Distribution Strategy

A 2003 Report
DISTRIBUTION:
ORGANIZATIONAL STRATEGIES
Joseph J. Zabik
Distribution Research
(860) 285-7740
jzabik@limra.com
Linda M. Rowland
Editor, Publishing Resources
© 2003, LIMRA International, Inc.

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006036-0103-100-0C38DISORG Printed in U.S.A.
2
CONTENTS
Click on page
number to connect.
EXECUTIVE SUMMARY.......................................................................................................4
RECOMMENDATIONS..........................................................................................................6
DISTRIBUTION: ORGANIZATIONAL STRATEGIES.....................................................................7

Organizational Structure...............................................................................................8
Company Philosophy and Objectives.........................................................................14
Revenue Allocation....................................................................................................17
Expense Allocation....................................................................................................20
PARTICIPATING COMPANIES..............................................................................................25
RELATED LINKS.............................................................................................................26
APPENDIX......................................................................................................................27
Reasons for Forming a Distribution Company and Expense Allocation.....................27
EXECUTIVE SUMMARY
Companies can organize their distribution activities in many different ways to best complement its
management philosophies, size, products, delivery channels, and targeted markets; but, until recently
often choose a traditional functional approach. Today a profit center approach is becoming more
common.
Under this traditional approach, a company views distribution as a revenue center with responsibility
for generating sales but with limited control over costs and shared resources. Distribution is
evaluated on the ability to generate appropriate levels of sales and the goal might be a certain
percentage revenue increase each quarter or year. Decisions about strategy, investments, and
resources are shared with other operating areas of the company. Functional unit cost analyses are an
integral part of managing distribution expenses.
Under a profit center approach, the distribution managers have decision-making authority over
revenues and costs (and therefore profits), but limited authority over the level of investment in the
segment. Under such a structure, the strategic issues are less about the coordination with other
operating units and more about developing and sustaining a competitive advantage for the goods and
services that are produced, positioning the business against rivals, and anticipating changes in
customer preferences. Distribution is evaluated based upon performance relative to profit targets.
Transfer pricing, cost allocation, and profit and loss analysis are an integral part of evaluating the
distribution performance.
This report explores the traditional organizational structure and three different profit center
approaches classified as nontraditional.
Separating Distribution and the Number of Channels per Company
The number of distribution channels operated by a company is one of many factors that a company
uses when thinking of separating distribution from manufacturing.
• The nine companies that have created distribution companies operate at least four distribution
channels.
• Other companies with at least four channels have rejected creating a distribution company and
feel it is more advantageous to keep distribution and manufacturing together.
4
Reasons for Forming a Separate Distribution Company
All companies agree that a distribution company makes it easier to control the costs of distribution
and make costs more visible. However, traditional companies disagree with the nontraditional
companies that a distribution company makes managing multiple distribution channels easier and
provides more effective revenue and resource controls.
Distribution Organizational Policy
When asked to identify their company’s organizational policy and list the top three reasons they took
their course of action, legal entity and distribution company profit centers reported similar reasons.
Both sited controlling the cost of distribution and revenue growth, but to appear independent to client
and producers through distribution-brand identity was a concern only for the legal entity distribution
companies.
Companies with distribution-channel profit centers listed many of the same reasons reported by the
traditionally organized companies, but also emphasized the importance of controlling costs. Both felt
the need to keep manufacturing and distribution together and create a distribution company would
only increase expenses through duplicated operations and functions. Company size and the number
of distribution channels per company were deciding factors for many of the traditional companies.
Financial Objectives
The 14 companies not taking a traditional approach of distributing products reported their financial
objectives as:
• Three plan to show a profit.
• Eleven plan to operate under a loss but move toward breaking-even in about three years.
Managing Expenses
The methods of managing distributions expenses are similar for all companies. However, distribution
managed like a business requires more frequent reporting and evaluation.
Distribution Challenges
The top five distribution challenges facing all companies are similar, however,
• Nontraditional companies place the most emphasis on controlling distribution expenses.
• Traditional companies’ primary challenge is distributor productivity.
5
RECOMMENDATIONS
General
• Use this report as background when evaluating and planning your company’s distribution
philosophy, objectives, and structure. It provides reasons and data for and against forming a
separate distribution company.
• Compare your objectives with those of your peers. Why and how have companies separated
manufacturing from distribution? For example, if you are a large company with four or more
distribution channels, should you create a distribution company? Why have companies with four or
more channels accepted or rejected creating distribution companies.
• Compare your plans for revenue and expense allocation with those companies in the study. What
can you learn from other companies.
Specific
• Companies have created distribution companies and profit centers to better measure and manage
distribution profitability. Should the distribution company be a legal entity or a profit center?
Consider creating a legal entity if distribution-brand identity and wanting distribution to appear
independent to clients and producers are priorities.
• When creating a distribution company or profit center, plan to manage distribution as a

business —do not expect to make a profit in the first few years. Most companies plan to operate
under a loss and plan to break-even sometime in the future.
• Should you consider creating a distribution company if you have four or more channels? All
companies that have created distribution companies have at least four channels. However,
companies with four or more channels have rejected creating a distribution company because they
consider it advantageous in keeping manufacturing and distribution together. Weigh the
advantages and disadvantages carefully.
• Look carefully on how companies rated their reasons for forming a distribution company.
Reasons not to form a distribution company are: retaining top producers, sharing profits with
producers, manufacturing specialty products, competitive choices and advice, selling direct to
customers, and manufacturing private-label products.
6
DISTRIBUTION: ORGANIZATIONAL STRATEGIES
This report addresses three areas: how distribution is organized, company philosophy regarding
distribution, and how revenue and expenses are allocated to distribution. Twenty-seven companies
with various numbers and types of distribution channels participated in the study with 12 of the top
25 life insurers by admitted assets-20011 represented. These 12 companies make up 48 percent of the
total assets of the top 25 life insurers. This study defines 11 types of distribution channels (see
Table 1).
TABLE 1
Distribution Channels Utilized
(27 Companies)
Number of Percent of
companies companies
Career agents* 21 78%
Regional or independent broker dealer 19 70
Insurance brokers 17 63
Banks, savings and loans, or credit unions 16 59
Independent financial planners 14 52
Personal producing general agents (PPGA) 12 44
Wire houses 12 44
Certified public accountants (CPA) 11 41
Producer groups 10 37
Direct marketing 2 7
Other** 1 4
* Managerial and general agencies, and multiple-line exclusive agents

** Special alliances
1
Source: A.M. Best Co. database, as of June 13, 2002
7
ORGANIZATIONAL STRUCTURE
Distribution can be organized and managed in various ways. One method is to separate distribution
from manufacturing and operate distribution as an independent entity. Even under this concept, there
are various organizational structures. The distribution company could be a legal entity or a profit
center made up of all, some, or only one channel. In a traditional structure manufacturing and
distribution are not separated.
Among the 27 companies (see Figure 1), four strategies emerge: distribution companies that are legal
entities; distribution companies that are profit centers; one or more channels are a profit center but
are not separate from manufacturing; and a traditional structure where distribution shares resources
with manufacturing and financial management emphasis is on cost control and sales growth.
Throughout this report, distribution companies and profit centers are categorized as nontraditional.
An advantage of creating a legal entity is that distribution must perform like a business and the
company can better control operating expenses. However, the financial, legal, operational, and
infrastructure expenses required to create the company is high. One of the five companies limited the
expense of creating a distribution company by merging its career distribution channel into the
company’s broker dealer, which is a legal entity, and presently, only the career channel is part of the
distribution company. Another method is to create a distribution company that is not a legal entity
but a profit center. Four companies have taken this approach allowing distribution to be managed as
an independent business without the cost of creating a legal entity. Five companies require greater
financial responsibilities from their distribution channels, but strongly believe there are advantages
for manufacturing and distribution to remain together. These companies view one or more of their
channel as profit centers.
FIGURE 1
Distribution Organization
Number of Companies
13
5 5
4
Distribution Distribution Distribution Traditional

company company channel structure
(legal entity) (profit center) (profit center)
-------------------- Nontraditional--------------------
8
The concept of separating distribution from manufacturing is not new. Some companies have utilized
this structure for many years. Only six companies or 22 percent surveyed have not considered
establishing a distribution company (see Figure 2). Almost an equal number of companies have
established or rejected this concept. Three factors that contribute to the decision for separating
distribution are: company size, number of distribution channels, and the company’s organizational
policy.
FIGURE 2
Creating a Distribution Company
(27 Companies)
41%
33%
Percent
22%
4%
Establ ishe d C onsi de ri ng Re je cte d Have not

conside re d
Distribution Organizational Policy

Company size, the number of distribution channels, financial considerations, company philosophy,
and business plans are just some of the factors that determine and shape how distribution is
organized. When asked to identify their company’s organizational policy and list the top three
reasons why they took their course of action, similarities and differences between the various
company organizational structures were evident.
• Legal-entity distribution companies sited controlling the cost of distribution, expense control,
revenue growth, and to appear independent to client and producers through distribution brand
identity as the most common reasons for forming a distribution company.
• Distribution-company profit centers sited similar reasons as independent legal entities, but did
not feel it was important to appear independent to client and producers through distribution brand
identity. In addition to the similarities, creating a legal entity was listed as expensive and not
justified by the benefits received. Clearly, companies that create distribution company profit
centers feel that they can reach similar objectives without creating a legal entity. An article written
by Barry Higgins that appeared in the National Underwriter about a new chief distribution officer
9
at a leading life insurer can best summarize this type of distribution organization policy.2 This head
of distribution describes how he will manage both the retail and the wholesale sides of distribution,
and operate it as if it was a separate distribution company. “I can run a distribution company off of
the margins that my company’s proprietary products provide me, and I’ve got external providers
who are going to give me capital, appropriately pay my producers, and allow me enough margin to
run a distribution company.”
• Distribution-channel profit centers and distribution-company profit centers site similar reasons
for developing their distribution organizational structure. However, distribution-channel profit
centers consider it important to keep manufacturing and distribution together, and view it
unnecessary and costly in creating an additional level of accounting and management-information
reporting.
• Traditional organized companies sited the cost, duplicated operations and functions, company
size, limited number of distribution channels, and the importance of keeping distribution and
manufacturing together — for not forming a distribution company. These companies are made up
of various sizes of distribution channels with a median of three distribution channels per company
(See Figure 4). Small and medium-sized companies and companies with few distribution channels
do not see any benefits, only additional expenses in creating a distribution company or profit
center. Two large companies with eight distribution channels believe strongly that manufacturing
and distribution should remain together.
FIGURE 3
Traditional vs Nontraditional Organization Structure
Number of Channels per Company
8 8
7
Number of Channels
Traditional Nontraditional
Minimum Maximum Median
2
For a complete discussion, see From MDRT Qualifier to Executive Suite: MONY’s New Chief Distribution Officer, National
Underwriter Profile, June 24, 2002
10
Company Size and Number of Distribution Channels
With the competitive marketplace and the expenses associated with each type of distribution channel,
companies are exploring, experimenting, introducing, and modifying distribution channels. Is there a
relationship between company size and the number of channels? Table 2 shows that small-to-
medium-sized companies tend to have fewer channels than larger companies. Large companies tend
to operate in a number of markets, therefore they need to establish channels for those markets.
Smaller companies tend to be more narrowly focused. Yet two large companies in the sample that
concentrate on a single market are very successful with only a career distribution channel. This may
indicate that smaller companies are more limited by the financial costs of operating multiple
channels, while company philosophy and long-term strategic goals play the major role in shaping a
company’s distribution strategy.
TABLE 2
Number of Distribution Channels and Company Size
(27 Companies)
Number of companies
Number of channels
per company Small* Medium** Large+ All
1 1 2 2 5
2–4 3 2 1 6
5–7 2 3 4 9
8 0 0 7 7
TOTAL 6 7 14 27
Average 4 4 6 5
Median 4 4 8 5
Minimum 1 1 1 1
Maximum 5 7 8 8
* Less than $250,000,000 in-force life premium

** Greater than $250,000,000 and less than $1,000,000,000 in-force life premium
+ Greater than $1,000,000,000 in-force life premium
11
Separating Distribution and the Number of Channels per Company
One would expect that the difficulties of managing multiple channels would cause companies to
separate distribution from manufacturing and create distribution companies. Results show that the
number of channels per company plays a major role; although it is not the only factor. Figure 4
shows that all companies that have created a distribution company operate at least four channels, but
other companies with four or more channels have rejected the concept. As with demutualization,
separating distribution from manufacturing is a highly emotional and philosophical issue. One
company in Figure 4 is not reported, with three channels, is currently considering separating
distribution from manufacturing.
The 11 companies that have rejected creating a distribution company can be divided into two groups:
five with an average of seven channels have created distribution channel profit centers within the
manufacturer, and six with an average of three channels have retained the traditional structure. This
indicates that companies with multiple channels recognize the need for the distribution channels to be
financially viable and managed as a business. The difference is philosophical. With a few exceptions,
companies that have not considered creating a distribution company tend to be small and medium-
sized companies with less than four channels.
FIGURE 4
Creating a Distribution Company
Number of Channels per Company
8 8 8
Number of Channels
6 6
1 1
Established Rejected Have not considered
Minimum Maximum Median
12
Reasons for Forming a Separate Distribution Company
All companies rated their reasons why a company may consider forming a separate distribution
company using a scale from one to five, where one means strongly disagrees and five means strongly
agrees (see Table 3). Reported are only the reasons when the traditional and nontraditional median
values are not neutral (3). For a complete listing, see Table A-1 and Table A-2 in the appendix
section of the report. Companies agreed that controlling costs, more effective use of resources,
making distribution costs more visible, and positioning distribution independent of manufacturing are
the benefits of creating a distribution company. Companies also indicated that retaining top
producers, sharing profits with producers, manufacturing specialty products, competitive choices and
advice, selling direct to customers, and manufacturing private label products are not reasons to form
a distribution company. Nontraditional companies agreed and traditional companies disagreed that it
is easier to develop, integrate, and manage multiple distribution channels by separating distribution
from manufacturing, and that a distribution company provides for a more effective use of resources.
TABLE 3
Reasons for Forming a Distribution Company
Ratings*(on a scale of 1 to 5 where: 1 strongly disagree, 3 neutral, and 5 strongly agree)
Company structure
Non-
Reasons All Traditional traditional
An easier way to control the cost of distribution 4 4 5
Provide more effective use of resources for distribution 4 3 5
Makes distribution costs more visible 4 5 4
Position distribution as independent of manufacturing 4 4 3
Provide more revenue control to the distribution head 3 3 4
Easier to develop, integrate, and manage multiple distribution channels 3 2 4
Creates a more variable cost structure 3 2 3
An easier way to retain top producers 2 2 3
Allow producers to share in the profits of the distribution company 2 2 3
Target market customers that require competitive choices and advice 2 2 3
Manufacture specialty products 2 2 3
Manufacture private label products for other companies 2 2 2
Allow manufacturing company to sell directly to customers 2 2 2
* median rating
13
COMPANY PHILOSOPHY AND OBJECTIVES
Financial Objectives
Managing distribution as a business is a concept that presents unique challenges. How do you
allocate revenue, expenses, and measure profitability? These challenges are reflected in the financial
objectives for the 14 companies that are not taking a traditional approach of distributing products (see
Figure 5). Only three companies plan for distribution to make a profit in 2002. Most, (79 percent)
plan to operate under a loss, but moving toward breaking-even. Some of these companies have been
operating these organizations for years while others just started. While most companies plan to break
even by 2005, it is unknown when they began managing distribution as a company.
FIGURE 5
2002 Financial Objectives for Distribution
(27 Companies)
Show a profit 3
Operate under a loss but move toward break-even 11
N/A traditional structure 12
Use company measurement standards 1
Number of Companies
14
Managing Expenses
The methods of managing distributions expenses are similar for all companies (see Table 4).
However, frequency of comparing, evaluating, and reporting does differ between the traditional and
nontraditional structured companies. Distribution managed as a business requires more frequent
reporting and evaluating.
TABLE 4
Managing Distribution Expenses
Frequency of Reporting and Evaluation
Compares distribution Compares actual

allowances against expenses with
Conducts a allocated and direct budget and/or prior
Frequency unit cost study expenses year’s expenses
Traditional structure (13 companies)

Monthly 8% 31% 54%
Quarterly 0 31 23
Semiannually 8 0 0
Annually 38 31 23
Biannually 15 0 0
TOTAL 69% 92% 100%
Nontraditional structure (14 companies)

Monthly 8% 77% 77%
Quarterly 8 15 8
Annually 54 0 0
TOTAL 69% 92% 85%
15
Distribution Challenges
Distribution management has become the top issue facing LIMRA member company CEOs in the
United States in 2002,3 after being the second most-important issue in 2001.4 Creating a distribution
company or profit center is one way to manage distribution and improve profitability, the second —
most important 2002 CEO issue. This report looks at the types of distribution challenges facing
companies. The top five distribution challenges facing all companies are similar (see Table 5).
Nontraditional companies place the most emphasis on controlling distribution expenses, while
traditional companies’ primary challenge is distributor productivity. Relying too heavily on a single
channel was not an issue with the nontraditional companies, which have at least four distribution
channels per company. However, relying too heavily on a single channel is an issue with the
traditional companies with less than five channels. Managing multiple channels is only a challenge
for all companies with four or more channels.
TABLE 5
Distribution Challenges Facing Companies
Five Greatest Challenges: (In order of significance)
Nontraditional company Ranking Traditional company
Controlling distribution expenses 1 Distributor productivity
Retaining top producers 2 Controlling distribution expenses
Distributor productivity 3 Relying too heavily on a single channel
Managing multiple channels 4 Retaining top producers
Maintaining strong relationship with distributors 5 Managing multiple channels
3
See CEO Perspectives on Company Challenges and Industry Issues (2002), A View From the Top.
4
See CEO Perspectives on Company Challenges and Industry Issues (2001), A View From the Top.
16
REVENUE ALLOCATION
The measures used to allocate revenue to distribution at companies vary considerably. Even within a
company, revenue is allocated differently by channel and by product. At companies with more than
one channel, 24 percent use different allocation formulas for each distribution channel. Products may
also differ, 22 percent of the companies reported that some products are developed exclusively for a
specific channel. At the other companies, 48 percent sell the same products through all channels, and
30 percent sell the same product but product features vary by channel.
First-year commissions, gross-dealer concessions, and renewal premiums are some of the measures
used in the revenue allocation formula. Table 6 and Table 7 show the percent of companies selling
each product listed and the percent of companies using each revenue measure by product. The totals
do not equal 100 percent because multiple measures are used for each product. Premiums and
commissions are the most common measures used for insurance and annuities. Gross-dealer
concessions is the most common measure used for mutual funds and related equity products.
With annuities, some companies consider all deposits and commissions to be first year, while other
companies consider them renewal if collected after the first year. For purposes of this report, all
annuity commissions and premiums are considered first year.
17
TABLE 6
Percent of Companies Using Each Measure to Allocate Revenue by Product
Fixed Products
Universal Long term Fixed

Type of measures Term Whole life life Disability care annuity
First-year premium or deposits 78% 75% 78% 33% 60% 69%
Excess first-year premiums — — 61 — — —
First-year commissions 33 38 33 33 20 31
New policies or accounts 22 25 17 — — 19
New face amount 6 6 6 — — —
Renewal premiums or deposits 56 63 61 17 50 —
Renewal commissions 11 13 11 33 20 —
Gross-dealer concessions 6 6 6 — — 13
Gross commissions 11 13 11 17 10 13
Policies or accounts in-force 22 25 17 — — 13
Face amount in-force 6 6 6 — — —
Service fees 17 19 17 33 10 19
Percent selling product 90% 80% 90% 30% 50% 80%
— Does not apply
TABLE 7
Percent of Companies Using Each Measure to Allocate Revenue by Product
Equity Products
Variable Variable Mutual Managed Separate

Type of measures universal annuity funds accounts accounts
First-year premium or deposits 82% 56% 7% — —
Excess first-year premiums 71 — — — —
First-year commissions 29 22 21 — —
New policies or accounts 18 11 — — —
New face amount 6 — — — —
Renewal premiums or deposits 59 — — — —
Renewal commissions 12 — — — —
Gross-dealer concessions 12 22 71 67% 50%
Gross commissions 12 11 7 33 25
Policies or accounts in-force 18 6 — — —
Face amount in-force 6 — — — —
Assets under management 12 39 29 17 25
Trail fees 24 28 21 33 50
Service fees 29 17 7 17 25
Percent selling product 85% 90% 70% 30% 20%
— Does not apply
18
Companies that allocate revenue may report premiums, deposits, commissions, and concessions as
paid (cash), or if annualizing the initial payment (annualized). A product is reported as both if cash
and annualization are both used. While this survey did not look at actual allocation formulas,
generally, equity-based noninsurance products and products without scheduled premium payments
tend to report on a cash basis (see Figure 6). Companies that used some other form did not identify or
describe.
FIGURE 6
Cash and Annualized Revenue Measures
(20 Companies)
Managed accounts 100

Separate accounts 100
Mutual funds 93 7
Percent of companies
Variable annuity 60 28 6 6
Fixed annuity 57 31 6 6
Disability 50 50
Whole life 49 38 13
Long-term care 45 33 11 11
Term insurance 44 44 12
Universal life 44 39 17
Variable universal life 41 35 24
0% 100%
Cash Annualized Both Other
19
EXPENSE ALLOCATION
How and where expenses are allocated depends upon a company’s organizational structure and the
types of distribution channels. This survey asked companies to identify its primary distribution
channel and if it allocates expenses. All 27 companies identified their primary distribution channel,
and 23 companies reported they allocated or were able to report how they allocate (see Figure 7).
Fifty-one percent of the companies reported its career channel as the primary form of distribution.
Independent insurance brokers represent four of the eight channels categorized as independent. The
remainder consists of two independent marketing organizations (IMO), one personal producing
general agents (PPGA), and one broker dealer. Two companies allocate expenses to the distribution
department and not to a specific channel. Revenue is allocated similarly. However, this report will
consider expenses as allocated to its primary channel.
FIGURE 7
Primary Distribution Channel
Career
Independent Managerial
30% 29%
Career
Multiple-line
General
19%
Agency
22%
20
The amount allocated for both field and home office expenses are different among distribution
channels. Figures eight through 11 report only some key expenses.5 Twenty three of the 27
companies reported allocating expenses.
FIGURE 8
Expense Allocation
Producer Compensation
0% 100%
— FIRST-YEAR COMM ISSIONS —

Career managerial 100
M ultiple-line 100
Career general agency 67 33
Independent 63 13 25
All companies 79 4 17
— RENEWAL COM MISSIONS —

M ultiple-line 100
— BONUSES —
Career managerial 71 14 14
M ultiple-line 100
Independent 63 13 13 13
All companies 75 8 8 8
Full Partial Not N/A
5
See appendix tables A-3 to A-12 for a detailed listing of allocated expenses.
21
FIGURE 9
Expense Allocation
Field Management Compensation
0% 100%
— BRANCH MANAGER COMPENSATION —

Career managerial 86 14
Multiple-line 67 33
Career general agency 33 17 50
— WHOLESALER COMPENSATION —
Multiple-line 33 67
— BENEFITS AND TAXES —

Multiple-line 67 33
Independent 50 13 13 25
Full Partial Not N/A
22
FIGURE 10
Expense Allocation
Field Operating Expenses
0% 100%
— RENT —
Multiple-line 67 33
— COMPUTER HARDWARE —
Multiple-line 67 33
— FURNITURE & EQUIPMENT —

Multiple-line 67 33
Full Partial N/A
23
FIGURE 11
Expense Allocation
Home Office Expenses
0% 100%
— MARKETING DEPARTMENT —
Multiple-line 67 33
— COMPLIANCE —
Multiple-line 33 33 33
— CONTRACT AND LICENSING —

Multiple-line 33 67
Full Partial Not
24
PARTICIPATING COMPANIES
Acacia Life MetLife

American Family Life Minnesota Life
American National Insurance MONY Life
American Skandia Life NACOLAH Life
CNA Insurance National Life
Columbus Life Nationwide Life
Farm Bureau Life of Michigan New York Life
Farmers New World Life Northwestern Mutual
Jefferson Pilot Financial Life Pacific Life
John Hancock Financial Service Inc. Phoenix Life Insurance Company
Kansas City Life Principal Financial
Lincoln National Life Insurance Prudential Financial
Manulife Financial State Farm Life
Massachusetts Mutual Life
25
RELATED LINKS
The following links are valid as of 01/01/03
LIMRA
A View From the Top: CEO Perspectives on Company Challenges and Industry Issues (2002)
This report takes a look at the key challenges facing LIMRA member company CEOs in the United
States including distribution management, improved profitability, managing capital and surplus,
growth, and strategy implementation.
http://www.limra.com/abstracts/4016.asp
Let the Separation Begin: When Manufacturing and Distribution Arms Divide
(LIMRA’s MarketFacts Summer 2001)
This article explores the rationale, structure, and functioning of four separate distribution companies.
http://www.limra.com/abstracts/3565.asp
Separating Product Distribution From Product Manufacturing: An Idea Whose Time Has Come
(and is Gaining Momentum) (LIMRA’s MarketFacts Nov/Dec 2000)
This article outlines many of the issues that have accelerated the interest in creating a separate
distribution company.
http://www.limra.com/membersonly/mf0011/24.1.asp
The Distribution Challenge: Examining Manufacturer and Retailer Strategies

(LIMRA’s MarketFacts Sep/Oct 1999)
This article explores the differences between the manufacturer and the distributor in terms of
strategy, skills, and management.
http://www.limra.com/membersonly/mf9909/26.1.asp
Non-LIMRA
From MDRT Qualifier to Executive Suite: MONY’s New Chief Distribution Officer
A profile of a head of a distribution company. Note: for subscribers only.
http://www.nationalunderwriter.com/archives/Lh_archive/2002/L06-24/L200225from.asp
26
APPENDIX
REASONS FOR FORMING A DISTRIBUTION COMPANY AND EXPENSE ALLOCATION
All reported categories
Table A-1: Reasons for Forming a Distribution Company — Traditional Company
Table A-2: Reasons for Forming a Distribution Company — Nontraditional Company
Table A-3: How Field Expenses are Allocated — All Companies
Table A-4: How Home Office Expenses are Allocated — All Companies
Table A-5: How Field Expenses are Allocated — Career Managerial
Table A-6: How Home Office Expenses are Allocated — Career Managerial
Table A-7: How Field Expenses are Allocated — Career General Agency
Table A-8: How Home Office Expenses are Allocated — Career General Agency
Table A-9: How Field Expenses are Allocated — Multiple-Line
Table A-10: How Home Office Expenses are Allocated — Multiple-Line
Table A-11: How Field Expenses are Allocated — Independent Producers
Table A-12: How Home Office Expenses are Allocated — Independent Producers
27
TABLE A-1
Traditional Company
Number of companies
Reasons 1 2 3 4 5 Median
Make distribution costs more visible 2 1 0 3 6 5
Position distribution as independent of manufacturing 2 0 2 3 5 4
An easier way to control the cost of distribution 4 0 0 6 2 4
Position company primarily as a distributor of products 3 1 4 2 2 3
Provide more effective use of resources for distribution 2 3 4 1 2 3
An easier way to access new distribution channels 5 1 3 1 2 3
Combine distribution and broker/dealer into a stand-alone company 3 0 4 4 1 3
Offer other company products on an equal basis as proprietary products 4 2 2 3 1 3
Position company primarily as a manufacturer of products 4 1 4 2 1 3
A better way to foster relationships with fee-only advisors 4 2 3 2 1 3
Provide more revenue control to the distribution head 4 1 5 2 0 3
Establish separate brand identity for distribution and manufacturing 3 1 6 2 0 3
Creates a more variable cost structure 4 3 2 0 3 2
Easier to develop, integrate and manage multiple distribution channels 3 4 3 1 1 2
Manufacture specialty products 6 3 1 1 1 2
Target market customers that require competitive choices and advice 5 3 2 1 1 2
Allow manufacturing company to sell directly to customers 5 4 1 1 1 2
Manufacture private label products for other companies 6 2 3 0 1 2
An easier way to retain top producers 6 3 1 2 0 2
Allow producers to share in the profits of the distribution company 5 3 2 2 0 2
1 = strongly disagree
3 = neutral
5 = strongly agree
28
TABLE A-2
Nontraditional Company
Number of companies
Reasons 1 2 3 4 5 Median
An easier way to control the cost of distribution 0 1 2 3 6 5
Provide more effective use of resources for distribution 0 1 2 3 6 5
Makes distribution costs more visible 0 0 5 3 5 4
Provide more revenue control to the distribution head 0 0 3 5 4 4
Easier to develop, integrate, and manage multiple distribution channels 1 1 4 3 3 4
Position company primarily as a manufacturer of products 3 3 0 2 4 3
Position distribution as independent of manufacturing 0 1 6 3 3 3
Offer other company products on an equal basis as proprietary products 3 0 6 1 3 3
An easier way to retain top producers 1 4 2 4 2 3
Position company primarily as a distributor of products 4 2 1 3 2 3
Establish separate brand identity for distribution and manufacturing 3 3 3 2 2 3
Create a more variable cost structure 1 3 5 2 2 3
An easier way to access new distribution channels 0 4 5 1 2 3
Allow producers to share in the profits of the distribution company 5 1 1 5 1 3
Combine distribution and broker/dealer into a stand-alone company 3 2 3 3 1 3
A better way to foster relationships with fee-only advisors 1 3 5 2 1 3
Target market customers that require competitive choices and advice 1 4 4 2 1 3
Manufacture specialty products 3 2 6 1 0 3
Manufacture private label products for other companies 3 4 2 3 0 2
Allow manufacturing company to sell directly to customers 6 2 2 2 0 2
1 = strongly disagree
3 = neutral
5 = strongly agree
29
TABLE A-3
How Field Expenses are Allocated
All Companies
Not
Field Expenses applicable Not Partial Full
Agent/Broker Compensation
First-year commissions — 17% 4% 79%
Renewal-year commissions — 21 4 75
Service fees 13% 21 4 63
Financial planning fees 50 8 — 42
Bonuses 8 8 8 75
New agent financing subsidies 29 8 8 54
New producer signing bonuses 50 13 4 33
Benefits and taxes 21 8 4 67

Branch manager compensation 25 — 13 63
General agent overrides and bonuses 33 4 13 50
Second-line management compensation 21 — 13 67
Regional director compensation 25 4 13 58
IMO/MGA compensation 54 8 4 33
Wholesaler compensation 35 13 4 48
Product specialist compensation 25 13 8 54
Functional specialist compensation 46 4 8 42

Recruiting and selection 25 4 17 54
Clerical salaries, benefits, and taxes 29 — 13 58
Expense allowances:
 Agents and brokers 25 4 17 54
 Field management 17 4 21 58
Rent 17 — 17 67
Telephone 21 — 13 67
Postage and related mailing expenses 17 4 13 67
Computer hardware (includes LAN and laptops) 13 — 25 63
Software 13 — 33 54
Furniture and equipment 21 — 21 58
Office supplies 21 — 8 71
Licensing fees 8 8 21 63
Field compliance 17 8 21 54
Conference, conventions, meetings 13 — 13 75
Sales, products, and other training 4 4 25 67
Travel 8 — 17 75
Local advertising 13 4 21 63
— Does not apply

TABLE A-4
How Home Office Expenses are Allocated
All Companies
Not
Home Office Expenses applicable Not Partial Full
Sales and Marketing

Sales administration and management — 8% 21% 71%
Sales support — 8 25 67
Sales and producer training — 13 39 48
Conferences and conventions 4% — 17 79
Awards and recognition — 4 13 83
Marketing literature — 4 43 52
Marketing department — 13 33 54
Field financial management 8 13 21 58
Advertising — 25 29 46
Other Operational Expenses

Product development 8 58 17 17
New business issue 8 63 13 17
Underwriting 8 58 17 17
Broker-dealer 8 33 21 38
Customer service 4 63 17 17
In-force management (orphans) 17 42 29 13
In-force management (non-orphans) 13 50 17 21
Actuarial services 4 58 17 21
Compliance — 38 29 33
Contracting and licensing — 21 38 42
Commission payment/processing — 29 25 46
Technology
Computer hardware — 13 50 38
Nonproprietary software 4 17 46 33
Proprietary software — 22 48 30
Financial planning software 9 13 35 43
Information management 4 30 43 22
System training 4 30 43 22
System support — 26 43 30
E-business 13 30 39 17
Communication services 4 26 39 30
Corporate Overhead
Human resources — 35 43 22
Executive — 52 35 13
Financial reporting and accounting — 39 48 13
Investment 9 48 26 17
Legal — 39 35 26
Public affairs 4 43 35 17
Information systems — 35 43 22
— Does not apply
31
TABLE A-5
Career Managerial
Not
First-year commissions — — — 100%
Renewal-year commissions — — — 100
Service fees 14% — — 86
Financial planning fees 29 — — 71
Bonuses 14 — 14% 71
New agent financing subsidies — — — 100
New producer signing bonuses 14 14% — 71
Benefits and taxes — — — 100

Branch manager compensation 14 — — 86
General agent overrides and bonuses 71 — — 29
Second-line management compensation — — — 100
Regional director compensation 14 14 — 71
IMO/MGA compensation 71 14 — 14
Wholesaler compensation 33 33 — 33
Product specialist compensation 14 29 — 57
Functional specialist compensation 29 — — 71
Benefits and taxes — — — 100

Recruiting and selection — — — 100
Clerical salaries, benefits, and taxes — — 14 86
Expense allowances:
 Agents and brokers — — — 100
 Field management — — — 100
Rent — — 14 86
Telephone — — 14 86
Postage and related mailing expenses — 14 — 86
Computer hardware (includes LAN and Laptops) — — 14 86
Software — — 14 86
Furniture and equipment — — 14 86
Office supplies — — — 100
Licensing fees — — — 100
Field compliance — 14 — 86
Conference, conventions, meetings — — — 100
Sales, product, and other training — — 14 86
Travel — — — 100
Local advertising — — — 100
— Does not apply
32
TABLE A-6
Career Managerial
Not
Sales and Marketing

Sales administration and management — 14% — 86%
Sales support — — 14% 86
Sales and producer training — — 33 67
Conferences and conventions — — 14 86
Awards and recognition — — 14 86
Marketing literature — — 67 33
Marketing department — — 43 57
Field financial management — 14% — 86

Product development 14% 71 14 —
New business issue 14 86 — —
Underwriting 14 86 — —
Broker-dealer — 43 — 57
Customer service — 86 14 —
In-force management (orphans) 14 43 43 —
In-force management (non orphans) 0 57 14 29
Actuarial services 14 86 — —
Commission payment/processing — 29 — 71
Technology
Computer hardware — — 14 86
Nonproprietary software — 14 29 57
Financial planning software 17 — 17 67
Information management — 50 17 33
System training — 50 17 33
e-business — 50 17 33
Communication services — 17 17 67
Corporate Overhead
Investment 17 50 17 17
Legal — 33 17 50
Public affairs — 50 33 17
— Does not apply
33
TABLE A-7
Career General Agency
Not
First-year commissions — 33% — 67%
Renewal-year commissions — 50 — 50
Service fees — 50 — 50
Financial planning fees 17% 33 — 50
Bonuses — 17 — 83
New agent financing subsidies — 17 — 83
New producer signing bonuses 50 17 — 33
Benefits and taxes — 17 — 83

Branch manager compensation 50 — 17% 33
General agent overrides and bonuses — 17 33 50
Regional director compensation 33 — 33 33
IMO/MGA compensation 67 17 — 17
Wholesaler compensation 50 17 — 33
Product specialist compensation 17 17 17 50
Functional specialist compensation 33 17 17 33
Benefits and taxes — — 17 83

Recruiting and selection 17 — 33 50
Clerical salaries, benefits, and taxes 67 — — 33
Expense allowances:
 Agents and brokers 33 — 33 33
 Field management 17 — 50 33
Rent 33 — 17 50
Telephone 50 — — 50
Postage and related mailing expenses 33 — 17 50
Computer hardware (includes LAN and Laptops) 17 — 33 50
Office supplies 50 — — 50
Licensing fees 17 — 50 33
Field compliance 33 — 33 33
Travel 17 — 33 50
Local advertising 17 — 50 33
— Does not apply
34
TABLE A-8
Career General Agency
Not
Sales and Marketing

Sales administration and management — 17% 33% 50%
Sales support — 17 33 50
Conferences and conventions 17% — 33 50
Awards and recognition — — 17 83
Field financial management — — 33 67
Advertising — — 33 67

Product development 17 50 17 17
New Business Issue 17 50 17 17
Underwriting 17 50 17 17
Broker-dealer — 33 33 33
Customer service 17 50 17 17
Actuarial services — 50 17 33
Technology
Computer hardware — — 100 —
Nonproprietary software 17 — 83 —
Proprietary software — — 50 50
Financial planning software — — 67 33
Information management 17 17 67 —
System training 17 17 67 —
e-business 33 17 50 —
Communication services 17 17 67 —
Corporate Overhead
Advertising — 33 67 —
Human resources — 33 67 —
Executive — 33 67 —
Financial reporting and accounting — 33 67 —
Investment 17 33 50 —
Compliance — 33 67 —
Legal — 33 67 —
Public affairs — 33 67 —
Information systems — 33 67 —
— Does not apply
35
TABLE A-9
Multiple-Line
Not
First-year commissions — — — 100%
Renewal-year commissions — — — 100
Service fees 33% — — 67
Bonuses — — — 100
New agent financing subsidies 33 — 33% 33
New producer signing bonuses 67 — — —
Benefits and taxes 33 — — 67

Branch manager compensation — — 33 67
General agent overrides and bonuses 33 — — 67
Regional director compensation 33 — — 67
IMO/MGA compensation 67 — — 33
Wholesaler compensation 67 — — 33
Product specialist compensation 33 — — 67
Functional specialist compensation 67 — — 33
Benefits and taxes — — 33 67

Recruiting and selection — — 33 67
Clerical salaries, benefits, and taxes — — 33 67
Expense allowances:
 Agents and brokers 33 — 33 33
 Field management — — 33 67
Rent — — 33 67
Telephone — — 33 67
Postage and related mailing expenses — — 33 67
Computer hardware (includes LAN and laptops) — — 33 67
Software — — 67 33
Furniture and equipment — — 33 67
Office supplies — — 33 67
Licensing fees — — 33 67
Field compliance — — 33 67
Conference, conventions, meetings — — 33 67
Travel — — 33 67
Local advertising — — 33 67
— Does not apply
36
TABLE A-10
Multiple-Line
Not
Sales and Marketing

Sales administration and management — — 33% 67%
Sales support — — 33 67
Sales and producer training — — 33 67
Conferences and conventions — — — 100
Awards and recognition — — — 100
Marketing department — — 33 67
Field financial management — — 33 67

Product development — 67% — 33
New business issue — 67 — 33
Underwriting — 33 33 33
Broker-dealer — — 67 33
Customer service — 67 — 33
In-force management (orphans) 33% 33 33 —
In-force management (non-orphans) 33 67 — —
Contracting and licensing — — 67 33
Commission payment/processing — — 67 33
Technology
Computer hardware — — 67 33
Nonproprietary software — — 33 67
Proprietary software — — 67 33
Financial planning software — — 33 67
Information management — — 67 33
System training — — 67 33
System support — — 67 33
e-business — — 67 33
Communication services — — 67 33
Corporate Overhead
Human resources — — 67 33
Executive — 67 33 —
Financial reporting and accounting — 67 33 —
Investment — 33 33 33
Legal — 33 33 33
Public affairs — 33 33 33
— Does not apply
37
TABLE A-11
How Field Expenses Are Allocated
Independent Producers
Not
First—year commissions — 25% 13% 63%
Renewal—year commissions — 25 13 63
Service fees 13% 25 13 50
Bonuses 13 13 13 63
New agent financing subsidies 75 13 13 —
New producer signing bonuses 75 13 13 —

Branch manager compensation 25 — 13 63
General agent overrides and bonuses 25 — 13 63
Second—line management compensation 38 — 13 50
Regional director compensation 25 — 13 63
IMO/MGA compensation 25 — 13 63
Wholesaler compensation 13 — 13 75
Product specialist compensation 38 — 13 50
Functional specialist compensation 63 — 13 25

Recruiting and selection 63 13 13 13
Clerical salaries, benefits, and taxes 38 — 13 50
Expense allowances:
 Agents and brokers 38 13 13 38
 Field management 38 13 13 38
Rent 25 — 13 63
Telephone 25 — 13 63
Postage and related mailing expenses 25 — 13 63
Computer hardware (includes LAN and laptops) 25 — 25 50
Office supplies 25 — 13 63
Licensing fees 13 25 13 50
Field compliance 25 13 25 38
Sales, product, and other training 13 13 13 63
Travel 13 — 13 75
Local advertising 25 13 13 50
— Does not apply
38
TABLE A-12
Independent Producers
Not
Sales and Marketing

Sales administration and management — — 25% 75%
Sales support — 13% 25 63
Conferences and conventions — — 13 88
Awards and recognition — 13 13 75
Marketing literature — 13 38 50
Field financial management 25% 25 25 25

Product development — 50 25 25
New business issue — 50 25 25
Underwriting — 50 25 25
Broker-dealer 25 38 13 25
Customer service — 50 25 25
Technology
Computer hardware — 38 38 25
Nonproprietary software — 38 38 25
Financial planning software 13 38 25 25
Information management — 38 38 25
System training — 38 38 25
e-business 13 38 38 13
Communication services — 50 25 25
Corporate Overhead
Investment — 63 13 25
Legal — 50 25 25
Public affairs 13 50 13 25
— Does not apply
39

Distribution Strategy

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A 2003 Report

© 2003, LIMRA International, Inc.

DISTRIBUTION: ORGANIZATIONAL STRATEGIES.....................................................................7

Company Philosophy and Objectives.........................................................................14

Separating Distribution and the Number of Channels per Company

Distribution Organizational Policy

• Three plan to show a profit.

• Nontraditional companies place the most emphasis on controlling distribution expenses.

• Traditional companies’ primary challenge is distributor productivity.

• When creating a distribution company or profit center, plan to manage distribution as a

Career agents* 21 78%

Regional or independent broker dealer 19 70

Banks, savings and loans, or credit unions 16 59

Independent financial planners 14 52

Personal producing general agents (PPGA) 12 44

Certified public accountants (CPA) 11 41

* Managerial and general agencies, and multiple-line exclusive agents

Distribution Distribution Distribution Traditional

Establ ishe d C onsi de ri ng Re je cte d Have not

Distribution Organizational Policy

Minimum Maximum Median

* Less than $250,000,000 in-force life premium

Established Rejected Have not considered

Minimum Maximum Median

Provide more effective use of resources for distribution 4 3 5

Makes distribution costs more visible 4 5 4

Position distribution as independent of manufacturing 4 4 3

Provide more revenue control to the distribution head 3 3 4

Easier to develop, integrate, and manage multiple distribution channels 3 2 4

Creates a more variable cost structure 3 2 3

An easier way to retain top producers 2 2 3

Allow producers to share in the profits of the distribution company 2 2 3

Target market customers that require competitive choices and advice 2 2 3

Manufacture specialty products 2 2 3

Manufacture private label products for other companies 2 2 2

Allow manufacturing company to sell directly to customers 2 2 2

Operate under a loss but move toward break-even 11

N/A traditional structure 12

Use company measurement standards 1

Compares distribution Compares actual

Traditional structure (13 companies)

TOTAL 69% 92% 100%

Nontraditional structure (14 companies)

TOTAL 69% 92% 85%

Nontraditional company Ranking Traditional company

Controlling distribution expenses 1 Distributor productivity

Retaining top producers 2 Controlling distribution expenses

Distributor productivity 3 Relying too heavily on a single channel

Managing multiple channels 4 Retaining top producers

Maintaining strong relationship with distributors 5 Managing multiple channels

Universal Long term Fixed

Percent selling product 90% 80% 90% 30% 50% 80%

— Does not apply

Variable Variable Mutual Managed Separate

Percent selling product 85% 90% 70% 30% 20%

— Does not apply

Managed accounts 100

Cash Annualized Both Other

— FIRST-YEAR COMM ISSIONS —

Career general agency 67 33

— RENEWAL COM MISSIONS —

Career managerial 100

Career general agency 50 50