This article originally appeared in the Summer 2018 issue of Perspectives.

Compared to other types of insurance businesses, brokerage is a relatively new industry. It came into being less than 40 years ago. Before then, consumers purchased life insurance through an agent who represented just one carrier. If that carrier did not offer policies appropriate for that consumer, the consumer would have to contact another dedicated agent who handled a different carrier’s policies.

Once brokerage began, individual local agents could offer easy convenience in finding policies for virtually every potential policyholder. That’s because those agents work with brokerage general agents (BGAs) who represent multiple carriers. BGAs use the case information gathered by producers to find the best policy for each person’s situation by looking at products from several carriers.

What would happen now if brokerage ceased to exist? How would people buy life insurance? Let’s see what some industry experts have to say.

Limited Choices and Increased Marketing Costs

“I can’t imagine a scenario where brokerage would cease to exist,” said Butch Britton, retired CEO of ING (now Voya) U.S.’s Insurance Solutions and past Mooers Award recipient.

“But if it did, the choice offered by brokerage distribution would cease to exist for clients and they most likely would be limited in choices for their insurance solutions. They could not be sure they received the best solution for their insurance needs. The choice as provided by brokers’ distribution is very viable.”

“Although many outlets have tried to direct clients/consumers to more transaction types of products and online solutions, many life insurance policies still need to be ‘sold,” Colleen Horner, VP, National Accounts, BGA Distribution at Nationwide pointed out. “The brokerage environment offers producers many products and services, allowing the producer to provide unbiased solutions based on consumer needs.”

She sees one key advantage of the brokerage marketplace is its ability to provide many solutions from various carriers.

Britton suggests without brokerage, insurance companies would have to sell life insurance policies through some form of career agent distribution or multi-tiered marketing organizations. He said these groups currently sell fairly unattractively priced products.

Another alternative would be Personal Producing General Agents (PPGA). Large numbers of them would be needed.

“In that case, insurance companies would have hundreds of points of contact with agents rather than one contact with a BGA,” Britton said. “Companies would have to beef up their internal marketing staffs significantly to fill the marketing void left by the absent BGAs.

“Carriers would have to work hard to recruit large numbers of PPGAs to distribute their products. It would be difficult for a producer to become a PPGA having sufficient companies to provide choice. This would mean fewer choices for clients to fit their insurance needs. Impaired risk insurance would be much harder to place without the shopping capability of the BGA.”

In this non-BGA world, producers would have to rely on carriers to provide information on their products, Horner pointed out.

“This would be a much more cumbersome process than the brokerage system in which they can get basically everything they need with regard to products and solutions from a single source: a BGA,” she said.

In her opinion, there is not any other single source capable of replacing what BGAs do. While some broker/dealers, wires, and banks provide similar services, she said most are supported, at least partly, by BGAs.

“A producer/customer would have to go to multiple sources, including the carriers, to get what they need in the way of product, solution, information, and options,” she noted. “It would be a very disjointed approach.”

Horner admits a private insurance counselor or someone like that could provide information and policy options similar to what BGAs provide.

“However, the breakdown would come once the solution is determined — how do they execute?” she wondered. “What carriers would be equipped and prepared to handle this type of approach? Determining the policy solution is only part of the process. Execution is key once the solution is identified. The BGA offers a beginning to end process.”

Could Technology Fill In?

BGAs use technology now in serving clients. Maybe technology could be an answer if brokerage went away.

Without brokerage, “carriers would have to rely more on direct solutions utilizing technology and/or alternate forms of distribution,” said Horner. “The challenge with this is being able to get their value proposition, products, and solutions to be shown in the best light consistently. In addition, the many alternate forms of distribution that exist currently utilize brokerage in some capacity.”

This suggests technology could not be a complete substitute.

“Technology provides three valuable assets for BGAs: front office solutions to their distribution, back office solutions including an agency management system and other tools, and the connectivity to all their training partners like carriers and service providers,” explained Ken Leibow, head of Distribution Technology and Strategy/Procurement at Global Bankers Insurance Group. Programs like these are not accessible to the public.

“When dealing with 20 carriers, 100 different products, and thousands of agents, it’s not possible to provide fast and efficient service without technology,” he said. “From agency management systems to e-applications, product brochures, email campaigns, and leveraging educational and other materials from carrier websites, technology is a crucial resource for BGAs.”

Leibow said some aspects of the insurance sales process could be done by using artificial intelligence. This would require customers to answer detailed questionnaires. Their answers would be curated and com-pared with different policies using algorithms based on an aggregate of similar cases to find appropriate policies.

He cautions a system like this would lack the needed sophistication and human judgement to find the best match between customer and policy.

“While technology can be leveraged for predictive underwriting, the underwriter has to make a judgement call after getting the scores back and then decide whether to take on that risk,” he said.

Another problem with using an online interview system is human fatigue. Now, when producers do telephone interviews with prospects to ask about their medical conditions, after 30 minutes there is a huge drop off in responses, Leibow said.

“An online application form would need to be simple and quick or potential clients would never complete filling it out,” he noted.

“If life insurance could only be purchased online, it would leave more people underinsured or uninsured,” Leibow said. “They could buy term insurance online, but people with medical conditions would be unable to find the best priced products. After buying, people might wonder if they got the best deal. Without outside professional guidance, they would not find the right products for their situations.

“Remember that life insurance is not just about the death benefit. It is an essential part of estate planning. A financial planner can help with that but not with underwriting. Affluent clients would get help, but Middle America gets sick too and might not find affordable insurance.”

Reducing cycle time is another benefit of technology to BGAs.

“The longer the cycle time, the lower the placement ratio,” said Leibow. “I can sell all day long but how many actually get placed? It depends on whether the policy gets approved at a certain price and how quickly it gets approved and paid for. By offering solutions on their own websites, BGAs can speed things up by making it easier for agents to do business with them.”

He said the BGA’s website can’t just look like a billboard to be effective. It needs to display many carriers and many solutions all in one place while offering e-apps and e-policy delivery to save time.

“The technology for online life insurance issuance exists, but will someone build out a business model to do this?” Leibow questions. “It would be a bold effort. Maybe something like this will happen a few decades down the line.”

What BGAs Do Now

While agreeing that BGAs are an essential part of the distribution strategy for life insurance companies, NAILBA Board member Jason Lea, CFP, who is CEO of Brokers’ Service Marketing Group, questions whether they are efficient.

“Do we provide a mechanism that not only provides profitable distribution results but also growth?” he wondered. “The challenge we have as distributors is maintaining our relevance as a key growth driver of life insurance sales or the carriers will look elsewhere, either by hiring their own agents or going online.”

Lea points out the importance of recognizing BGAs as the distributors and carriers as the manufacturers. He is concerned about how much work in the transactional marketplace is being duplicated by BGAs and carriers and he wants to see changes in that process.

Currently only 20 percent of all transactional business is done on an e-platform. Eighty percent of the time there is lots of paperwork moving back and forth, as well as gathering medical records and lab test results, and then having human underwriters review everything manually at both the BGA and the carrier.

“If you ask BGAs, they say they do all the heavy lifting, but the carriers will say they also do it,” he said. “The reason BGAs are involved in the case management of transactional business is because the process is terrible, involving complex medical information and administrative tasks that can take 60 to 90 days before a policy can be issued. Each carrier is working on accelerated underwriting. Our task is to help them. Brokerage will cease to exist if we don’t do that. If we become mired in processing applications, we’ll never get there.

“The way we maintain relevance is by making sure we are distribution companies and not only service entities where we’re grinding out all of the effort it takes to sell, process, and put in force a traditional life insurance policy,” Lea added. “BGAs have become service entities for high volume policies like term insurance which consume a lot of staff resources but provide limited revenue. The question for BGAs is how can we become better distributors by working with carriers to allow them to control the process?”

In the time since brokerage began, the life insurance business has changed. Outside factors, including low interest rates, the shrinking agent population, and low awareness of the benefit of life insurance at the consumer level, which is caused by having fewer agents to serve more customers, have made life insurance sales harder, Lea noted. He is also concerned about people who serve as financial advisors but don’t help their clients with their risk management needs, seeing themselves only as wealth managers.

“Fifty years ago, 20 million new life insurance policies were sold every year and now there are only 10 million because there are fewer sellers, a bad process, and the notion that the group policies they get at work are adequate,” said Lea.

“We should be selling much more to middle income mainstream America. BGAs need to get financial advisors to talk to their clients about the importance of life insurance. But we can’t ask them to have clients fill out a 45-page application, take a medical exam, get blood drawn, and wait for their medical records to be gathered. All of this can take 60 days or more before they get a carrier decision or can see the policy.

“We’re going to work with financial advisors and talk with them about the importance of risk management so they can share that information with their clients. This process needs to be easier and BGAs can be the reason why that happens.”

Lea believes BGAs are not talking to financial advisors enough right now.

“The problem we need to solve is making it easier for advisors,” he said. “Every financial planner meets with two to three clients most days. How are they not selling life insurance to more of those clients? Because there’s not enough money in it to justify putting the client through the horrible process and risk losing them as clients as a result.”

Benefits of Brokerage

In considering the role of brokerage, “You need to remember that traditionally life insurance is not purchased, it’s sold,” Britton stressed. “People just don’t wake up in the morning and say, ‘I’m going to go buy myself some life insurance.’ So, no matter how we look at it, there still needs to be a force that encourages the buyer to make the step and understand they need life insurance. This is what the professional life insurance agent does, and he provides plans that fit clients’ needs.

“Agents spend a significant amount of time prospecting and that is what they are paid to do. If you use mass media like TV to do that job, then you’re simply moving agent compensation from an agent to the cost of advertising. Eliminating the salesman does not reduce the cost of distribution.”

To Britton, the benefits of brokerage are fourfold:

  1. Variable low-cost distribution.
  2. Client and agent choice to pick the best plan.
  3. Reduced internal marketing by carrier that is replaced by BGA.
  4. Reduces point of contact and agent support to one vs dealing directly with hundreds.

Leibow emphasizes the benefits of BGAs’ in-house underwriting expertise combined with their ability to shop among carriers to find the best policy for each client.

“If a person were to go out and try to buy insurance for a specific situation it would be very difficult without BGAs,” he said. “Agents get more carrier expertise by working through BGAs and are able to find better product solutions for clients’ situations. BGAs are most important for the underinsured because these people don’t know what they need to buy and BGAs know which carriers offer appropriate policies for specific situations and health conditions.”

“I do not believe there is a current system that could accomplish what the BGAs do for the industry,” Britton noted. “No other system can replace brokerage. If brokerage went away, industry sales would take a hit and product cost would go up to support another distribution method. Client access and choice would be greatly reduced.

“Brokerage is agent and client first. It is total variable cost to the product providing company. It overall reduces the cost of distribution and provides greater value. Even with a financial counselor, clients would be better equipped under the support of a BGA.”

“Carriers rely on the brokerage distribution to be an extension of them in getting their products and solutions to the end consumer,” Horner said. “Without brokerage, carriers would lose a significant amount of exposure with producers which ultimately limits their exposure with the end consumer.

“While carriers face heavy competition in a brokerage environment, their access to producers increases substantially in a brokerage environment versus a direct sale environment. This type of competitive environment allows the carrier to gain intelligence on their competition, which, in turn, helps them remain a viable alternative and solution in the marketplace.”

Or a Slightly Modified Future Role?

While it is likely that brokerage will continue as a leading form of distribution, it will need to evolve so it operates somewhat differently than it does today.

“As things stand, advisors can’t identify the most appropriate policies for their customers without BGAs,” Lea said. “Transactional term insurance has gotten a lot cheaper over the years, but commission rates are basically the same as they were, so advisors now earn less in providing term insurance to their clients.

“New technology solves this problem. The agent can spend a few minutes online explaining the options to their client, complete an order, and the policy arrives by email in a few days. BGAs need to be involved in partnering with carriers to solve this transactional term insurance dilemma.”

Absent brokerage, “simple life insurance like term insurance could continue to be sold through direct marketing, ads, and online solutions,” Horner agreed. “Any transactional type of product can certainly be sold this way. However, the more complex sale almost always requires a producer, financial advisor, or expert. These more complex sales I would assume would experience a significant decline.

“Brokerage distribution provides unbiased solutions that reach a vast array of consumers,” Horner continued. “The carriers they represent and the solutions they provide are crucial in the sale of life insurance. We have all seen the statistics showing how underserved Americans are, either by not having any life insurance or being grossly underinsured. Limiting the outlets of distribution would damage competition and ultimately limit the options for the end consumer.”

The world has changed significantly in the past 40 years. Brokerage has not kept up.

“We are going to become Blockbuster Video if we don’t change. What we want to be is Netflix,” Lea stressed. “We have this antiquated process so outsiders are coming into the insurance business trying to find a better way. Why shouldn’t BGAs get in front of that technology wave and be a part of it?

“We still have to be involved, we still have to provide the solutions by working with the carriers, but we don’t have to process every single case that comes along. High end cases will always require our high touch concierge approach while we redirect transactional cases to a more automated process between the manufacturers (carriers), distributors (BGAs), and retailers (advisors).”