Incentive Compensation Management for Insurance

Transcription

1 Markets, J. Galvin, K. Harris Research Note 10 September 2002 Incentive Compensation Management for Insurance Packaged ICM applications provide alternatives for insurance companies struggling to transform their commission systems to provide greater commission flexibility and match corporate distribution demands. Core Topic Customer Relationship Management: Sales Leadership Strategies Key Issues How will new and emerging technologies enable sales organizations to achieve their objectives? Which technology-enabled sales applications will be most critical for improving sales effectiveness? Although commission payments remain the dominant performance driver for insurance agents, brokers and other distribution channels, the commission process has been a challenge for insurers since the dawn of insurance sales. The payment of agents in an accurate and timely manner is crucial, especially when the distributor is independent and loyalty and "mind share" are essential. Efficient management and payment of commissions help the insurer achieve greater operation efficiency and reduce commissioning costs. The problem has become more difficult to solve, however, because of the growth of complex, multichannel distribution models, increasingly diverse product offerings and increased competition from diversified financial institutions. Unique needs in commission management for insurance companies include: Managing massive amounts of insurance data: Transactional data for insurance sales reside in multiple databases, including third-party broker or agency management systems. Data volume is high and, in some cases, must be maintained for 20 or more years because of legal requirements. This demands extensive data integration and application scalability to be able to process and pay upward of 100,000 payees. System performance to meet commission processing schedules is also critical. Supporting licensing, registration and continuing education requirements: The insurance industry is highly regulated, requiring each agent to be licensed by product and state to be eligible to receive commissions. This is changing as the National Association of Insurance Commissioners (NAIC) complies with U.S. Gramm-Leach-Bliley Financial Services Modernization Act (GLBA) requirements to manage certification, streamline the licensing system and move to a national licensing system. To date, 35 states are already Gartner Entire contents 2002 Gartner, Inc. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

2 compliant with the NAIC national standards. Maintaining agent licenses and registrations, especially with the possible migration from state to federal level, and integrating this information for accurate transactional crediting through the commissions crediting hierarchies are complex. Furthermore, continuing education is required in certain states, and insurers must manage educational requirements of their agent force to maintain their registry and commission eligibility. The information requirements make commission management difficult, resulting in potential overpayment and underpayment to agents not eligible for certain commissions and in substantial costs for the insurer. Managing complicated relationships: The type of salesperson differentiates the level of commission that the person is paid. Independent agents are typically paid based completely on commission, while captive agents may be paid salary plus commission. Combining job role and product type/structure creates a complicated commission crediting matrix. The matrix is also fluid because ad hoc relationships for example, cross-sell/up-sell product referring can create multiple commissioning scenarios, every day, and potentially multiple times in a set period. Reporting on commissioning and payments generated must be maintained over time. Supporting plan complexity: Annuity-based legacy commission structures, attention-grabbing competitive commission schemes for independent agents, and variable product margins force diverse and rapidly changing compensation plans. Many insurers have a variety of sales channels supporting multiple types of distributor relationships, including captive agents, independent agents, brokers and other intermediaries (for example, affinity groups, banks or retail outlets). Insurers must be able to vary payment levels across sales sources and split commissions based on cross-channel sales efforts (for example, insurance companies giving the agent a smaller commission for sales that were initiated on the Internet). Systems must be able to handle variations between property and casualty (P&C), which is more fixed and based on a certain percentage commission per product sold plus overrides based on growth or profitability, and life, which is more variable, with changes each year it is in force. Both the process and the payment of commissions are complex based on these variations. The severity of commissioning problems has encouraged many insurers to evaluate their current system's ability to maintain, process and accurately report transactions and commissions to their varied distribution channels. Commonly, it is determined that the current legacy, in-house-built commission system is incapable of meeting the performance and flexibility 10 September

3 requirements, and the insurer begins to seek commission system alternatives. Since mid-2001, packaged applications have emerged to manage, administer, track, report and pay commissions to agents, independent brokers or third-party resellers. Incentive compensation management (ICM) vendors have scaled their applications to address the complexities and transactional volumes of insurers, and, in some cases, vendor solutions are beginning to replace legacy applications. Initially, these applications were unable to support the transactional volumes and payee demands typical of insurance companies. However, current release versions from leading vendors have become sufficiently robust to address these challenges and warrant evaluation. Vendor Selection Currently, there are nine vendors, soon to be 10, that offer ICM applications that meet the demands of insurers (see Table 1). The decision process begins with an analysis of each vendor and its market position. 10 September

4 Insurance-Specific ICM Vendors Trilogy CSC Table 1 ICM Systems for Insurance Software vendors that provide ICM applications exclusively for the insurance market. Trilogy's Distribution Management System (DMS) is focused on insurance companies with very high transactional levels combined with high degrees of plan/crediting complexity. CSC offers an ICM application only for insurance. PerformancePlus 1.0, a mainframe or midrangebased system, was released in October ICM Market Bestof-Breed Vendors Callidus Centiv Synygy Enterprise Software Vendors Motiva Siebel Oracle SAP PeopleSoft Source: Gartner Research ICM market best-of-breed vendors offer specifically designed applications to solve the challenges of sales ICM across all vertical markets. Callidus Software announced TrueComp for insurance in April 2002 followed by the announcement that a large insurance company had selected TrueComp 2.5. Centiv, formerly Incentive Systems, addresses insurance requirements in the recently announced Centiv/EIM 4.0 product suite with an insurance component library. Centiv is in development at two large insurers. The Synygy 10.0 ICM application, now in a Web-based architecture, builds on 11 years of compensation management experience. A large insurance company is currently in development. The Motiva Financial Services program was announced in May 2002 to support banks, brokerages and insurance companies with Motiva 8.1. Enterprise vendors provide applications for multiple CRM functions and provide enterprise applications such as ERP, ERM or financials. Siebel Systems offers ICM as a module in the Siebel 7 release. For insurance, it recommends Siebel IC with the Siebel einsurance product. Oracle offers the Oracle incentive compensation module as part of release 11i, with no pre-configured insurance product. SAP currently offers the SAP Incentives and Commissions management module as part of mysap Financials. A CRM version will launched in 3Q02, with mysap CRM 3.1. PeopleSoft currently does not have an incentive compensation module. It is in development and anticipates launch of a full-featured ICM module in 4Q02. Insurance-specific ICM vendors: Trilogy and Computer Sciences Corp. (CSC) provide insurance-specific commission applications. They have been designed exclusively for the insurance market. Both vendors have established insurance client bases. ICM market best-of-breed vendors: Callidus Software, Centiv, Synygy and Motiva represent an emerging alternative for insurers, as they have developed their applications to meet the scale and performance demands of the largest insurers. Several large insurance companies have made best-of-breed decisions in These vendors create and develop software exclusively for ICM across all verticals, leveraging their focus and compensation expertise to produce functionally superior products. Enterprise software vendors: Large software companies that provide software at the enterprise level offer superior integration to their customer relationship management (CRM) systems and their other systems human resources (HR), enterprise 10 September

5 resource planning (ERP), financials or employee relationship management (ERM). Oracle, SAP and Siebel Systems have ICM modules in production today and are investing resources to continue their development. PeopleSoft will release its initial ICM module in 4Q02. Incentive Compensation as Part of an Insurance Application Framework ICM systems should not be considered in isolation of other distribution strategies. Recommendations include: Evaluating requirements of surrounding back-office (for example, HR, ERP and policy administration) and front-office (agency management, producer solutions and other point-ofsale systems) systems and applications that would need to interface with the ICM system. Sales representatives will also have other types of sales force solutions, such as agency management solutions or point-of-sale solutions, that would be housed either at the regional office or sales office. Information from the ICM system in many cases will need to be downloaded to these solutions for individual accounting and management. Acronym Key CRM CSC ERM ERP GLBA HR ICM NAIC P&C Customer relationship management Computer Sciences Corp. Employee relationship management Enterprise resource planning U.S. Gramm-Leach-Bliley Financial Services Modernization Act Human resources Incentive compensation management National Association of Insurance Commissioners Property and casualty Considering ICM within the context of current portal projects. According to a 2002 Gartner study, 60 percent of life and 59 percent of P&C insurers had already built sales force extranets to support interaction with agents and brokers at year-end These sites, on average, generate only about a 66 percent usage rate from agent offices and only reach this rate after extensive marketing to the staff. Low usage may be correlated with the limited functionality (most only offering static information and supporting very limited interaction between the agent and the insurer). Therefore, they provide limited value to the agent/broker. Leveraging ICM information on the site will enhance the value derived by the sales representative and help the insurer improve extranet adoption rates. In this example, commissions and compensation will "bait" the agent to use the site. Overall success, however, must go beyond putting commission information on the site and include a site renovation to add value-added information and functionality. Bottom Line: Insurance companies should evaluate their commission management systems' ability to support their complex and diverse commission requirements. Agent performance, loyalty and motivation are tied directly to their ability to earn, and be accurately paid, commissions. Today, packaged ICM system applications provide an alternative to improve commission management and ensure the accurate payments of commissions. Many large insurers have already 10 September

6 evaluated and replaced their systems. Companies struggling with legacy systems' limitations and flexibility should evaluate packaged ICM applications for functionality, performance and their ability to meet insurance-specific requirements. 10 September