Financial services convergence, lower investment earnings, and market demand for more financial products all have combined to force insurers to develop new products more quickly. But how about getting those products to the market more quickly?That requires developing incentive plans and delivering commissions to producers to encourage them to sell your products.
Reducing time to market for new products is a key strategic goal for Penn Mutual Life Insurance Co., according to Neeta Garg, assistant vice president of sales business information for the Horsham, Pa.-based insurer. "But we could only do that by making sure that our compensation systems were up to the task," she says.
"If we decide we want to bring a new product to the market quickly, our product developers can develop the product quickly. But if we can't implement the compensation with the same speed, we can't bring the product out in a timely manner."
As a result, Penn Mutual decided in 1999 to invest in a new compensation management system. The company is currently in the third phase of implementing the system-from Trilogy Software Inc., Austin, Texas-and already, it is developing compensation plans more quickly. Furthermore, when the company completes the migration of producer compensation to the Trilogy platform by the end of this year, it also plans to measure producer profitability.
Indeed, enterprise incentive management (EIM) technologies can help carriers address the distribution challenges associated with speed to market, according to Chad Hersh, senior analyst at Celent Communications, a Boston-based research and advisory firm. The technology enables them to develop more flexible incentive plans, to see a single view of producers across multiple channels and disparate administration systems, and to pay producers more accurately and quickly, says Hersh, in a recent report titled, "Incentive Management Systems for Life Insurers."
Slow to catch on
But even with these potential benefits, EIM has been slow to catch on in the industry-primarily because the technology had to catch up with insurers' complex sales operations, he says. Now, these products have been tailored to the industry's unique needs and insurers have had successful implementations. As a result, Hersh predicts life insurers will invest in EIM at a growing rate-from $15 million this year to $80 million by 2007.
"EIM is an important tool for life insurers," Hersh says. "The variable compensation portion of these systems is a great way for carriers to offer incentives. But their real value is in providing a broader tool for managing the entire distribution process-from licensing and contracting producers all the way through payment."
In fact, insurers including Penn Mutual, Jackson National Life Insurance Co., Manulife Financial, and CUNA Mutual Group-as well as some managing general agencies (MGAs)-are reporting improvements in their compensation management programs as a result of implementing EIM applications.
Manulife Financial, for example, has eliminated thousands of spreadsheets it was using to manage commission override rates for MGAs. One Resource Group, an MGA in Fort Worth, Ind., has saved 25 to 30 hours a week setting up various commission structures for its agents. And Penn Mutual has reduced the time it takes to implement compensation plans for new products by 75%.
"When management started thinking about a new compensation management system back in 1999, we had multiple commission systems, and they didn't have the flexibility we needed to make rapid changes and reduce our overall costs," Penn Mutual's Garg says.
In addition, it was difficult for management to get a comprehensive view of what products producers were selling because the information was dispersed among these siloed administration systems, she says. "By moving to one centralized compensation system, we'll be able to look at trends and decrease our costs."
For example, Garg says, the company wants to determine which products are making producers more profitable. "Producers know that the higher the face amount of the policy, the better it is for them," she says.
"But profitability involves more that that. It could mean selling a $1 million insurance policy as opposed to selling smaller ones to 1,000 people. But it's a give and take-because once that person stops paying the premium on the $1 million policy, it's history. So, profitability is about spreading risk, and that's what we're hoping to help producers determine."
Another insurer that has implemented EIM also stresses the importance of managing distribution more effectively.
"In today's dynamic world of distribution within financial services, flexibility is the key to meet all the (market) demands and manage distribution accordingly," says Jim Quinn, vice president of broker management at Jackson National Life Insurance Co., Lansing, Mich. "You need to know every standing relationship and touch point your company has with each agent-or with the organization each agent represents."
To get a better handle on its producer relationships, Jackson National in November upgraded its distribution management system from the mainframe-based system it implemented in 1994 to a multi-tiered, browser-based system from Computer Sciences Corp. (CSC), El Segundo, Calif.
More flexibility
The new distribution system manages detailed information on distributors and their relationships and computes compensation based on a range of formulas. It provides Jackson National with the ability to set up the various payment configurations its distributors demand. It also helps with regulatory compliance and management reporting, according to Quinn.
For example, the system currently handles producer licensing and appointments in separate records; in the old system, the records were combined.
"That was a problem because licensing and appointment are handled differently by different states," Quinn says. "One state may have a perpetual license, but an appointment that renews annually or biannually, while another state may have a perpetual appointment as long as the license stays intact or unless we tell the state to terminate the appointment," he says.
In addition to making compliance easier, retrieving data the company needs for ad hoc reporting is much faster and more manageable on the new system, Quinn adds. To produce reports on appointments, disbursements, and address changes on the old system, the company had to extract the data and massage it. "Now we can get our hands right on the data. It takes hours instead of days," he says.
One Resource Group, a managing general agency (MGA) in Fort Wayne, Ind., would not be able to meet its growth projections if it didn't invest in a commission payment system, according to Andrea Baumer, co-owner, CFO and general manager.
"When we started this company two years ago, that was one of the first decisions we focused on-because managing compensation plans has always been a stumbling block in this business," she says. "If you wanted to pay agents in any way other than the ordinary way, you had to do it manually. And that just would not work with our growth projections."
To give One Resource Group the flexibility it needed to more quickly and easily design compensation plans for its 6,000 active agents, the MGA invested in an EIM system from Actek Inc., a Birmingham, Ala.-based software company.
Now, instead of manually setting up the various commission structures in an Access database, Baumer is using Actek's automated, Internet-based system, which has saved her 25 to 30 hours per week.
"We can change pay structures based on the volume production we get from an agent or agency," she says. "The system is so flexible, I can pay agents at a different compensation level down to the product, whereas before, I had to use one compensation level across the board."
Eliminating manual work
Similarly, the Manulife Financial Corp. was using a time-consuming manual process to manage commission override rates to managing general agencies that distribute its products.
But with plans to position itself from 13th to within the top three insurers in the Canadian MGA channel by 2005, the Waterloo, Ont.-based financial services firm implemented an EIM system from Toronto-based DSPA Software Inc.
Certain commission override rates are assigned to various channels by product and the type of broker contract within that channel, notes Doug Powers, assistant vice president of distribution systems at Manulife.
Before implementing DSPA's distribution management system in November, override rate calculation was processed manually outside the company's legacy distribution management system-using thousands of spreadsheets.
"Each relationship with each MGA is a little bit different-because each MGA wants to receive compensation the way they want to receive it, and then pay their individual brokers the way they want to pay them," Powers says.
Because Manulife's 30-year-old distribution management system was designed to compensate individuals in the independent advisor sales force-not entities or agencies such as MGAs-Manulife's compensation administration staff had to go through a time-consuming process twice a month for five days to pay its MGAs.
That process involved disassembling compensation data generated through the agency systems and manually reconstructing that data in spreadsheets according to each MGA's contract with the insurer.
Now, however, with the DPSA application in place, Manulife has virtually eliminated the manual effort while also meeting MGA's requests for more frequent weekly payments and electronic data feeds, according to Powers.
"People want to be paid more quickly than in the past," he says. "When brokers sell policies, they expect payment for those policies within days after the policy has been issued."
In addition, MGAs are becoming more technologically savvy, Powers says. "They've invested in their back-office systems and they are maturing in the way they run their businesses. They want much more detailed information and more robust reporting in a format that enables them to extract data and turn it into information to help them run their businesses more profitably."
Reams of paper
Obtaining that kind of business information is possible for MGAs when it is digitized and transmitted to them electronically as opposed to receiving paper reports from carriers. Prior to installing DSPA's application at Manulife, paying MGAs and brokers involved cutting checks or, in some cases, transferring funds electronically to a centralized account, says Powers.
"But in all cases, the (management reports) associated with those payments were produced on paper and sent out as hard-copy statements," he says. "So, an MGA with 2,500 brokers would receive a box or multiple boxes of paper twice a month listing all the payments we made to their brokers that had done business with us."
Now, the larger MGAs receive those reports through electronic data feeds-and early feedback indicates that Manulife is exceeding their service-level expectations, Powers says.
Manulife hopes its EIM system is helping it create a competitive advantage-and if industry research is a reliable indicator, the company is indeed on an upward path. Industry rankings place Manulife in sixth position in the Canadian MGA life insurance distribution channel, compared with 13th in 2002, says Powers.
Credit unions and sales representatives who distribute products from CUNA Mutual Group also were asking for electronic reporting, according to Jim Lazarz, vice president of field compensation at the Madison, Wis.-based financial services company.
These requests, along with the company's need to implement compensation plans more quickly, led management in 2001 to reinvent its approach to field compensation and replace its legacy compensation systems with an EIM system from Callidus Software Inc., San Jose, Calif.
In April, 2003, CUNA Mutual completed the installation of the new system, and the insurer is now able to design and implement compensation programs in hours or days, instead of weeks or months, says Lazarz.
In addition, credit unions and reps are receiving production and compensation reports via the Internet, which has eliminated the company's costs associated with printing and mailing 2,000 reams of paper reports every year.
Overall, CUNA Mutual expects to reduce the costs of its compensation management by 25% to 30% using the EIM system. "We group our savings into three categories," Lazarz says-hard-dollar costs, soft-dollar costs and marketplace value.
Hard-dollar costs include labor in the compensation administration department and in IT, mainframe run-time and storage, and printing, mailing and imaging of reports. Soft-dollar costs are those avoided by implementing compensation plans more quickly, says Lazarz.
CUNA Mutual also has benefited by replacing aging systems with new technology. And, because it is now meeting competitive pressure to provide Internet reports to credit unions and sales reps, the company is in a better position in the market, Lazarz says. "Internet-based reporting will help our sales going forward," he says.
Few Insurance Companies Exploiting EIM's Full Potential
Although insurers are beginning to use enterprise incentive management systems, they have yet to take advantage of the technology's broader potential, according to Chad Hersh, senior analyst at Boston-based Celent Communications. Most insurers are using EIM tactically-to manage producer compensation more efficiently, he says. "But insurers won't see the true value of EIM until they use it strategically," he says. "Otherwise, it just fixes a broken system."
Strategic uses of EIM include managing individual producer profitability as well as distribution channel profitability, according to Hersh.
"These systems enable insurers to drill down right to the producer level to manage a channel more effectively," he says. "You can reward your best producers, and you can adjust your relationship with the ones that aren't as profitable," he says.
Penn Mutual Life Insurance Co. is an excellent example a life insurance company that is implementing enterprise incentive management for the broader strategic goal of managing its producer profitability, he adds.
"Once Penn Mutual's system is fully implemented, the company will be able to look at a producer six months into his appointment with the company and say, 'This is or isn't someone we want to spend a lot of money training or marketing to,'" Hersh notes.
EIM can also measure profitability by distribution channel. An insurer can look at a brokerage channel, for example, to determine if it is performing the way it appears to be performing according to its profit and loss statement-or did the company just have a couple of big individual sales to a large wealth management client," he says.
Because compensation analysts can more easily tweak incentives using EIM versus legacy compensation systems, insurers can more quickly change those incentives to meet market conditions. "An insurer can heavily (push) a new product to the market, and taper that off over time," Hersh says. "In the legacy system, that can be extremely difficult because they have to do a lot of re-coding."
What's more, an EIM system can improve accuracy and provide more timely compensation information to producers, according to sources.
Some companies may be underpaying or overpaying their sales representatives, and that can be painful, notes Jim Lazarz, vice president of field compensation at CUNA Mutual Group, a Madison, Wis.-based financial services firm that implemented an EIM system last year. "People in the field may be coming to you saying, 'You're paying me wrong; prove to me that you're paying me right.'"
To minimize those kinds of inquiries, Penn Mutual's EIM system, once fully deployed, will enable the company to provide its producers more detailed statements along with their checks.
"They'll be getting checks and statements simultaneously and they will know the specific policies they're being paid for," says Neeta Garg, assistant vice president, sales business information at the Horsham, Pa.-based insurance company. "The information we will be able to provide them will be so much more detailed than in the past. So, fewer questions, fewer phone calls, and hopefully more satisfaction."
