Income differentials between personal non-captive and personal agents, who base their business on a multi-company sales format, are high and are strongly related to labor input decisions affecting quality levels. An important question to examine is therefore whether agents that have limited themselves to a more specialized career force than personal agents have made optimal labor input decisions for their occupation that maximize their level of flexible retirement income. Since limitations are put on personal agents through inducements, such as excellent prospecting/sales promotion material and the availability of selling methods, incentives available to captive sales forces to supply a uniformly high quality product are inevitable. Recruiting and educating agents who engage in productive enterprise promotional and other support activities are key managerial tasks. An open question is to what extent concentrated captive sales forces are similar to field/captive sales forces and how the two agency groups contrast in their quality levels.

This study focuses on an occupational choice decision made by individuals when entering the insurance sales market, i.e., the decision to sell insurance through a participating or independent sales force. In the United States, a standard format for the marketing of life/health insurance through a field sales force is to limit the number of companies marketed by each salesperson. Mutual companies that sell through field agents limit marketing to the company’s policies, while stock companies that employ agents on a field agency basis or independent sales force are more likely to own or affiliate with multiple life/health insurance companies. Field agencies market the parent’s products only. Attractive ownership and marketing arrangements, such as flexible product design opportunities, strong agency support in the area of sales promotion and prospecting, and superior marketing programs are sometimes offered to captive/casualty agents in most cases.

1.1. Background and Importance of Insurance Agents

This research aims to answer the following questions related to the insurance agent side of the insurance market: What distinguishes customized and independent insurance agents in the marketing strategies utilized by insurance suppliers? Are insurers who underwrite nonstandard casualty lines customized and independent agents tend to be less specialized? What affects the degree of specialization in the producers of nonstandard contract services offered by a structured insurance company? Can insurance companies that are accountably organized use increased production of crafted contract laws for niche insurance coverage? The link between the possibility of a specialized agency and the ownership and governance of a structured insurance company is fundamental.

Consumers often have no knowledge of the quality of an insurance policy, and a retail agent supplies that knowledge. The retail agent is usually the only source with whom a consumer can assume a contract, and agents will provide the consumer with information (or misinformation) about the policy under consideration. This research may analyze situations in which the agent utilizes informational bonuses they can purchase to lessen consumer information disparities. The type of agent insurance consumers must contend is determined by their contractual relationship with the insurer. Agency problems relate in part to the type of relationship in which an insurance supplier is involved. Insurance agents help create value by lowering the influence of consumer traits through reducing satisfies and monitoring policyholders.

Insurance is a complex product that is often difficult for a customer to understand. Intermediaries reduce the complexity of the insurance transaction by providing an array of services linking insurers and consumers, such as helping consumers gather and understand information, determine what risks are to be insured against, and determining the best insurance company from which to buy. The reason that these intermediaries often possess a greater level of information is because, recognizing significant differences in knowledge, they attempt to screen product quality at the time of the exchange, and they try to develop a reputation for providing reliable, unknown information to potential buyers. As insurance agents were more informationally efficient, insurance intermediaries could influence the nature of the products contracting parties would reach.

2. Captive Insurance Agents

An obligation relationship binds the enterprise, and the enterprise is subject to certain legal constraints. The insurance company has the right to take back the monetary awards that agents are entitled to, or to monitor the business performances of captive insurance agents. Furthermore, the company can also undergo arbitration in case they find any lapses or monopoly backbiting. A lawsuit can be properly filed in civil court terminology in case of any breach of duty. An agent is a person about whom any service of notice or instrument is required or authorized by the state, including legal process. The captive insurance agent is limited to the authority given by the company. The activities the captive develops for a particular area depend on the underwriting, sales, after-sales, marketing, and policyholders, including the service line opted by the management of the underwriting manager. The CEO of marketing and distribution highlights the key responsibility of management underwriting. Under company terms, payment of the premium, funding of the policy, renewals, and transactions may normally be obtained with the assistance of captive agents.

Training centers of the insurance company and independent universities have developed relationships with colleges and universities. Offering consulting services, conducting training programs, and giving group presentations are critical activities carried out by captives. They also establish expertise in specific products with the company. Sales scripts, calls to action, and templates for promoting sales must be developed, structured, and familiar to insurance agents. The price of their services and the terms and conditions applied in each insurance transaction, as well as with policy owners, are usually fixed and developed by the company for its insurance agents, allowing no variations in business operations. The insurance company is responsible for collecting market transactions within a process under the scope of authority to gain a competitive advantage. The company’s authority is an efficient way to create arrangements or cooperation with specific enterprise channel members.

Well-known insurance companies selling life insurance products through the agency distribution systems recruit captive insurance agents as their permanent employees. Their role is to act as representatives or agents for the company, selling insurance products in the market. The training and skill requirements of the agents are established and developed by appointing an insurance institute. Until the closure of the business, the company is responsible for training and developing human skills, as well as supervising and guiding the process. The functions of the captive agents are usually covered by the scope of control over the insurance through the supervision of the company’s executives and the human resources department in the area of insurance agencies. The insurance company’s executives are responsible for recruiting insurance staff.

2.1. Definition and Characteristics

In all industries, firms must make decisions about how they will sell their products – who will present them to potential buyers, how they will do it, and how they will coordinate and control the sales process. Three key variables that each company must face are: the ownership of the sales force (company or independent), the degree of autonomy of the sellers to promote specific products and specials, and the talents and skills of the people in charge of selling (in order to increase the quality of the relationships, improve the services to the owners, and increase performance). In the insurance industry, similar decisions are made with respect to the protection products. Insurers can choose to use captive agents as salaried employees or to sell their products through independent insurance agencies compensated through commissions. Both the seller choice method and the incentive structures chosen may influence the quality of the insurance contracts promoted and the prices.

The present study focuses on how channels or ways of sale and distribution of insurance influence the final premium offered. It specifically analyzes information and economies of scale of insurance through the sale of insurance through exclusive captive agents or independent agents.

Insurance intermediation plays an essential role in the sale and purchase of insurance. Intermediaries are the market’s most important resources, as they create transactions and bring buyers and sellers of insurance closer together, in compliance with risk distribution and sharing mechanisms. Therefore, producers of insurance services are critical, and studies have been conducted to understand this reality. Numerous studies report significant information and economies of scale in the insurance industry, with large insurance companies having low costs and high productivity. However, the opposite result is also valid. For example, Bowman and Amato show that small insurance companies in the UK sell motor insurance at a lower premium than their larger counterparts.

2.2. Advantages and Disadvantages

From the retailer’s point of view, being detached from the client can lead to greater conflicts over interests, data, and the appraisal of activities performed by service providers. Another potential disadvantage is sharing technology and management infrastructure necessary to carry out daily operations. Should the service provider, one day, decide to become the retailer’s competitor, this would create a conflict of interests and information on the issue.

Using third-party service providers for deliveries can also contribute to better focus on one’s core business. The service provider becomes responsible for the operation, making investments and updates to operations. Over time, one can achieve greater economies of scale and specialization, offering unique and differentiated service.

As for the disadvantages, one could mention the need to fully understand market requirements. The company needs to invest in this aspect and prepare itself to learn from that process. In Brazil, this model is typical of franchising. Of all the franchise chains operating in the country, only the minority has a company store.

The advantages of using conventional delivery and production are that capturing the entire product value chain often allows for increased product quality and stability. Therein lies a potential for developing a sustainable competitive advantage. The seller’s relationship with the client is also protected and exclusive.

3. Independent Insurance Agents

Several hundred standardized insurance products are supplied by the insurance companies, and there is likely to be considerable overlap among these companies and between the products they offer. One indication of the difficulty in attracting and maintaining a distributor’s business in such a competitive environment is that the independent insurance agent writes, on average, only 10 percent of a particular insurance company’s business. Captive agents for life insurance and personal insurance tend to write 60 percent of the business of a single insurance company in those lines, but commercial lines and brokerage business have lower concentrations of the producer business.

Independent insurance agents represent several insurance companies and offer consumers a wider choice of insurance products. Independent agents operate through retail insurance agencies that serve as intermediaries between the insurance companies and the insureds. Retail agencies have an average of five employees and use a variety of organizational forms, but the majority are small independent enterprises, often family-owned. While the retail agency system reaches both personal and commercial markets, it is particularly effective in the market for small commercial businesses and lower volume personal lines.

3.1. Definition and Characteristics

Obviously, the independence of operation and business strategy between captive and independent insurance agencies gives a differing feature of agency organizations in an insurance business and the characteristic of work motives. It is necessary and left to empirical work comparing the different captive agencies, which represent similar customer level and occupation. Data observed over time give a rich stake dynamic, also several rigorous characteristics, including selection of captive agencies and customers, which would permit to have an exam capacity-income relationship. Stiglitz presented Model-P, which is the model of large insurance companies. Without the cost minimization hypothesis that is imposed for the economic function of a company, there are several agent organizations, whether these participation profit sharing as diversified is promised. Each team is from someone else, where can the insurance activities be individually accelerated? They describe agents in several forms of contracts. These contracts characterize the degree of competition between insurers, and separate payments are provided that are paid. Sometimes the volume charges do not affect the sale of the insurance company’s ability to reduce the cost of the distribution.

According to Scott Harrington and Greg Niehaus (2004), independent insurers are self-employed entrepreneurs who trade policies of several insurers for a commission. They are operationally independent of any one of the insurers. They aim to maximize their own utility. On the other hand, captive insurance agents are company employees that trade the policies of only one single company. They have no relationship with any other competitors. Sometimes they could only be the result of the binding contract between agents and companies, and they are employed for a long period. The only problem for a productive contract, which the agents account for, may be about working for the company, not remaining in the company, and retaining the company’s customers. This paper gives insight into the business of agents’ selection problem and capacity of employment. Captive agency agents’ income, which is the cost of production, affects the quality of implication and develops different business plans. After studying the firm-agent relationship principles, some hypotheses arise. Highly trained and licensed requirements for captive agency agents provide effective action to make agency an effective business instrument.

3.2. Advantages and Disadvantages

– Require more start-up capital; also necessitate a significant amount of working capital – to pay both business expenses and personal bills, while waiting to build a client base – No-salary periods – An administrative burden requiring accounting skills, a strong understanding of business practices, and also some system automation – Two primary barriers to entry: regulations and training in the form of licensing and continuing professional education – Competitive pressure – Job-related stress due to direct involvement in the outcome of sales activities

Disadvantages of independent insurance agents:

– Complete independence: higher earning potential; be your own boss – Ability to fully control schedules – Market diversity and the option of choosing the best company for the client’s specific needs – Fulfillment born of helping others – Short learning curve for experienced individuals – Opportunity for lifelong learning

Advantages of independent insurance agents:

4. Comparison of Captive and Independent Agents

An independent agent must allocate her fixed, step, and issue-specific payout expenses to each of the companies she represents for the sale and servicing of each policy. For independent agent-generated transactions, for new sales and all renews, funds directed to the company can be marked for timely accounting crediting to a customer’s central fund. Immediate identical reduction of policy-related unearned premium surplus and earned premium surplus positive reinforcing feedback.

An insurance company’s sale of insurance products is not based on the producer type’s insurance sales, acquisition, or servicing costs. Compared to independent agent transactions, the per policy non-commission acquisition costs for average premium business are lower through captive agents. When variable direct internal costs are considered, the pricing of insurance through captive agents makes risk-based underwriting for low premium transactions uneconomical. The lower per case volume of business, high fixed/low variable costs of underwriting and processing, and communication technology expenses still create poorly incentivized internal costs for lower average premium business.

In fact, many companies use both captive and independent agents and adopt a hybrid compromise known as exclusive or excluded agents. Freelance or brokerage agents are brokers who, among other products, sell insurance. There are four types of insurance producers. This includes independent agents, who are entrepreneurs who operate their own insurance agencies but are not employed by any insurer. Captive insurance agents are those who sell insurance for only one insurance company. Direct response writers employ no insurance agents and sell insurance directly to customers via the internet, mass marketing, direct mail, and/or national telephone systems.

Captive agents work exclusively for one insurance company, while independent agents work for themselves and represent multiple companies. Given these differences, why do insurance companies use one or the other, or both? What are the pros and cons? The reasons to use or not use captive or independent agents are explored through the use of current and historical perspectives.

4.1. Key Differences in Business Model and Operations

There are other important differences in the basic agency-operating model for the two types of agents. To a small degree, independent and captive agents exhibit different behavior when the market is shrinking. Only captive agents have to maximize commission income from their territory, so that the company can minimize investments in the agent’s market. If a large market drop is expected, a company’s risk manager might want to deposit less surplus in that state, due to the threat of being seized by the insurance department. In a perfect market, captive agents would prevent such a shift in surplus to more profitable lines because that would cause commissions to decrease. However, if a company is publicly owned, this change in underwriting can increase company profits if margins increase without losing market share. Since independent agents earn fixed commissions, expense reduction is reflected in the company’s combined ratio, unless agencies are consolidated.

Certain structural differences separate captive agents from independent agents prior to analyzing producer effectiveness. The independence of agents can be determined based upon the commission structure of a particular insurer. Commission earned by a captive agent is based on the number of policies sold, or premiums written, and if an agency’s book grows, the agents’ sales costs grow as well. Growth is penalized in the short run as the expenses for support staff do not grow proportionally and it may take one to two years of additional amortization of fixed expenses before a new agency can become profitable. Also, markets with declining premium volumes restrict sales revenue. Consequently, expenses associated with captive agencies can be quite variable. Independent agents on the other hand, receive a smaller fixed commission for service and claims handling for policies sold. Consequently, this decreased commission reduces the insurer’s sales expenses and agents are more variable in terms of associated costs. At the same time, lower commissions is an incentive for agents to capture market share as soon as feasible.

4.2. Client Interaction and Relationship Building

We conclude our analysis by demonstrating that captive agencies remain the dominant channel used by insurers to reach personal lines’ customers. However, lower profitability and higher loyalty rates among customers who chose exclusive agents should motivate insurers to enhance their independent distribution capabilities, perhaps by adapting methods used in other countries. Factors which can overcome the advantage of independent agents are not the object of this study but are an interesting topic for future research. This situation opens a direction for further empirical studies on this problem. The aspect that an insurance company operates bank insurance subsidiaries is an important factor attracting and maintaining dependent agents since agents are interested in selling deposit, credit, and other banking services in insurance companies. It will also be valuable to find out how the alliance of banking products is related to agent performance in insurance companies.

One of the significant differences between captive and independent agency structures is client interaction and the capability to build and maintain client relationships. Working on the instructions of the principal, captive agents possess limited authority to negotiate with the client over certain insurance policy terms and are mainly in charge of policy delivery and claims representation. On the other hand, independent agents represent both the insurer and the insured, and maintain administrative, advisory, and client maintenance functions to a significant degree. They are associated with all types of insurance intermediary services, offer clients several insurance products to choose from, and also set insurance fees easier. They provide consulting services that improve the efficiency and rationality of risk prevention, prepare a detailed risk study of corporate or individual customer activities, and create and optimally set up insurance coverage. Furthermore, we suppose that independent agents usually provide insurance clients with valuable information on insurance products and offer them flexible insurance terms and conditions. Providing professional insurance services requires an ability to create permanent and strong relationships with their clients.

4.3. Product Offerings and Market Access

Captive insurance facility types, such as the National Conference of Firemen & Oilers Insurance Fund (NCFOIF), engage only in the sale of property and casualty products, but they are not members of NAIC as a property and casualty insurer. This is quite likely due to political reasons. Information on the geographical area in which NCFOIF is allowed to sell property and casualty insurance is not available, but one can reasonably surmise that as a regional insurance fund connected to a union, they are probably recognized in or near most states. Employees’ associations captive groups have about half of their sales from life insurance and about one quarter of their sales from annuities, and the rest from property and casualty. The fourth ownership group of organizations is tax-exempt social welfare associations that conduct insurance; funds of this type have similar characteristics as employees’ associations.

A large share of independent insurance agent association members focus more on personal lines, with a minority of their sales being commercial. For example, Independent Insurance Agents and Brokers of America (IIABA) members derive an estimated 54% of their sales from personal lines and 46% from commercial including life, while Gambino reports that 50% of National Association of Professional Insurance Agents (PIA) members’ sales come from personal lines, with 9% of sales being from life. Neither IIABA nor PIA provides data that includes sales of only independent, nonbank insurance agents. Typical independent agents sell a variety of carriers throughout the United States and can sell out of multiple states. In fact, a majority of PIA members sell policies from 11 to 20 carriers through the placement of business outside of their primary states of operation.

5. Conclusion

The future for captive agents is generally positive. Their percentage of new business written will continue to grow faster than that of the independents, as their use is expanded by the life-health insurers that have traditionally used this marketing arrangement. The major concentration of captive agents, as well as that of newly licensed insurance agents, in the six largest states is also expected to continue, as this marketing innovation becomes more expensive and complex. There are, however, some forces of change that may apply to the captive as well as the independent insurance agent. These changes have a number of potential causes and implications. The first set of changes comes from changes in the states’ regulation of their domestic life-health insurers. The second source of change that could affect captive agents involves the change in tax laws imposed on the overall life-health industry. The last set of changes arises from new systems development activity in the computer industry. Independent agents should be concerned over captive agents possibly encroaching on formerly inviolate markets for group insurance, erosion of guaranteed renewability laws, and premium rate instability. Captive agents should be concerned about probable price competition and availability of insurance problems as a result of an economically unstable marketing system. In sum, both groups have much to learn from the experiences, past and future, of the other. Nevertheless, these learning experiences pale in significance compared to what the two marketing systems have learned from the third major source of changes affecting life-health insurance: government actions taken to temper the growth of its runaway cost.

The American insurance system has long been bifurcated into two separate marketing systems for the sale of insurance products: the use of independent insurance agents by property-casualty insurers and the growing use of captive agents by life-health insurers. There is little doubt as to the use and efficacy of independent insurance agents by property-casualty insurers, as indicated by their insistence on an attractive commission structure and substantial territorial protection. Their ability to negotiate such features can largely be ascribed to the protracted and bitter fight between independent insurance agents and property-casualty insurers in 1944 over the notorious McCarran-Ferguson Act. Although the property-casualty marketing system operates less aggressively today than it did in 1944, few insurance company managements would willingly undertake the political costs of a frontal assault on their distribution system by proposing any widespread use of captive agents. A number of state insurance commissioners would also look upon the proposal with disdain because of the concentration of property-casualty agents in their respective states and the perceived commensurate loss of their agents’ goodwill.

5.1. Summary of Key Findings

Second, this research focuses exclusively on the business insurance market and segments within this property and casualty insurance market. We offer an exploratory, interpretive, and descriptive field investigation—a comparative analysis of captive and independent insurance organizations in the United States. Polemic debates exist within the insurance industry regarding the most efficient form of insurance distribution. Numerous competing perspectives are evident. Captive insurance proponents argue that vertical integration occurs, transaction cost economies result, potentially leading to the lowest final insurance transaction costs. Critics counter by pointing to potential agency costs resulting from information problems, risk-bearing cost escalation, regional diversification benefits lost, and a generalized lack of economies of scope that many large and small agencies possess. Profile and business insurance market share distribution results are also unique among a limited pool of incorporated independent market share organizations and their captive insurance production associates.

The conceptual framework that supports our research approach rests primarily on the economics of contractual relationships. Proposals derived from transaction cost, agency cost, and capabilities perspectives in relation to captive and independent agency market structures have been tested and analyzed within a financially regulated environment. Among our key research contributions is distinguishing independent agency firm location in rural and urban settings. The transaction and structural characteristics of agency ownership impact the personal production effort and also suggest structural associate reasons for observed intra-organizational agency performance differences.

5.2. Implications for Consumers and the Insurance Industry

Commission differences seem to be the most important determinant favoring the rapid expansion of the direct-writing insurer. A price comparison has no elements of the unknown that call forth the services of a professional salesperson. Neither perceived consumer savings from buying only one company’s product nor any single company’s product producing so distinct a difference that buyers pay a few percentage points more matters greatly to buyers. Only when both elements work together does a rate difference between an independent agent and a direct marketing company cause these individuals to buy insurance from the latter. Fifty years ago, personal auto insurance was the only necessary condition bringing direct response insurers to the American insurance-buying public. The industry evolved from strict territorial ratemaking regulations to a mixture of other factors resembling a variation of fifteen minutes plus low rate. Government policy changes will occur in areas of simulation of agent and direct insurer competition when they recognize that the status of being the first insurance industry able to dominate the marketplace of any one line of financial services products that seeks to maximize the use of consumer comparative shopping techniques.

Overall, the quality of insurance rates and the service provided by captive agents will determine whether most regulators allow this marketing system. The importance of these two determinants will likely vary by the type of insurance product, the preferences of buyers, and the competitiveness of the local area, with more poorly performing captive agents experiencing an influx of independent agencies. More importantly, unlike other consumer financial services markets, consumers generally pay the same price for an insurance product regardless of the agent. Even though independent agents claim otherwise, exceptions to the law of one price are few. Buyer preferences are usually not an issue with most insurance categories, but some consumers may want to personally know or work with only one agent.

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