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May 1, 2008updated 13 Apr 2017 9:01am

Distribution channel conundrum

Distribution channel conundrum Though increasing consumer demand across Europe for private pensions presents a big opportunity for life insurers, meeting the demand requires in-depth analysis of consumer attitudes towards existing and emerging distribution channels

By Steve Deaville

Though increasing consumer demand across Europe for private pensions presents a big opportunity for life insurers, meeting the demand requires in-depth analysis of consumer attitudes towards existing and emerging distribution channels. Specialist in the distribution field, Steve Deaville, provides insight.

Pensions distribution channelsDeregulation in Europe’s financial market has introduced true competition in life insurance, pensions and general insurance. The result has been a substantial increase in the mobility of the customer, further exacerbated by the diminution of state inclination – or indeed ability – to guarantee a viable level of pension provision for citizens.

In addition, no European country is producing children at what is generally considered to be the population replacement rate, with the consequence that the contributions of a dwindling number of younger working people are struggling to support the pension consumption of a growing number of retirees.

Across key European economies, there is widespread consumer concern that state pensions will be inadequate to fund a basic quality of life in retirement. Even in the socially benevolent regimes found in Netherlands and Sweden, a fifth of the population feels they cannot rely on the state pension. At the other end of the scale, getting on for a half of all Spaniards are disillusioned about state pension provision and are putting over 5 percent of their income into private pension schemes.

The increasing demand for private pension provision presents the life insurance and pensions industry with massive opportunity. Yet at the same time, traditional distribution channels are in flux, with new distribution channels emerging in retail, banking and in bancassurance. Traditional and new channels involve investments in property, collateral and people, as well as issues of marketing and customer service support. Pensions companies need to understand where, or whether, to retain their existing distribution channels.

UK-headquartered corporate services group Pitney Bowes recently commissioned research to investigate consumers’ enthusiasm for buying pensions through non-traditional channels – firstly banks, and then emerging new channels such as retailers and post offices.

The established pattern of distribution channels for life and pensions products differs across the main countries of Europe. Tied agents are the dominant channel in Italy, Spain and Germany. Brokers figure large in the UK, Germany and the Netherlands. Banks are dominant in France but not in Italy.

However, the critical question in the minds of pension industry managers is whether the current distribution mix is effective or efficient. From both an operations and a marketing perspective, it is essential to know what level of support should be given to which channel; or indeed, whether new channels need to be established.

Bank buying

Retail bankers throughout Europe are becoming very focused on increasing their track record on ‘products per customer’, as a means of improving performance and shareholder value.

There are currently major variations from country to country, the highly competitive and deregulated UK sitting on just 1.5 products per customer, compared with the European average of 2.3. But generally there is a pressing need to increase average rates across the European industry, with pensions being a prime contender for cross-selling.

The study found over half of European consumers would be “just as inclined to consider buying a private pension through my bank, as I would to go direct to a pensions company or my independent financial adviser”.

This is a startling statistic, both for life and pensions companies planning their distribution strategies, and indeed for the huge opportunity that pensions products offer the banking channel, an opportunity which is evidently under-exploited as the low scores on products-per-customer show.

The propensity for consumers to buy their pension through their bank varies from around 40 percent in the UK, to more like 60 percent in Spain and Sweden. Two clear behavioural groups emerge from the study, with UK, France and Netherlands in the 40 percent to 45 percent range, contrasting with Germany, Italy, Spain and Sweden in the 55 percent to 60 percent range.

However, whichever group one looks at, the opportunity for pension sales presented by the banking channel is a consistently substantial one.

Pensions off the shelf

What, then, of more radical new channel options? Once again, Pitney Bowes’ research reveals a surprising willingness on the part of European consumers (24 percent, on average) to take up pensions products through channels such as their main supermarket or the post office. However, the variation from country is far more dramatic and polarised than was the case with the banking channel.

In the Netherlands, the potential for pensions selling through alternative channels appears to be negligible – around 10 percent – and certainly quite insufficient to merit standalone support and resources. In Germany, France, Spain and Sweden, the picture is more worthy of note, ranging from around 15 percent up to 27 percent. Italy (35 percent ) and the UK (39 percent ) are in a league of their own, however.

The UK is known as a pioneer in ‘brand stretch’, with many retailers offering a range of financial services products. Italy is not usually put in the same bracket by marketing experts, and so the importance of alternative channels revealed by Pitney Bowes’s research may cause pension marketers to commission more detailed analysis of their own brand to better understand its potential for their company specifically.

Location intelligence

Pensions distribution channelsIt is worth dwelling on the need for each pensions company to take note of the national distribution channel propensities revealed in Pitney Bowes’s research, but also not to assume that their own company and customer base conforms to the national trend.

Individual analysis is crucial to see where one pension provider’s optimal distribution mix sits versus the national norm. Crucial to this analysis is location intelligence, a powerful combination of geographical location and consumer characteristics, behaviours and possibly even psychographics.

Location intelligence tools allow the pensions distribution strategist and planner to correlate the reach of any potential distribution partner – bank, department store, supermarket, post office, or whoever – with their own target audience. This analysis would usually be focused in two ways.

First, a profile of the partner’s customer base including factors such as where they live and their geo-demographic profile, would be compared to the target group profile to see how close a match could be obtained. Secondly, the catchment of the partner’s portfolio of outlets would be analysed and similarly compared to the target characteristics. These analyses allow potential and existing distribution partners to be assessed for suitability.

Overall, Pitney Bowes’s research has shown that an objective re-appraisal of pension product distribution channels is an imperative in key European countries, as consumer channel usage and behaviour is changing both radically and rapidly.

The appetite for private pension provision is increasing as demographic change forces up demand. However, future industry winners in this changing market, many of whom operate on a multi-country basis, need to conduct individual analyses to understand where their optimal channel mix lies.

The use of location intelligence to determine this optimal mix, as well as continuative analysis and performance monitoring, coupled with automated customer communications to complement ‘industrialised’ pensions workflows with a concomitant level of customer service, are essential in grasping the growing private pension opportunity in Western Europe and Scandinavia.

Steve Deaville is retail, insurance and banking industry sales director at Pitney Bowes

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