5. Brand image and trust: As mentioned above, distribution channels are important in customer experience and the service customers receive from distribution channels would be directly linked to the insurance company’s brand image and trust. It is essential to perform due diligence on a certain distribution channel before launching or collaboration to ensure there is no reputation risk involved and the goal of that distribution channel aligns with the company’s brand image.

What are the Different Types of Distribution Channels?

The most commonly known type of distribution channel is selling through insurance agents, brokers, and financial advisors. Those are licensed individuals who have a good understanding of insurance products and are able to offer personalized advice depending on client needs. Some might be more product-focused (i.e., experts at one or several types of products) or more relationship-focused (i.e., focusing more on relationships with clients). They could either exclusively sell one company’s products or sell multiple companies’ products. In the event they sell multiple companies’ products, other than client needs, their tendency to promote one product over another could be heavily dependent on commissions.

Another distribution channel would be direct sales. This can be done through phone calls, in-person sales teams (e.g., going to different neighborhoods and knocking on people’s doors) or digital platforms (e.g., company’s own website). There is a trend toward digital platforms partially due to advancements in technologies and targeting the millennials as a customer segment.

A third type of distribution channel is through financial institutions. An arrangement that is of rising trend in the Asia-Pacific market is bancassurance. This is an arrangement between a bank and an insurance company that allows the bank to sell the insurance company’s products to the bank’s client base. From the bank’s perspective, this helps build the brand as a one-stop shop for clients, diversify their offerings, and earn additional revenues. From the insurance company’s perspective, this allows them to tap into the bank’s customer base without increasing their sales force.

Another common distribution channel is employee or university sponsored programs. Companies offer group benefits to their employees they could purchase from insurance companies. This could include life insurance and health insurance. Certain companies purchase insurance for key persons in their companies to lower key person risk and to recruit and retain talent. Universities in Canada also offer UHIP, which stands for University Health Insurance Plan, and is mandatory health coverage for registered international students and exchange students.

One last type of distribution channel I want to mention in this article is affinity groups. This could include alumni associations and professional organizations. For example, I graduated from the University of Waterloo who has partnerships with some insurance companies to offer insurance products, for example, term and whole life insurance, to their alumni. This is a way for insurance companies to tap into alumni and professional associations without significantly expanding their sales force.

Conclusion

Distribution channels matter a lot for insurance companies. If you are an actuary who is interested in your company’s distribution channels, I strongly encourage you to set up coffee chats and lunches with your distribution partners to understand more.

To hear more on distribution channels. You are encouraged to review the recording of “Back to Basics: Distribution – Overview of Channels” from Sept. 22, 2023, a webinar hosted by the SOA Marketing and Distribution Section.

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the newsletter editors, or the respective authors’ employers.

Tiana Zhao, FSA, CERA, is an actuary focusing on product innovation, design, and pricing in the high-net-worth market space at Sun Life International. She can be contacted at tianazhao2000@outlook.com.