When I started as a programmer trainee in the late ’70s, I was assigned to the agent/agency subsystem as part of a large project team focused on implementing one of the first commercially available life insurance administration systems. We were a sponsoring customer, so I was able to interact with many of the architects who developed that specific subsystem. As a result, I gained compelling insights into the principles and decisions that went into the design of the distribution component of the broader system.
At the time, the admin system encompassed all aspects of insurance operations, including support for the general ledger and all financial reporting. We were converting all existing business from our company’s first-generation homegrown system. In those days, that was a viable strategy. My subsystem supported all the distribution/compensation management functions outlined in the Novarica Core Systems Map. These functions include:
- Licensing and Appointments
- Contracts and Terminations
- Compensation Calculations, Modeling, and Admin
- Payments
- Credentials
- Demographics and Hierarchies
- Performance Management
- Statements
Many insurers adopted a similar approach, and the first distribution/compensation management solutions were tightly integrated into their large-scale policy admin solutions. The general design was to have the new business component integrate directly with the distribution system for verification of licenses and credentials, identification of the agent’s contract in effect, and capturing the management hierarchy at the time of the sale to enable the payment of override commissions.
These point-in-time data feeds were passed to the policy administration master data files to be tracked and potentially modified as the agency management structures evolved. The policy administration component would identify commissionable events that were either tied to financial activity or changes to certain policy options elected by the customer (i.e., mode/frequency of payment).
For each commissionable event, specific point-in-time information was passed to the agency component that would calculate first-year/renewal commissions for the writing agent and managers. Included were the tracking of advances, annualized commission payments, reversals, management of the agent’s financial ledger, the production of periodic statements, benefit and tax reporting calculations, and the ultimate payments to each member of the distribution channel.
The system also tracked the performance of each producer to identify the leaders in the company, progress against recognized industry standards, as well as progress against internal clubs and reward levels. The distribution management component was a complex subsystem encompassing a high degree of functionality that could vary greatly by insurer.
Over time, insurers would add additional policy administration systems to their operations due to mergers and acquisitions as well as the need for more complex products that could not be supported in their existing admin system. In addition, companies acquired additional distribution channels including broker-dealers. Insurers also made changes to the way they compensate and reward their agents and managers, adopting an approach that aggregates writing agent commissions over specific time periods with payments varying based on achieving higher thresholds.
The result of these changes caused companies to break their distribution systems down into subcomponents with functionality split across the core systems ecosystem. Many companies used a replication approach to handle multiple admin systems, with one system being the authoritative source for credentials, contracts, and hierarchies, and the others being updated after 24 hours. This added some latency to the onboarding process and sometimes resulted in scrambling and exceptions during times of high volume. It also served to distribute functionality across many systems, with data and processing rules contained in multiple systems. For some of the more complex calculations, it created a situation where companies were required to make exceptions to the system-calculated amounts and provide for manual adjustments, many of which had to be calculated outside the system.
As companies focus their efforts on legacy transformation and a microservices architecture, they will need to look closely at the way distribution functionality is dispersed inconsistently across their systems. Many policy admin systems offered in the marketplace do not provide the full scope of functionality required for distribution management. Additionally, many companies are realizing that a big-bang conversion of all in-force business is not optimal. They should develop a roadmap that evolves the distribution function to a more modern design. This needs to be factored into their overall transformation journey and not left until the end to be hard-wired into the environment.
For more information on this topic, refer to Novarica’s Distribution/Compensation Management Systems Market Navigator and Business and Technology Trends: Individual Life Insurance.
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