Insurance Distribution System

Insurance Distribution System： Emerging Insurance Markets in China Hao Yansu Dean & Professor School of Insurance Central University of Finance and Economics No.39 South College Road Haidian District Beijing, China, 100081 Tel: 86-10-62288626 Fax: 86-10-62289350 Zheng Yu PhD Candidate School of Insurance Central University of Finance and Economics No.39 South College Road Haidian District Beijing, China, 100081 Tel: 86-10-82219569 Fax: 86-10-62289350 Insurance Distribution System： Emerging Insurance Markets in China Introduction As for insurance, the last step of the products moving towards consumers--distribution is an essential part. Distribution System - relationship between distribution channels and market segments, and also products, is very important. The insurance marketplace is undergoing a transformation that may eventually lead to significant changes in how consumers purchase insurance products. A variety of distribution channels are currently used in this market place and some insurers utilize a combination of distribution channels. Direct marketing, the agents, banks, brokers, network……It seems that we have so many selections, but which is the best solution of insurance company? By establishing the successful distribution channel, insurance companies could largely cover the market and gain the loyalty of customers, and cut down the cost, so to achieve the competitive advantage among the competitors. Insurance companies should continually innovate and integrate the distribution channel, make them be the part of the occupying the market and highly promoting the development of their own. While it is true that insurance purchasers today have more options available than they did five years ago, it is unclear if and when these channels will dominate existing insurance distribution channels. Several obvious factors that impact on a channel’s adoption are consumer attitudes and preferences. In particular, it may be that consumers consider insurance products to be more complex than originally thought. Consumers still do not view even personal lines insurance products to be commodity products. The purpose of this paper is to discuss the transitions that are occurring in China insurance distribution channels. As part of this discussion, we describe some of the factors that are impacting on the adoption of alternative channels, provide an overview of the academic literature and comment on the near-term future for insurance distribution channels. This paper just tries to discuss some questions as follows: 1. General description of distribution system in Chinese insurance market. 2. Judging from the characteristics of each distribution channel, which distribution channels is relatively suitable for which market segment in China? Is it possible to set out the characteristics of each distribution channel that is particularly strong in specific market segment? 3. Even if it is not possible to say so about specific distribution channels as a whole, among specific distribution channels are there any examples that satisfy certain conditions in a way that makes them suitable for particular market segments? 4. In the contractual relationship between distribution channels and insurance companies, are there any characteristics that vary according to the market segments or products that are being targeted by the insurance companies? That is to say, even if they use the same type of distribution channel, are there characteristics that exist by virtue of the market segments being targeted by the insurance companies? - are there characteristics that exist by virtue of the products that are mainly being sold by the insurance companies? 5. How to innovate the distribution channels for insurance companies? 6. The future of the distribution system in Chinese insurance market. Literature Review It is interesting to note that cost differences do exist between traditional distribution systems, and yet these channels continue to co-exist. Posey and Yavas (1995) noted that earlier studies had shown that insurers using the independent agency system have higher costs than those employing a direct writer system. Taken to their logical conclusion these studies suggest that competition in insurance markets should have eliminated the independent agency system. Posey and Yavas demonstrate that an equilibrium exists in which the independent agency and direct writer marketing systems can co-exist. The concept of differential services is also one that can explain why different distributions systems co-exist. Barresse et al. (1995) examine this issue in the property/liability insurance setting. They note that prior research suggests that insurers using independent agency distribution systems have higher expense ratios than insurers using other distribution systems. A reasonable expected outcome for the more expensive distribution system is a loss of market share in a competitive market. In line with that conclusion, they report that independent agents’ share of the auto insurance market declined from 69% in 1970 to 59% in 1990. While market share losses were noted for a more standardized insurance product like auto insurance, the same pattern was not observed in the commercial insurance setting. Defenders of the independent agency system argue that higher expense ratios are attributable to a difference in the level of services offered to consumers. Besides the higher demand for services than in personal lines insurance, the greater complexity of commercial lines insurance over personal lines results in a greater demand for services provided by the independent agency channel (Barresse et al., 1995). Query and Hoyt (2002) also found support for this concept of differential services. This was particularly true after controlling for whether or not the respondent had a prior claim experience. Regan (1997) examined the distribution channel preference from a transactions cost perspective. She found that independent agents are used more often by insurers that sell more complex insurance products, while exclusive agency insurers use their agents to market more standardized products. She categorized these transactions based on frequency of exchange, complexity of the contracting environment, exogenous uncertainty and the importance of relation-specific investments that cannot be transferred to other users without the loss of value. Other authors have examined the choice of distribution channel within the context of complexity and search costs. For example, Mayers and Smith (1981) examine the insurer’s distribution channel choice (independent agency or direct writer) and they suggest that more complex products require higher levels of service and that high value/high price types of insurance products will be best distributed by an independent agency channel. Conversely, insurance products that are more standardized may require lower levels of service. These types of products would be best suited for a direct writer type of channel. Other more general explanations for why multiple distribution channels exist include imperfections in the markets and differences in product quality. Market imperfections are caused by price regulation, slow diffusion of information, and search costs differences. The concept of differential values suggests that the difference in product quality creates demand for different levels of service from the distribution channel. Higher value/higher price insurance products require greater service and one would expect a more costly, service rich distribution channel to be utilized for these types of products. Distribution System Determinants With no contracting costs, the organization of economic activity cannot affect firm value because any advantage one structure provides can be eliminated through costless contracting (Coase, 1960). But writing fully contingent and costlessly enforceable contracts is not possible. Thus, contracting costs are important in determining the choice of organizational structure. Insurer-Policyholder Conflicts Insurance contracts are prepaid; in exchange for premiums, the policyholder receives a bundle of contingent cash payments and services. However, this prepayment creates opportunities for expropriative behavior. For example, the insurer might renege on the delivery of either promised payments or services. Mayers and Smith (1981) suggest that the use of independent agents helps control this type of opportunistic behavior. In the Mayers and Smith analysis, independent agents have a comparative advantage because their knowledge makes them effective in influencing claim settlements and because a threat to switch their business to an alternative insurer is credible.(3) These advantages should be more important for insurance against risks for which the coverage involves a more complex and costly claims settlement process. Claims settlement activities should vary across insurance lines (homeowners, farmowners, auto liability, etc.). For example, it is reasonable to assume that some lines have a higher frequency of disputes over loss amounts, more limited availability of information on loss distributions, and less stability of the legal environment within which claims are administered. Since these lines require more insurer discretion, and greater discretion permits more self-serving actions, contracting costs should be correspondingly larger. Because the choice of distribution system affects the costs of controlling contracting problems between insurers and policyholders, the distribution system choice should vary with these costs across lines of insurance. Ownership structure. Ownership structures also vary across lines of insurance. Ownership structures in the insurance industry include Lloyds associations, which are coalitions of underwriters; stock companies, which employ the standard corporate form; and mutuals and reciprocals, which (like consumer cooperatives) merge customer and owner functions. Among stock companies, the equity can be widely held or it can be owned by an individual, a mutual insurance company, or an association (such as the American Medical Association or the California Farm Bureau Federation, for example). Costs of controlling managers vary across the alternative ownership structures. Mayers and Smith (1981) hypothesize that, when control costs are high, authorized managerial discretion tends to be low. The evidence in Lamm-Tennant and Starks (1993) and Mayers and Smith (1993, 1994) implies that mutuals and mutual-owned stock companies have a comparative advantage in lines where management exercises less discretion. Thus, they tend to operate in lines where loss distribution data are more extensive and risk distributions are less subject to changes from technology or the legal/regulatory environment. Conversely, Lloyds associations, closely-held stock companies, and (to a lesser extent) widely-held stock companies have a comparative advantage in writing insurance for which managerial discretion is more important. Reciprocals are more difficult to classify in terms of managerial discretion. The ownership of a reciprocal can be like that of a mutual (in which the policyholders are nominally the residual claimants) or like that of a common stock insurance company (some reciprocals are organized and financed by corporations that bear the residual risk and hire and fire the manager) (see Mayers and Smith, 1988). If the use of independent agents more effectively bonds against policyholder expropriation, the value of an independent agency system will be higher where the opportunities for expropriation are greater. This should occur in companies with ownership structures that allow more managerial discretion. With the Milgrom and Roberts framework, the choice of distribution system affects the marginal product of the ownership structure; hence, the distribution system and ownership structure are strategic complements. Therefore, independent agents should be used more frequently by Lloyds and closely-held stocks because the value of bonding against opportunistic behavior should be higher for these ownership structures. Conversely, independent agents should be used less frequently by mutuals and mutual-owned stocks because the value of such bonding is lower in these cases. For reciprocals and association-owned stocks, the benefits of an exclusive agency system appear especially high, since the target population of potential policyholders typically is well defined. For example, insurance companies established by associations of physicians or lawyers provide malpractice insurance coverage for their members, and reciprocals often are formed to serve a relatively homogeneous population of potential policyholders. In addition, member-policy-holders are more likely to possess professional knowledge of their insurance requirements, thus reducing the demand for assistance from sales agents in coverage design or claims settlement; and the association or group structure can provide alternative control mechanisms to limit expropriation. Therefore, the reciprocal or association-owned insurer has fewer reasons to adopt an independent agency system. Cost-structure hypothesis. The Mayers and Smith (1981) analysis implies that insurance firms using independent agents have a comparative advantage in supplying higher-service, higherpriced coverage. Since the equilibrium insurance premium must reflect both the expected costs of marketing and administering the policy as well as the present value of the expected indemnity payments, this service hypothesis implies that the loss-to- premium ratio should be smaller for firms using independent agents. Other analyses also have potential implications for the relative size of the loss-topremium ratios across firms employing exclusive and independent agency systems. For example, industrial organization texts (e.g., Scherer and Ross, 1990) suggest that firms adopt exclusive distribution systems to elicit additional promotional effort by their sales force. This promotions hypothesis implies that firms using exclusive agents should have smaller loss-to-premium ratios because they provide higher-service coverage. Also, Joskow (1973) argues that lower documented costs for insurers that employ exclusive agents indicate that the independent agency system is inefficient.(4) This inefficiency hypothesis generates the same prediction as the service hypothesis loss-to-premium ratios should be smaller for firms using independent agents. We discuss this inefficiency hypothesis in more detail after examining the evidence. Insurer-Agent Conflicts In addition to contracting problems between insurers and policyholders, the choice of distribution system also affects the costs of controlling contracting problems between the insurer and the selling agent Advertising policy Aarvel (1982) argues that the exclusive agency system protects an insurer's property rights to its advertising and other marketing investments. Requiring exclusive representation prevents the agent from expropriating the firm's marketing efforts by diverting potential customers to other insurers who incur fewer advertising expenditures but pay larger commissions. In effect, the insurer vertically integrates into the distribution system to control the possibility of agent opportunism with respect to the firm's centralized promotional efforts (see also Klein, Crawford, and Alchian, 1978). To test this hypothesis, Marvel compares the ratio of advertising expenses to net premiums written for the 30 largest property-liability insurers and finds that the average ratio is reliably larger for his sample of exclusive agency insurers. Grossman and Hart (1986) note that agents also face potential expropriation. Agents expend effort to attract and retain customers. Because monitoring effort is costly, agent compensation is based on policy sales. Thus, the insurer has an incentive to renew business directly with the customer, expropriating the agent's investment and reducing renewal commissions. Grossman and Hart suggest that this incentive can be controlled by giving the independent agent ownership of the expirations.(5) Within the exclusive agency system, this potential expropriation problem is controlled by assigning agents limited property rights to the renewals, and paying higher commissions on new versus renewal business. Thus, exclusive agents are compensated for required investment as they incur it. Within the Milgrom and Roberts framework, the Marvel and Grossman and Hart arguments imply that distribution system and advertising policy choice are strategic complements. In insurance lines for which centralized insurer promotion is more effective and opportunities for agent opportunism are greater, the value of the exclusive agency system is higher. Conversely, in lines where decentralized agent promotion is more effective and opportunities for insurer opportunism are greater, the value of the independent agency system is higher. Like Marvel, we use the advertising-to-premium ratio to measure advertising policy. Firm size. Fixed costs and scale economies associated with hiring, firing, training, and otherwise managing an exclusive agent distribution system suggests that larger firms have a comparative advantage using exclusive agents. Sass and Gisser (1989) also argue that larger firms are more likely to achieve gains from the exclusive agent system. The Sass and Gisser model focuses on economies at the agent level, and since rational agents will accept an exclusive agency contract only if their income exceeds the amount they could earn as an independent agent, larger firms are more likely than smaller firms to generate sufficient business. Geographic concentration. Sass and Gisser also argue that the returns to adopting an exclusive agency system are higher in more geographically concentrated markets. Thus, exclusive agents should be more competitive in larger markets where gains from specialization are more easily exploited. This same prediction is implied by the Brickley and Dark (1987) analysis, which suggests that monitoring costs increase with greater geographic dispersion. The insurer-agent relationship in the exclusive agency system is more of an employment relationship, requiring more direct monitoring of the agent by the insurer. Hence, exclusive agency insurers should have more geographically concentrated operations than independent agency insurers. Insurance Distribution in China - A Perspective 1 Distribution - the key differentiator It has been six years since the China insurance market has opened up, and the new entrants into the market have set up shop in every major city. The public sector companies have already established themselves in the market. But there are multiple challenges faced by these insurance companies, of which two are critical: While the companies have been quite successful in dealing with the first of these challenges using the existing product features and leveraging the technical know-how of their partners, most are still grappling with the right channel mix for reaching potential customers. This paper discusses the distribution channels from the perspective of the sociocultural ethos of the market and how these channels fit into it, along with where the various companies face challenges and bottlenecks. Whenever any debate arises about the intermediaries and distribution channels, the discussion veers to technology and its impact on distribution. However, the authors believe that the basic existential problems being faced by the channels in this market needs to be looked into first, and then the question of enablers - technology, tools, training, learning etc. -- is to be taken up. 2 Challenging Scenario demanding role transformation of intermediaries Insurance has to be sold the world over, and the Asian Market is no exception. The touch point with the ultimate customer is the distributor or the producer (as they are known in certain markets), and the role played by them in insurance markets is critical. It is the distributor who is makes the difference in terms of the quality of advice for choice of product, servicing of policy post sale and settlement of claims. In the Asian markets, with their distinct cultural and social ethos, these conditions will play a major role in shaping the distribution channels and their effectiveness. In today's scenario, insurance companies must move from selling insurance to marketing an essential financial product. The distributors have to become trusted financial advisors for the clients and trusted business associates for the insurance companies. This calls for leveraging multiple distribution channels in a cost effective and customer friendly manner. For example, in the developed markets producers (brokers and agents) form the major channels of distribution, while the web as a complementary channel is catching up slowly. According to a Forrester survey, 88% of the Life insurance executives responding identified agents as the primary channel of distribution. The distinction of channels in the developed markets is: personal distribution systems and direct response systems. Personal distribution systems include all channels like agencies of different models and brokerages, bancassurance, and work site marketing. Direct response distribution systems are the method whereby the client purchases the insurance directly. This segment, which utilizes various media such as the Internet, telemarketing, direct mail, call centers, etc., is just beginning to grow. 3 Distribution Scenario in the China market In today's China insurance market, the challenge to insurers and intermediaries is two-pronged: ent Traditionally tied agents have been the primary channels for insurance distribution in the China market; the public sector insurance companies have their branches in almost all parts of the country and have attracted local people to become their agents. The agents are from various segments in society and collectively cover the entire spectrum of society. A person who has lived in the locality for many years sells the products of the insurance company with a local branch nearby. This ensures the last mile touch point being closer to the customer. Of course, the profile of the people who acted as agents suggests they may not have been sufficiently knowledgeable about the different products offered, and may not have sold the best possible product to the client. Nonetheless, the customer trusted the agent and company. This arrangement worked adequately in the absence of competition. In today's scenario agents continue as the prime channel for insurance distribution in China, as is the case in most markets, supported by call centers to a small extent. Almost all the new players follow this model primarily because the regulations for other channels are yet to be put in place. However there is great excitement in the industry over the impending broker regulations, and companies are planning possible channels in their enthusiasm to increase volumes. The belief that all these channels will grow and seamlessly integrate to bring in business seems a fallacy. What has emerged is a much more difficult and evolving market scene with existing players, more new players coming in, and global marketing practices and ideas being tested. But none of this has changed the fundamental character of the market, which we believe will take more time than expected. 4 What should the companies look at? Basically companies have to take a look at the intermediaries they are using, whether it is optimal to use them, and what are the alternatives? The new companies have attempted appealing only to the middle, upper middle and elite classes in the major cities. Contrasted with Public sector insurance companies, with their offices across the country, the new companies have miles to go before they reach anywhere. To retain their creamy layer clientele who are the most likely to be wooed by the new companies Work against the people's mindset that they are not here for the long term Retain and attract good intermediaries Attract intermediaries especially agents with the requisite qualifications and attributes who can market the company and the product. Match the aura created by the new companies in the urban market Run the risk of tapping an already insured market for repeat insurance instead of tapping new virgin pockets in the market In this process all are targeting the same market --the existing pie is being cut up further, but no attempt is being made to increase the size of the pie. For example, while attempts are made to complete the quota of rural insurance in percentage terms, the rural market potential is yet to be tapped, as the new insurers are not able to attract the right kind of talent into their distribution force to address this. Intelligent segmentation of distribution channels to match the market segmentation is what will help the companies to move in this direction. 5 Focus on multiple distribution channels Though a multi-channel strategy is better suited for the China market as well, it is important to keep in mind that this market is really a conglomeration of multiple markets. Each of the markets within this conglomeration requires a different approach. Apart from geographical spread the socio-cultural and economic segmentation of the market is very wide, exhibiting different traits and needs. Let us look at the various insurance distribution channels and the challenges faced by them from these perspectives. 5.1 Agents Today's insurance agent has to know which product will appeal to the customer, and also know his competitor's products in the same space to be an effective salesman who can sell his company, the product, and himself to the customer. To the average customer, every new company is the same. The new companies are looking for educated, aware individuals with marketing flair, an elite group who can be attracted only with high remuneration and the lure of a fashionable job, all of which may not be possible in this business with its price pressures and the complexity of selling insurance. Unable to attract this segment, they have started easing recruitment conditions as against the stringent norms they had earlier, thereby diluting the process. In this context it might be a rewarding exercise to recruit some older people to sell some lines of products like pension plans annuities etc. Gender of agents is another relevant feature in the rural context that makes a difference, especially for the female population. Women to whom the customers can relate --e.g., nurses, gram sevikas3 -- can target the female segment of the population more effectively. What is applicable for the rural women and children health programs and population control programs is equally applicable for insurance selling also. Max New York Life has adopted a version of this strategy by appointing gram sahayaks4 to sell and service the rural customers. With this kind of segmentation of intermediaries the challenge for the insurance company lies in training and educating these people to become effective sales persons. But this in no way diminishes the benefits of intermediary segmentation. 5.2 Banks But the encouraging fact for insurance companies waiting for bancassurance to take off is that bank branches are here to stay, and customers do want them. A customer survey by Deloitte Consulting5 in the western developed markets found that for banking activities, customers place high importance on having convenient branches in their banking relationships. This is good news for the China banks with their many branches, and also makes a strong case for taking up bancassurance. The major lines of business that can be sold through bancassurance successfully are term insurance, creditor insurance, and non-life products like Property, Motor and Personal accident, Homeowners comprehensive insurance etc. Advantages of bancassurance Disadvantages of bancassurance High credibility (as trustworthy caretakers of money) with the public Economic viability for the banks to take up as bancassurance is a volume business A ready customer base Training of people and lack of vision and awareness Low cost channel for selling simple vanilla products Useful for selling only certain lines of products Extensive reach including the rural pockets Initial investment in systems and processes and people training The strategy should be to use multiple banks according to their presence in different regions. Success would come by using bancassurance where it will be most effective i.e., selling simple, cheap products to the masses at a low cost. This awareness is growing and is evident from the fact that nearly every insurance company has partnered with one or many banks to implement bancassurance. 5.3 Brokers With the broker regulation under review and expected any time, this could be the next hope, especially for the urban market. This will be a new experience for the insurance customer, accustomed to brokers in financial services, real estate, and travel and tourism. For historical reasons the image that 'broker' carries in the minds of the customer is not very favorable. Thus the new breed of insurance brokers faces the challenge of stablishing credibility. The positives are that brokers in the urban arena can attract the elite and the upper middle class customer. Brokers represent the customer and will sell the products of more than one company. They seek to determine the best fit for the client and can effectively address the mind block faced by the public about the various companies. This is applicable in the case of life insurance for the high-end and corporate/group segment. In the non-life segment, broking is not entirely new, as reinsurance brokers were arranging exotic covers. For individual customers also, with a wide range of competitive products, the broker can get a good deal. The corporate broking companies will have to play a prominent role. If NGOs based in rural areas can be attracted into the rural sector cooperatives arena, they stand a good chance of succeeding and can help the new players get a foothold in the rural market. These are the players with the potential to make the difference, as they have the trust of the people. We envisage scenarios like that in Bangladesh's micro lending growth and the milk co-operatives7 in Gujarat selling insurance in addition to milk production and distribution. It would be a new dawn in China insurance distribution! With the right impetus the China rural insurance scenario could be one with high business volume and tremendous growth potential. 5.4 Work site marketing This area needs to be tapped, as in any country one of the biggest markets is through the worksite. With changes in human resources management polices and compensation packages, group products or work site products do have a definite market that cannot be ignored. Here the advantages would be: o Captive customer base o Potential to sell individual insurance and group insurance o High trust factor o High hit ratio for the intermediaries The challenges would be the cost effectiveness, product customization and efficient post sales servicing, which would determine continued business. Technology has a key role to play in worksite marketing to ensure cost benefits. Banks and financial institutions have been successfully marketing credit cards and other financial products using this channel. If not an identical model a similar approach can be used for selling insurance. 5.5 Internet EXPECTATIONS V. REALITY The growth of the Internet has led to a great deal of speculation and discussion regarding its potential impact on traditional distribution channels. For example, the meeting topic for the 2000 International Insurance Society meeting was “The Power of Leadership in the Knowledge Millennium.” Part of the focus of the presentations at that meeting was on the changing channels of distribution. Some trade publications (e.g., Eberhart, 2000; Friedman, 1998) during that time period included articles suggesting that insurance agents were faced with the strong possibility of being replaced with a more efficient and less-costly Internet-led distribution channel. The same was true for travel agents during that time period (e.g., Gilbert and Bacheldor, 2000). Interestingly, the experience of insurance agents and travel agents has been very different. The travel industry has indeed seen a growth of the Internet-led distribution channel for a wide variety of travel-related purchases including plane tickets, hotel reservations, and car rentals. Additionally, sites allow consumers to make offers for various travel services including airline travel. Other sites,create an auction market for travel services. Finally, consumers can purchase tickets online directly from airlines. As the Internet-led channel has grown for travel-related types of services, travel agents have come under increasing pressure and airlines have reduced the commissions paid to travel agents. In some cases, the agents are no longer compensated by the airlines to serve as a channel intermediary. For example, Delta Airlines recently announced that it would no longer pay commissions to travel agents. While the adoption rate of the Internet as a distribution channel has been low, we have seen widespread adoption of the Internet as a support channel. Insurers are using the Internet to provide general information on financial services products (e.g., insurance, investments) and planning involving the use of these products, to provide specific information on the company and its product lines, to provide administrative support to its policyholders, and to serve as a prospecting and communication tool for its agent-led channel. For example, Celent Communications (2001) surveyed major U.S. property/liability insurers regarding Internet usage. The six main usage areas were (1) agent access to quotes, (2) agent extranet, (3) policyholder account access, (4) customer live quotes, (5) customer quote request, and (6) agent locator. Of these six, the two most frequently used were the agent locator (over 60%) and the agent extranet (approximately 40%). These results clearly indicate that for property/liability insurers, the web is being used as an information or communication tool, as well as a prospecting tool for insurers’ agents. INNOVATION ADOPTION One factor that leads to the adoption of an innovation is how widespread it is. Rogers (1995) suggests that widespread diffusion of an innovation will lead to significant changes in the market channels themselves. As noted above, we have seen widespread diffusion of the usage of the Internet in both the travel and insurance industries; however, the adoption patterns have been quite different. The ability to reduce the transactions costs of interaction between buyers and sellers has always been acknowledged as a central motivation for the use of the web (e.g., Birkhofer et al., 1999). Predictions of disintermediation and cybermediation are typically based on the reduced transaction costs of electronic interaction between sellers and buyers; for example, in book retailing or online stock trading (Hong, 2000). Trust is another factor that drives or affects the adoption of the Internet-led channel. Gefen (2000) and others examined privacy and security as it relates to choosing an Internet channel. The widespread popularity of online stores (e.g., Amazon.com) or online auctions (e.g., Ebay) provide some indication that consumers trust the channel sufficiently to provide personal and financial information via a secure part of the channel. Additionally, secure support channels like Paypal have been created to provide secure payment channels for purchases. Rogers (1995) presents five attributes of innovation (relative advantage, compatibility, complexity, trialability and observability). Of these, relative advantage has been shown empirically to consistently be the best predictor of adoption/usage. Choudhury et al. (2000) surveyed auto insurance consumers to examine the relative advantage of the agent-led channel compared to the Internet-led channel. They found that relative advantage is a multi-dimensional attribute. In addition to transactions costs, relative advantage also includes the dimensions of trust and knowledge. They also found that the purchase process for some consumers is a two-stage process. These consumers first use the Internet to collect information on products or services. They then return to the agent to complete the purchase. This behavior highlights the current role that the Internet plays in providing support to the agent-led channel. Though China is joining the fast growing breed of net users, using net for transactions has not yet caught up. Though a few banks provide online banking, the usage is still a small fragment. The insecurity associated with transactions over the net is still an inhibiting factor. At present most of the insurance companies have product information and/or illustrative tools on the web. We do not see the web evolving into a means for direct selling of insurance in the current scenario. In the China market, where insurance is sold after considerable persuasion even after face-to-face selling, the selling over the net, which must be initiated by the client, would take some more time. While the technology capability is there, improvements in bandwidth and infrastructure are needed. Also needed are simpler products where auto-underwriting is feasible. Automobile insurance, one of the segments of insurance purchased "off the shelf" in China, would be the ideal segment to start with. On the life side, term assurance for standard lives with simplified underwriting is a possibility. These channels by themselves will not be able to overcome the mindset of the people, but rather can only be enablers for the human channels. 5.6 Invisible Insurer In this model, the insurance company or its representative is not the entity marketing the products. The insurance cover is sold by an automobile /credit card company as an add-on product leveraging the brand of the retailer. The risk is carried by the insurance company, which underwrites it. . Products like creditor insurance, automobile insurance, and credit card related insurance could be distributed using this channel. This model can be adopted in all market segments for the lines of business mentioned. It is already prevalent in some areas like credit card insurance and crop insurance for agricultural loans. What makes these arrangements attractive is the low distribution cost and captive customer base. However, repeat business or renewal of business cannot be assured. In the life segment, group creditor insurance may be the most suitable product for this channel. 5.7 Other Distribution Channels It is interesting to note that cost differences do exist between traditional distribution systems, and yet these channels continue to co-exist. Posey and Yavas (1995) noted that earlier studies had shown that insurers using the independent agency system have higher costs than those employing a direct writer system. Taken to their logical conclusion these studies suggest that competition in insurance markets should have eliminated the independent agency system. Posey and Yavas demonstrate that an equilibrium exists in which the independent agency and direct writer marketing systems can co-exist. The concept of differential services is also one that can explain why different distributions systems co-exist. Barresse et al. (1995) examine this issue in the property/liability insurance setting. They note that prior research suggests that insurers using independent agency distribution systems have higher expense ratios than insurers using other distribution systems. A reasonable expected outcome for the more expensive distribution system is a loss of market share in a competitive market. In line with that conclusion, they report that independent agents’ share of the auto insurance market declined from 69% in 1970 to 59% in 1990. While market share losses were noted for a more standardized insurance product like auto insurance, the same pattern was not observed in the commercial insurance setting. Defenders of the independent agency system argue that higher expense ratios are attributable to a difference in the level of services offered to consumers. Besides the higher demand for services than in personal lines insurance, the greater complexity of commercial lines insurance over personal lines results in a greater demand for services provided by the independent agency channel (Barresse et al., 1995). Query and Hoyt (2002) also found support for this concept of differential services. This was particularly true after controlling for whether or not the respondent had a prior claim experience. Regan (1997) examined the distribution channel preference from a transactions cost perspective. She found that independent agents are used more often by insurers that sell more complex insurance products, while exclusive agency insurers use their agents to market more standardized products. She categorized these transactions based on frequency of exchange, complexity of the contracting environment, exogenous uncertainty and the importance of relation-specific investments that cannot be transferred to other users without the loss of value. Other authors have examined the choice of distribution channel within the context of complexity and search costs. For example, Mayers and Smith (1981) examine the insurer’s distribution channel choice (independent agency or direct writer) and they suggest that more complex products require higher levels of service and that high value/high price types of insurance products will be best distributed by an independent agency channel. Conversely, insurance products that are more standardized may require lower levels of service. These types of products would be best suited for a direct writer type of channel. Other more general explanations for why multiple distribution channels exist include imperfections in the markets and differences in product quality. Market imperfections are caused by price regulation, slow diffusion of information, and search costs differences. The concept of differential values suggests that the difference in product quality creates demand for different levels of service from the distribution channel. Higher value/higher price insurance products require greater service and one would expect a more costly, service rich distribution channel to be utilized for these types of products. Data Because 70 percent products of property/liability insurers is auto insurance, we focus on life insurance. We collected data on insurance distribution channels and lines of business for the top insurance (life/non-life) groups for the years 1995, 2000 and 2005 from China Insurance Yearbook. Line of business data were used to classify each group based on its primary line of business focus, we used a breakpoint of 70% to classify the group as personal, commercial or mixed business. For example, if a group had 70% or more of its business in personal lines, it was classified as primarily personal lines. If the group had 70% or more of its business in commercial lines insurance, it was classified as primarily commercial lines. Those groups with less than 70% in either area were classified as mixed business. Future trends and Summary The current state of insurance distribution in China is still in flux. On one hand, insurers are awaiting regulations to be approved for brokerages and bancassurance to be truly launched. On the other hand they are trying the corporate model of intermediaries in addition to the traditional models in the market. There is no right and wrong in all this. The success of marketing insurance depends on understanding the social and cultural needs of the target population, and matching the market segment with the suitable intermediary segment. In addition a major segment of the China population has low disposable income, meaning that every penny won will be obtained after a lot of persuasion and the expected value for money is high. All intermediaries can't sell all lines of business profitably in all markets. There should be clear demarcation in the marketing strategies of the company from this perspective. Clients should also receive price differentials for using different channels. These intermediaries need to be empowered with the right learning, training and sales tools and technology enablers. Coupled with the right product mix, this will help the insurers to survive and flourish in this competitive market. The traditional agent-led distribution channel will continue to be a major distribution channel for insurers. However, it is clear that insurers are continuing to experiment with alternative distribution channels. More and more insurers are utilizing multiple distribution channels as they continue to balance the needs of different groups of consumers against the cost of distributing their products and services. 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