The Geneva Papers on Risk and Insurance Vol. 28 No. 3 (July 2003) 495 501 The Creation of Value through a Specialized Distribution Network by Giovanni Perissinotto Within the value creation chain of an insurance company the role of sales networks is fundamental, as creating shareholder value is strictly linked with creating customer value. As sales networks are the main point of contact with customers, choosing the best possible distribution structure is vital. Selling channels have become a distinctive feature of insurers, together with their products and services. Financial institutions must consider consumers preferences with regard to distribution channels in order to reach as many consumers as possible. This article describes the distribution approach of the Generali Group in the Italian market, focusing on the strategies implemented by the parent company and Generali Vita. Both companies use networks of highly specialized tied agents, with a widespread distribution on the territory. For their role within the value creation process, sales forces can be considered a strategic asset. Consequently, the costs sustained for their development and loyalty turn out to be investments as they increase their value. Introduction Over the last 20 years, deregulation, technological innovation, development prospects brought about by welfare reforms, and increasingly sophisticated consumer needs have led to market globalization. This process has triggered convergence between financial institutions. In order to be up to the challenges and seize the opportunities offered by this radically modified scenario, several institutional investors have developed a new business model: global finance. In this new scenario characterized by higher competition, lower profit margins and swift changes, calling for constant care and frequent structural and organizational adjustments, financial institutions have to find their own way to create value for the company. The focus is now more than ever on profitability, mostly due to the increasingly significant role of investors in financing internal and external growth, the latter carried out through mergers and acquisitions. Companies aiming to attract investors must be able to guarantee satisfactory returns on invested assets. However, in the medium and long term, which is the most appropriate yardstick of time for insurance companies shareholders, merely speculative interests fade into the background. On-going growth in the company s value turns out to be essential. This is the prize investors rightly expect when they decide to put their trust in a company and to keep relying on This article is based on a presentation delivered at the first Montepaschi Vita annual meeting The Paradigms of Value The Integrated Distribution of Insurance and Financial Services, co-organized by Montepaschi Vita and The Geneva Association in collaboration with Macros Research and held in Rome on 18 October 2002. Managing Director, Assicurazioni Generali SpA, Italy. Published by Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK.
496 PERISSINOTTO it for a long time. Therefore, strategies and efforts must be primarily aimed at value creation, even if this is to the detriment of profit maximization in the short term. Is shareholder value equal to customer value? How canvalue for shareholders be created? This is the issue on which we must focus. The answer can only be found in a thorough analysis of the company s business units, their profitability and their concrete potential ( as is analysis), combined with a parallel analysis of reference markets. The resulting scenario will allow areas to be identified in which it is worth investing new assets as their returns are higher than their average costs. In addition, other actions improving profitability will be identified. On the other hand, if this analysis identifies areas with inadequate returns and no prospects, it will be necessary to take into account discontinuity actions. A detailed examination of the value creation chain in an insurance company (Figure 1) goes beyond the scope of this article, which focuses on product and service distribution. Leaving out other possible activities (finance, administration and control, product development, etc.), this article simply describes the actions that can be implemented in the sales network and through it, with a view to increasing the value of investments made by shareholders. The sales network is clearly acquiring a fundamental role in this process. Suffice it to say that creating shareholder value is strictly linked with creating customer value. A company s growth largely depends on customers appreciation of its products, services and operational procedures. Insurance value chain Finance Administration and control IT & operations Human resources Communications Product development Sales forces training & support Professional advice & underwriting Contracts administration Claims management Figure 1:Insurance value chain
THE CREATION OF VALUE THROUGH A SPECIALIZED DISTRIBUTION NETWORK 497 An appropriate strategy for each distribution channel Choosing the best possible sales network is vital, as this is where the company and consumers meet. This choice will be based on a careful evaluation of costs and benefits, as well as competitive advantages and disadvantages involved in the various options. In particular, an evaluation should be carried out of those linked to a generalist approach (suitable for simple and easy-to-understand products) or a specialist one (for sophisticated and customized products, for which professional advice is required), a single channel or multichannel strategy, and their integration or lack of it. The characteristics of the demand for insurance, financial and banking products and services are to be considered here, too. From this perspective, there is a common tendency to enhance the insurance culture of consumers, thanks to widespread information and greater transparency about financial products. Consumers are more aware of their needs. They ask for quality products and services and reconfirm their insurance provider only if its products and services fully meet their expectations. The number of policyholders who do not hesitate to move to a new insurer because of inadequate service or inflated premiums is increasing. The range of products must be wide and flexible, to meet an increasingly diversified and changing demand. Higher prices have to be justified by added value services. Moreover, as a result of the development of new distribution channels and increasing diversification in sales channels, selling procedures have also become a distinctive feature of insurers, together with their products and services. Therefore, major operators must also consider customers preferences with regard to distribution channels in order to reach as many consumers as possible. At present, the strategies of major groups are based on accurate market segmentation, following which a number of product providers will be set up. Each of them will have particular features aimed at offering each client segment the services, products and access procedures that best meet their needs. This kind of sales structure is positive both in terms of flexibility and ability to respond to changes. It also allows all personal finance tools to be channelled into the retail market. The size of each product provider and the use of relevant resources, both human and financial, are established and, if necessary, periodically adjusted in the light of the targets set for each segment. Accurate identification of objectives, along with the setting out of appropriate sales policies and products, minimizes risks of overlapping and, consequently, competition between products and channels within the same group. Lastly, the specific features of each product provider guarantee higher chances of success for various promotional initiatives (cross-selling, client loyalty, acquiring new clients, etc.), which will reflect the characteristics of each market segment. The Generali strategy in the Italian market: a multichannel approach Generali, too, decided to operate in the most important markets using an organizational structure based on product providers, which are technically and commercially autonomous, and shared service centres, which deal with all IT, financial and claim settlement functions. In Italy, the group interfaces with the market through 16 insurance companies, one financial advisor network (after the merging of Altinia, Ina Sim and Prime Consult Sim into Banca Generali) and a multichannel bank.
498 PERISSINOTTO Generali provides a wide range of products, which can meet any insurance and asset management need of retail and corporate customers, the latter only for insurance needs. It includes life and non-life insurance products, pension funds, current accounts and linked services, mutual funds, loans and other financial products. In particular, as regards insurance business, we can easily identify the specific features of insurance companies in terms of distribution channels and types of services and products supplied, which meet the needs and preferences of their client targets. For example, the parent company Assicurazioni Generali, and its subsidiaries Generali Vita, INA, Assitalia and, partially, Alleanza, use vast and specialized networks of tied agents to distribute high added value products. Professional and customized advice is essential in this field. Assiba, AdriaVita and, partially, Alleanza itself resort to banking outlets to sell standardized life and savings products, which meet the needs of less sophisticated clients. La Venezia offers customized investment solutions through financial advisors, whereas Genertel (sales over the telephone or the internet) distributes mass-market products to price-sensitive clients. Tied agents: a key asset in insurance distribution The following paragraphs will consider the strategies implemented by the parent company and, concurrently, by Generali Vita, within the wider approach of the Group towards Italian and foreign markets. These strategies are the result of a series of changes that have been implemented over the last few years in order to adapt the sales network, its objectives, remuneration and incentives to changing global market needs. With reference to such companies, the new scenarios and the focus on value creation have led our Group to reconfirm its distribution choices. These have traditionally been based on a specialized distribution network, consisting of a wide tied agent network, which is our key and most valuable asset. This type of sales organization represents a competitive advantage in a market with more demanding and sophisticated clients. Clients expect and appreciate added value, which consists of qualified advisors capable of interpreting their needs and identifying the most appropriate solution out of a very wide and flexible range of solutions. Such a modus operandi, whereby clients benefit from the know-how and experience acquired over many years, is the most appropriate to help Generali achieve growth, while meeting the objectives set. Measuring its skills against competitors, whether they have an insurance background or not, in a field where Generali have a long-standing tradition offers more chances of success and enables the company to reach satisfactory results both from a quantitative and qualitative point of view. Since the agency network is one of the main value creating tools, it is crucial to identify its objectives and, accordingly, devise result analysis systems, remuneration packages and incentive schemes. With strategies aiming at enhancing investors appreciation, objectives will take account of all those factors which, according to the as is and market analysis, can add value to invested assets: premiums and new business growth rate, embedded value, portfolio value growth rate, business profitability, not to mention the ability to attract new clients and to retain existing ones. The sales forces will receive clear and effective information about objectives through targeted training courses and remuneration and incentive schemes. These initiatives will help sales forces to work consistently with the company s policies. Performance will be measured
THE CREATION OF VALUE THROUGH A SPECIALIZED DISTRIBUTION NETWORK 499 against the same indicators used for setting out objectives (premium growth rate, embedded value, etc.). Avirtuous circle will thus be triggered. Objectives will be gradually adapted according to the changing characteristics of the market and real network potentials. The latter will in turn be progressively enhanced by developing staff training and identifying all business unit synergies. All this shows how creating highly specialized competencies and implementing ongoing training to enhance potential, and therefore the value of the network, are oriented to the creation of customer value. This, in turn plays a fundamental role in creating shareholder value. In this light, the sales forces, being the main point of contact with customers, are a strategic asset. Consequently, the costs sustained for personnel development turn out to be investments because they increase their value. The crucial role of training To train our highly qualified and specialized sellers, we resort to instruments such as inhouse training, remuneration packages and incentive schemes. The company also gives them all the support and assistance they may need (agencies, PCs, demo and simulation software, information and advertising material about the company and its products, technical advice, etc.). Training and continuous updating of the sales staff have high priority as salesmen must be in a position to provide clients with services that are always up to their expectations. The Generali Group has a dedicated structure that holds regular meetings of agents, sub-agents, sellers and financial advisors. Some figures can give an idea of training frequency, width and comprehensiveness. In 2001, 1,353 meetings were held totalling 21,682 person days. The courses cover 100 per cent of sellers, who participate in training sessions at least once a year, and 90 per cent of agents. The courses not only provide information on the products and services offered by the company and the group; they also deal with sales psychology and techniques. New recruiting patterns for high-profile sellers have led to the development of courses named The lions of savings, which are characterized by in-depth training on a large number of subjects. Among other things, these courses help develop specific financial advising skills and offer considerable operational support, and are aimed at setting up global asset management teams. Particular importance is given to innovative courses for agency employees, who are agents employees. These courses have just started and have been designed, organized and held by the Commercial Training Unit and the company s agents. Sales forces welcome the efforts made by the group and welcome professional development initiatives, repaying the company with their loyalty. The retention rate of agents is nearly 100 per cent and their average length of service in the company is 13 years. The retention rate of direct sales forces is very high too, about 85 per cent. All this positively affects the business organization efficiency and the network value. Unlike what usually happens on the market, the best people do not leave Generali but work for the company for a long time. This is due to our constant care in the professional development of the sales staff and to specific compensation and incentive schemes.
500 PERISSINOTTO Implementing a new comprehensive incentive scheme As far as the incentives to the sales network are concerned, recently there has been a shift from a traditional approach, where the only goal was growth in business, to another approach which also sets targets aimed at ensuring the quality of risks taken. Such a shift is the result of a gradual process that lasted several years. So, in non-life business, although Generali has always valued insurance portfolio quality, as shown by the lower-than-market average loss ratio indexes (in 2001 Generali recorded 73.3 per cent against the market s 79.3 per cent), economic targets, aimed at containing or reducing the loss ratio, have been established in addition to business targets only in the last few years. In order to expand business in line with the expected shareholder value increase, incentives are established so as to reward growth in the most profitable fields according to a careful profitability analysis of the various sectors (corporate/individuals), lines of business and types of products. However, in order to preserve the overall insured portfolio profitability, such incentives are paid only if global combined ratio levels do not exceed pre-established limits. In life business there has been a more radical change in the company s approach. Indeed, the concept of business growth has been replaced by the concepts of new business value and growth of managed funds. This new approach attaches the utmost importance to the ability to establish long-term relations with clients in order to retain them, i.e., to keep or reinvest assets at maturity. This has to be done by resorting to awhole range of products made available by the company or companies of the group in order to meet clients needs in asset management, in the insurance, financial and banking sectors. Therefore, life business incentive schemes consider, on the one hand, the ability to limit the impact of early outflows and, on the other, the ability to retain assets at maturity, by deferring sums matured and/or underwriting new policies. On the basis of experience of previous financial years, average trend ranges are established for these parameters, against which increases or decreases in incentives due for the achievement of business targets are calculated. Generali s sales network has achieved good results in terms of portfolio asset retention. About 50 per cent of assets matured are reinvested in new policies or deferred. The most recent incentive schemes include benefits for agencies that use the whole range of asset management products: life and non-life policies, pension funds, banking services, investment products, etc. Towards a global service network These are cross-selling initiatives based on total integration of financial and insurance services, aimed at fully exploiting the potential offered by the volumes of assets that have matured. Such cross-selling initiatives are something of a turning point in sale policies, as they are aimed at the global management of clients assets, also through more frequent contacts. This way we exploit structural and training investments made to set up Generali s main asset, that is a specialized and highly qualified sales network operating in one single sales point and with the same client base, which can offer high added value products and services. The achievement of this objective has brought about a radical change in the company s traditional distribution network. According to the one-stop shopping principle, agencies have been transformed into business units where insurance and financial experts work
THE CREATION OF VALUE THROUGH A SPECIALIZED DISTRIBUTION NETWORK 501 together. Agents, who are highly qualified and have long experience in insurance business, work together with financial advisors, who can integrate with them, thus covering all types of saving investments. In small agencies, these skills are combined in one single person on the grounds of critical mass. Strategic choices and investments allow Generali to serve about 12 million clients through a specialized and highly qualified network that can meet any financial and asset management need within one single sales point. This is a big competitive advantage for the group, both in terms of time and structure. It enables Generali to seize, at the right time, any opportunity offered by supplementary pension developments and asset management growth.