As an industry, we have arrived at a tipping point where the insurance distribution model is changing dramatically and rapidly. Consumer business that was once available only to large, established corporations is now wide open for those who can reach customers, hear them, speak to them, and serve them best. The shift is welcomed by consumers tired of being “stuck” with what is available. For individuals and companies with fresh new approaches, this shake-up in insurance distribution channels presents arguably the most significant shift the insurance industry has seen in the last century.
Data-driven insights can now reveal granular markets where insurance needs are unmet and underserved. Large corporations have tended to tailor insurance products to the “mass average,” understandably. Mass marketing and brand dominance have proved an effective way of growing profits through volume.
While this approach yields plenty of business for large companies, it leaves a staggering number of opportunities for those willing to identify niche audiences, tailor products to meet their needs, and effectively place those solutions before them at the opportune moment. In larger markets, limited competition has contributed to complacency, creating ample opportunity for agile startups to step in and serve customers in fresh, new, and welcomed ways.
The shifting of distribution channels isn’t just an opportunity for agents selling insurance products to reach more clients. The shift presents an opportunity for defining new risk groups, creating new products, forging new pipelines, and reaching outlying markets effectively and affordably. It’s a shift that affects all the players in insurance distribution channels and allows individuals and smaller companies to bypass or become some of those players to serve niche markets.
Understanding the Key Players in Insurance Distribution
Knowing how insurance products flow through the channels to become solutions for a target audience is an essential first step in connecting the dots.
Reinsurance Companies
A reinsurance company provides financial protection to insurance companies. Essentially, what they offer is insurance for insurance companies. When an insurance company’s risk pool becomes too centralized, an insurance company shares this risk with a reinsurer to prevent insolvency in the event of a loss. In addition to sharing risk and obligation, the insurance company shares a portion of the premiums collected with the reinsurance company.
Reinsurance Intermediaries
Reinsurance intermediaries, or reinsurance brokers, serve as intermediaries between ceding companies and reinsurance companies. Reinsurance intermediaries can operate as an outside sales force for the reinsurance company, developing relationships and adding value to a reinsurance relationship between a ceding company and the reinsurance company.
Insurance Companies
The insurance company, i.e., the “ceding company” or “carrier,” takes on the burden of an agreed-upon risk. The insurance company receives premium payments in exchange for taking on this risk. Large insurance carriers usually take on “risk pools” composed of individuals that meet defined and specified criteria that can be used to evaluate and measure the risk.
Fronting Companies
In a fronting arrangement, the fronting company issues the policy and conducts all business with the policyholder but transfers all the risk to a reinsurance company. The fronting company holds none of the ownership of risk. However, it still takes on a credit risk because the fronting company initially issues payment before seeking reimbursement from the reinsurance company.
Managing General Agents (MGAs)
A managing general agent (MGA) acts as a broker or an agent on behalf of the insurance (ceding) company. MGAs are the customer-facing intermediary that acts on behalf of the insurer. In exchange, the MGA receives a portion of the premiums for servicing the policy.
Unlike a general agent or broker, who must adhere to established underwriting guidelines, an MGA has been vested with the authority to underwrite policies (i.e., make decisions about assuming risk). The MGA can underwrite, set premium prices, bind coverage, and conduct the business of claims handling without having to obtain case-by-case approval from that insurer.
MGAs can earn commissions from premiums and share in the insurance company’s underwriting profits (and losses). MGAs are not employed by the insurance carrier but are independent agents that represent and act on behalf of the carrier with more authority than a general agent or broker.
MGAs are one of the fastest-growing segments in the insurance industry today. With the greater ability for companies to establish niches and affordably reach clients, this sector has seen expansive growth.
Wholesalers
Wholesalers typically work in surplus lines, pairing hard-to-place risks with specialty insurers. Wholesalers are intermediaries between licensed insurance agents and carriers. They have relationships with insurers, negotiate rates and coverages, and get deals inked for unusual or specialty risks. In return, they receive a portion of the commission from the agent.
Retail Agents
An insurance agent holds a license to transact insurance and works closely with clients seeking insurance coverage. A retail agent can either act as a captive agent (sell policies only from one insurance company) or as an independent agent (sell policies from various insurance companies).
Captive agents are often compensated with a fixed salary or hourly wage and sales bonuses, while independent agents receive commissions for their book of business. One of the primary reasons a retail agent may choose a captive agency arrangement is for the steady income and company-generated leads. Independent agents typically have the potential to earn a far greater income but must source leads themselves. This sector is another growing area in the industry, as digitization is creating new ways for independent agents to reach buyers directly.
The Digital Transformation of Insurance Distribution
Insurance is among the oldest industries in civilization. The way in which risk transfer agreements are made has evolved and brought more roles into the market with every iteration. Digitalization’s impact on distribution channels is creating one of the most significant shifts in the insurance market, allowing new and emerging independents to tap into vast and niche market sectors through the internet. Digitization is shifting the nature of the business from just “who you know” to “who can figure out how to best reach and serve the target audience directly.”
This shift has placed InsurTech startups at the top of the pack, leveraging marketing tools and emerging technologies such as AI to not only reach a target audience but also to discover them, create conversations with them, and provide a level of targeted, personalized, and ongoing interaction with them — and to do so without a massive sales force. Digitization is making it possible for small startups and independents to claim large shares of an industry that once required legions of intermediaries.
Navigating the Changing Landscape
Replacing the need for a large and broad salesforce is a deep and specialized knowledge of digital marketing tools and strategies to reach and speak to specialized audiences on a mass yet personal scale. Digitization has become highly complex, involving integrating information across product platforms and developing an overall strategic model to choose, use, and implement the tools. The market will go to those who create an intelligent strategy for finding, reaching, and communicating with the audience — and then implement the right tools to carry out the plan.
The markets are there not only to be reached but to be discovered, too. Pairing an underserved market with a more appealing insurance product or a more effective way of obtaining that product is the dynamic for success. Placing your message directly in front of your target audience through digital channels is the multiplier in the equation.
Connecting people with insurance problems to people with insurance solutions is our expertise. When you’ve found the niche, Nielson offers a suite of solutions for dialing into that audience, meeting them where they already are at the opportune time. If you can define precisely who you want to locate and the message you want to communicate, the technology exists to do just that.
About Neilson Marketing Services
Since 1988, Neilson Marketing Services has been implementing innovative marketing solutions and strategies for our clients in all areas of marketing. Contact us today at (866) 816-1849 to put our talent, expertise, and vast resources to work for you. Let’s make things happen, together!
