In Singapore, there are about 19,000 insurance agents employed by insurance companies and agencies. In a country with a population of about 5.6 million, this equates to having one agent for every 294 people. This number becomes even lower once you include personal bankers, who are also able to sell insurance products to customers.
If you are working, chances are that you would know at least one or more insurance agents. Some of them may be your close friends, relatives or family members.
While most of us know that insurance is important, we sometimes find it difficult to plan for our insurance coverage needs. Some of us may even deliberately avoid insurance agents, as we think that agents may have sales-related agenda for wanting to meet us.
But are our concerns really justifiable? Or are insurance agents just misunderstood?
Aggressive Recruitment Tactics
Unfortunately, one of the prevailing issues for the insurance advisory space is the aggressive recruitment of insurance agents. The idea here is fairly straightforward; a larger team means a bigger reach, a bigger reach tends to lead to more sales. More sales lead to bigger market share.
While the same logic can be said to apply to most other industries, the recruitment structure of most insurance companies is what makes it different. Most insurance agents in Singapore are considered self-employed individuals. They get paid when they sell insurance products on behalf of the insurers they represent. If they don’t sell, their insurers don’t pay them. There is no direct financial loss for an insurer to hire an underperforming agent.
Is Your Agent An Advisor Or A Salesperson?
This leads us to an important next question. Is your insurance agent primarily a financial advisor or a financial salesperson?
Advisors are seen as experts in their area of specialisation. Advisors’ job are to understand our needs, tap on their experience to advise us, and recommend to us the next steps to take based on their professional experience. They are remunerated by their clients for service provided, rather than through products they sell. Professions such as doctors and lawyers are typically seen as advisory-based.
A salesperson job is to sell. A good salesperson takes into consideration the needs of his potential customers, such as their preferences and budget in order to propose something that makes sense.
An example of a salesperson would be a car salesman. When you go to a showroom, a good salesman may ask you about the type of budget you have in mind, the size of your family and the type of activities you expect to use the car for. He will then (hopefully) recommend to you the ideal car that he thinks you are most likely to want.
He isn’t paid to provide recommendations but he does that knowing that a suitable recommendation gives him the highest chance of being able to clinch a sale.
We encounter this all the time in daily life. A polite and knowledgeable salesperson at Best Denki can be extremely useful if the person is able to quickly help us with identifying a suitable washing machine for our home, based on our usage and budget. We also rely on their recommendations, even though we know intuitively that their job is to sell us products.
It’s important for us to stress that whether you see your agent as an advisor or a salesperson doesn’t necessarily translate into his advice being better or worse. If a person is seen as an advisor, it’s possible that he can still give really bad advice. At the same time, a person seen as a salesperson can also give really good advice even though his ultimate goal is to sell.
The Lemon Problem
Written about by economist George Akerlof in 1970, the Lemon Problem is an interesting concept that can apply to our discussion today.
Simply put, the Lemon problem arises when sellers have more information than buyers on a product. Every seller will claim that they sell good products, rather than duds. Buyers are aware that they know less than sellers and will have no way of knowing if a product is a dud. They are not willing to pay more than an “average price” for a product because they have no way of differentiating if a product is really good. In some cases, buyers may choose to exit the market entirely.
Though not entirely the same, the problem with the insurance industry can somewhat be liken to the lemon problem.
Imagine that insurance agents are now the product. We have both good and not-too-good agents. Good agents are the one that are able to give good advice and recommendations that are based on the needs of their clients. Not-too-good agents are the one lacking in knowledge and who are only interested in selling products that provide them with a high commission.
Consumers want to meet and work with good agents, but because there are so many agents in the industry, they are not able to distinguish between good agents and not-too-good agents. Hence, unless they know better, their immediate attitude would be to take any agents approaching them with a heavy dose of scepticism, similar to how our guard will automatically be up when a used car salesman tries to convince us that the car he wants to sell is a good car.
Consumers do this not because they think all agents are bad, but simply because they don’t know who are the good ones.
The Lemon problem is a real issue because if left unsolved, it can lead to market failure. An example in the insurance space will be how some individuals already prefer to buy insurance policies through robo-advisors or online marketplace, where no advisors are present to help them. They do so not because they think advisors are not valuable, but because they do not know whom they can trust.
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