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Development of distribution strategy

Distribution in Emerging Markets is affected by both financial and non-financial drivers. Financial drivers such as relative wealth, money transmission mechanisms and the availability of state social support influence the types and distribution of products. Non-financial drivers such as literacy, life expectancy and respect for legal title affect pricing, product complexity, and communication techniques and content. Countries with lower average customer income need simple, costeffective products. Here, the educational aspect of selling the product is critical.

The mature markets allow for more effective leveraging of existing relationships and capabilities, and development of new distribution channels such as the internet. Skandiabanken is an example of innovative distribution using the internet as a gateway.

The factors outlined above influence the way we think about the retail consumer in our various markets. We are carrying out detailed work to understand the evolution of customer segmentation in the new retail markets that we are targeting. And we maintain ongoing research on the framework within which customers buy or get access to financial services in their particular markets.

In bringing together the LTS division, Old Mutual is managing distribution channels across its life markets more strategically. We are intent on understanding how and what organic growth opportunities can be better leveraged to achieve growth in our various markets - and in particular on leveraging our achievements in South Africa, Namibia, Sweden, the UK and Colombia. We manage distribution country by country, using local market experts resident in those countries.

LTS will invest in the channels that are most likely to increase effective distribution. Channels are most effective where they are directed to the appropriate consumer segment and offer us the greatest control. The principal detractors from channel performance are poor persistency and poor agent productivity. Using our own agents (employed advisers) can be more expensive, but there are long-term benefits: their closeness to the customer enhances loyalty and customer retention.

The current size and projected growth of the emerging market countries where LTS operates suggest that more investment is needed in distribution to capture the growth opportunities.

Our current approach to enhancing distribution has four broad aspects:

1. Growing advisers organically. Tied agency forces are critical - particularly in Emerging Markets, where they remain the dominant form of distribution.
2. Strengthening efficiencies. An inefficient sales force incurs large overhead costs which may lead to acquiring poor-quality customers and delivering poor-quality advice to customers.
3. Strengthening bancassurance. Several of our retail markets have large, dominant retail banks.
4. Adding new channels selectively in relevant markets such as Retail Europe, Latin America and Asia.

Our distribution channels and their mix differ by market maturity and by country. The chart above shows the mix by business across all LTS markets. Tied or employed agency forces (own advisers) are dominant in Emerging Markets while independent financial advisers (IFAs) are the main distribution channel for us in Europe and the UK. The differences in distribution mix between Emerging Markets, Europe and the UK are mainly due to factors such as financial services sector development and maturity, and the relative expense of having own sales force versus the use of independent financial advisers.

There are some differences in the terminology used internationally to describe distribution channels. We use the term 'tied agency' for distribution channels contractually tied to the product provider or employed agents, or worksite marketing. The term 'IFA' is used more broadly here to include independent brokers and independent insurance advisers. Tied agency distribution gives us more control and can be targeted more accurately at the relevant consumer segments. In mature markets life companies have access to and can use independent advisers or brokers as well as retail bank or bancassurance advisers. In some mature markets, and in Asia, the fast-developing internet model offers a completely new means of accessing consumers. While we acknowledge its potential, we believe the internet's role as an effective distribution channel within a country is largely dependent on the development and widespread roll-out of broadband technology as, for example, in the Nordics.

Old Mutual has a long history in southern Africa of establishing and growing new distribution channels. OMSA established independent insurance brokers or IFAs in the late 1970s and established mass market worksites shortly thereafter. Skandia has been effective at establishing IFA networks and channels. Tied agency and worksite marketing is very effective in reaching the mass market and middle market consumers, while IFAs are very effective at penetrating and developing the wealth markets of UK, Europe, China and southern Africa.