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Sub-theme 53: Dynamics and Change in and between Organizations

The impact of organizational transformation on the relationship between the insurance agents and the company

FRANCESCA CABIDDU Researcher of Management University of Cagliari, Facolty of Economics Viale S. Ignazio, 74 070/6753382 fcabiddu@unica.it

MARIA CHIARA DI GUARDO Professor of Organization Theory University of Cagliari, Facolty of Economics Viale S. Ignazio, 74 070/6753360 diguardo@unica.it

The impact of organizational transformation on the relationship between the insurance agents and the company Introduction Insurance organizations in Italy have changed radically and deeply in the past twenty years. Deregulation, globalization of insurance institutions, intensified competition, electronic commerce, and the emergence of new risks are among the challenges faced by insurance organizations. Among the most important changes that are affecting the Italian insurance market it is important to emphasize the peculiar role played by the Law n. 40/2007 (the socalled "Riforma Bersani"), which came into force on January 1st, 2008 and dramatically changed the long-term relationships between insurance companies, and customers by repealing a previous clause regarding exclusive agents in the field of non-life insurance sector1. In fact, the Law n. 40/2007 establishes the professional figure of independent agent (or, an independent seller working for more than one insurance company at the same time) whom, unlike exclusive agents, is entitled for insurance distribution in the behalf of each single firm he represents, thus revoking previous agreements between insurance companies and exclusive agents. Considering the fact that among all the working insurance agents in Italy (about 22.600) exclusivity has always been the main characteristic underlying agency relations while a mere 8.4% of them, in 2007, were independent agents (multifirm agents) it is easy to assume that after the coming into force of the Law n. 40/2007 a whole organization transformation is set for both insurance companies and agents, with new competitive challenges regarding the re-planning of the relationships inside the organizations. This paper provides an exploratory analysis of insurance organization transformation following the introduction of the opportunity for the Italian insurance agents to represent more than one insurance company at the same time through a multiple players relations model (Suarez F.F., 2005; Cook K.S., 1977; Katz M., Shapiro C., 1985). This change involves the creation of new disciplinary regimes that produce new kinds of structures of work organization inside the insurance sector in Italy. Based on the detailed study of one of the insurance division of the Allianz Group (Allianz-Lloyd Adriatico) and her company (Allianz S.P.A.), one of the biggest insurance company in Italy and in Europe, our paper tackles this
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The insurance industry consists of the non-life insurance sector and the life insurance sector. The value of the market is shown in terms of gross premium incomes. The life insurance market consists of mortality protection and retirement savings plans. The non-life insurance market consists of accident and health, and property and casualty insurance segments.

issue with an unprecedented richness of data. The objective is to considers how organizational insurance transformation can be explained and in doing so the paper fits with the sub-theme Organizational Transformation: Power, Resistance and Identity. The principals-agents-customers relations: Problem description The traditional relationship between the insurance agent and the insurance company can be described as a typical principal-agent relationship (Holmstrom, and Milgrom, 1987) as the one drawn in the agency theory. The agency theory focuses on the analysis of the relationship between a principal and an agent, where the principal asks an agent for satisfying the principals demands or, in general, for performing a certain act and rewarding the agent for taking negotiating effectively on his behalf. The survival and the success of an agency relation depends on the principals ability to establish a set of rules which can control and promote the agents' activities, but also relies on the principal's ability to coordinate the team work and to adopt efficient strategies and effective policies. The costs of an agency relation might arise from diverging interests between the principal and the agent, and from the need of a set of obligations (which may be implicit agreements) establishing rules and incentives, consequently avoiding moral hazard. The principal, therefore, should aim to stipulate a contract which maximizes his own expected utility while meeting and satisfying the interests of the agent, motivating him to comply with honor the contractual agreements through a system of incentives and penalties. Before the Law Bersani took effect, what characterized the relationship between the insurance agent and the insurance company could have been effectively represented using the agency theory scheme, insofar as it was mainly a relation between two 'subjects': the principal (dealer), or the insurance company in the behalf of whom the local agency is run by; and the insurance agent, who works permanently in a professional and autonomous way to provide at his own risk and operating expenses for the administration and management of the agency's business, paid completely or partially on commission. The abolition of exclusive sales contracts in the field of non-life insurances has deep consequences in agency relations, because it dramatically changes the balance between the actors involved, therefore requiring a transformation of both the companies' and the agents' competitive strategies. As a result, the peculiar relationship that is established between the agent and the insurance companies in such a system, cannot allow an analysis of the relationship based simply on the results accomplished by agency theory, but requires the use
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of a different model, the common agency one, that allows us to study the multipart relationship established between several principals and one agent, as well as the relationships established between different principals. Each agent can establish a relation with more principals (with the latter becoming direct competitors as a result), and each company may get in touch with new agents who previously worked -or currently work- for other companies, and who are potentially dynamic, innovative and interested in increasing the number of their collaboration agreements. Methods Research design Given the nature of this type of research, a case study methodology is appropriate. In fact, the qualitative case study approach is particularly useful when concepts and contexts are not well defined because it enables in-depth understanding and explanation (Eisenhardt, 1989). In particular, a case study is as an empirical inquiry that investigates a contemporary phenomenon within a real-life context, especially when the boundaries between the phenomena and the context are not clearly defined (Yin, 2003) . Research setting The Allianz Group is one of the leading integrated financial services providers worldwide. With approximately 152,000 employees worldwide, the Allianz Group serves approximately 75 million customers in about 70 countries. On the insurance side, Allianz is the market leader in the German market and has a strong international presence. In fiscal 2009 the Allianz Group achieved total revenues of over 97.4 billion euros. Allianz is also one of the world's largest asset managers, with third-party assets of 926 billion euros under management at year end 2009. Lloyd Adriatico is a division of the Allianz Group. Lloyd Adriatico led by Enrico Tomaso Cucchiani. Lloyd Adriatico, in the last years, was able to transfer to its customers the savings obtained from improved efficiency. The motor third party liability (TPL) costs for customers without accidents were reduced and further cuts are expected in the coming months. Savings can reach 30 percent on motor TPL and 85% on fire and theft.

Also in life business, the creation of value for customers was testified by the excellent performances of all Lloyd Adriatico investment lines and the ability to avoid the negative impact of the several crises that hit the financial markets. Data collection We collected data through phone interviews, observations, and secondary sources. The primary source was semi-structured interviews with individual respondents (manager of Allianz S.P.A and insurance agents). 275 interviews were conducted over the telephone between July and October 2008, and between July and September 2010. All agents were located in Italy. We described the topic of the research to each participant before the interview. Participants were told that their responses would be kept confidentially. To conduct the semi-structured interviews, one common protocols were adopted. The protocol was employed for the interviews administered to Allianz S.p.A. managers. We structured this protocol as follow: In the first part of the protocol, a number of questions concerning the role of the interviewee were asked; in the second part, we asked questions regarding the relationship between the company and the insurance agents. Interviews lasted from 1 hour to 2 hours. All interviews were recorded and the recordings were transcribed. Interview transcripts were verified for accuracy by the managers. Each transcript was analyzed immediately following the interview and used as a basis to explore emerging themes in subsequent interviews. We collected also demographic information from insurance agents. Among the insurance agents, 91 percent were male, and 51 percent of them were aged 36 to 49 years old; 33 percent had an age ranging from 50 to 60; while 8 percent were over 60 years old. Finally, 8% were under 35. 60 percent of the insurance agents sample was from Northern Italy, 25 percent from the South and Islands and 15 percent from Central Italy. Follow-up interviews were conducted with several managers to verify themes that emerged in subsequent interviews. A literature search was conducted in tandem with data collection and analysis in order to ground the analysis theoretically. Data analysis The first question, aimed at understanding the agents evaluation (be it positive or negative) of the early effects of the insurance market reform (Bersani law), gave the following
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results: more than half of agents (55%) assessed the effects of reform as positive, 13% of respondents said that the effects of the reform were negative and, finally, 32% of respondents claimed they didnt know how to evaluate, to date, the real implications of the reform.

The second question, logically related to the first, sought to focus attention on the agent's intention to become a multi-firm agent. 17% of respondents said they had already become multi-firm, 8% said they would become multi-firm during the year. Finally, 32% of the agents, more than one third of the total, said they would remain one-firm. The unsure were 43% of the total. The leading obstacle to become multi-firm agent is the lack of understanding of the opportunities and threats related to this law.

Interesting information can be obtained by comparing these results with those collected three years ago, by administering to the same agents, a questionnaire aimed at understanding their opinions before the introduction of the Bersani Law. The number of agents who have chosen to become multi-firm agent is lower than the statements they made three years ago (17% versus 33%). There was, however, a slight increase in agents' determination to maintain a one-firm (now 28% against 33% in the past). The adoption barriers that agents face most are managerial and cultural rather than those related to the Bersani Law. The third question was aimed at understanding whether the agent had given their firm sales network the opportunity to become a multi-firm agent, developing what can be considered a "hidden" multi-firm agreement. In fact, 20% of respondents said that they had access to other mandates through their sales network. The mandates obtained by the sales network were mainly related to the auto industry, and in a very limited number to retail and corporate damage. The fourth question was aimed to understand if the agent considered the opportunity given to their sales network was perceived positively. The result was surprising. 43% firmly believed that the above mentioned opportunity was an advantage for both agents and sales network. On the other hand, 57% stated that it was a risky decision. They once again clearly pointed out their uncertainty towards the effects of Bersani law.

As concerns the interest expressed by other companies to acquire the Allianz sale network, 68% of agents stated that they were contacted by different companies (Aviva, Axa, Navale, Cattolica, Carige, Zurich, Sara, Reale mutua, Tua, Vittoria). In spite of this, few agents accepted to become multi-firm agents because they were uncertain about the advantages of this choice. This uncertainty was the same that they had shown during the previously administered questions. They seemed to be afraid of leaving the certainty of their present relationship with their company.

The above mentioned fear to change their present relationship was also expressed by the fact that 78% of the agents declared that they had not taken any action to become multi-firm agents. They showed little interest in acquiring new mandates.

Despite their reluctance to become multi-firm agents, they manifest interest when asked : in what sector would you like to receive offers from other companies. They predominantly chose the automobile sector that was followed by requests for the retail claims and specialist corporate ones. Another question concerned their thoughts about the possibility that a multi-firm agreement could have had major management costs. Only 14% of the sample believed that the Bersani reform had determined only major costs such as management cost, training etc., and expressed their negative perception about the multi-firm agreement. Once again, more than 55% of the sample expressed their inability to evaluate the opportunities given by multi-firm agreement. This result is in line with the high level of those that were uncertain (43% of the total) with the choice of multi-firm agreement.

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Very interesting is the view of the agents who believed that become multi-firm agent had brought benefits. The statements provided by one multi-firm agent are quite meaningful in this sense: The multi-firm agreement allows you to operate in the best of ways, this creates an advantage for your clients and for you. If through an exclusive mandate only 3 out of 10 contacts become customers, under the multi-firm agreement the percentage rises to 7 or 10. Findings Our findings are based on a sample of instances of Allianz S.p.A. mangers and insurance agents. As with any research study of this scope and complexity, our work has limitations that should be taken into account when interpreting the results. The bulk of our data is in the form of responses to interviews. In order to limit the impact of this single form of data, and to be able to triangulate our findings, we elicited multiple relevant perspectives in each organization. Moreover, when possible we corroborated the interview data with observations or follow up requests for specific information. Our first finding consisted in identifying the evolution from the traditional principal-agent model to a many-to-many relationship model between multiple agents and multiple companies- consequently re-establishing a balance in the relationship between agents and companies (figure 1). In fact, companies might discriminate against agents or discourage them in their choices, in order to preserve their sales network exclusiveness, or simply to promote policies that maximize expected utility.

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Fig. 1 - Principals-agents-customers relations

Insurance Company

Insurance Company

Insurance Company

Agent (seller) Agent (seller )

Agent (seller ) Agent (seller)

Agent (seller )

Custo

Custo mer

mer

Custo mer

Custo mer

Secondly, we found that the customer compare and evaluate different products from the different companies the chosen agent works with: in this way, while of course it impossible for the agent to compare all the different products available on the market, he is nonetheless able to advise his customers in a more accurate way. Also, the relationship between customer and agent is not affected by the relationship between the different companies and the agent because the latter has a wider range of offers and, therefore, choose in a less constrained way. This competition should be assessed not only as regarding exclusively the final market, but also concerning the possible connections that an agent can establish with insurance companies, thus setting a number of multiple players relations (Suarez F.F., 2005; Cook K.S., 1977; Katz M., Shapiro C., 1985). The agents in fact, taking into account the changes brought to competition by the abolition of the clause on exclusivity, cannot be considered as separate and independent from each other. All the possible different ways of relating to insurance companies that each agent will choose,
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have a direct and immediate effect on the different competitive options available to all the other players in the system. Actually, it is important for the agent to know if there are other multi-mandatory agents that sell the same policies for the same insurance companies in its own geographical area, especially to assess his possible positioning within that market. Moreover, the decisions and choices made by the majority of other agents working for the same company (even though in different geographical areas) will influence the agent's own decisions Future research can investigate the relationship with the customer. In particular, it would be interesting to understand whether the agents have incentives to place products or policies which are best suited for a certain customer, or if they choose those that are more profitable for him. These can happen because customers might find it difficult to properly assess and compare different products that offer different quality and coverage level. In addition, it would be interesting to understand if the agents could have difficulty to meet the demands made by different companies (this can happen, for example, when companies ask the agent to adopt the same criteria for clients' selection). Another topic that should be analized is the number of mandates that an agent is able to handle. . Discussion and conclusion Our model shows how insurance organization transformation are tied to externalities: in fact, each single agent is strongly influenced by the way in which all the other players that belong to the (same) system behave. Each agent, in fact, has to define a strategy that takes into account the possible choices other agent can opt for, and in particular they have to consider carefully the choices made by agents that belong to their same sales network and agency. Going further in detail, they face two alternatives: they can try to define a strategy aimed to maximize their utility, regardless of what others decide; or, they can opt for a solution that minimize losses that might be caused by other competitors or any relevant decision maker. As a matter of fact, opting for a multi-mandatory scheme can be rewarding not only for the intrinsic qualities and the opportunities it offers, but also depending on which and how other agents have already opted in (or are willing to do so): for sometimes it can be more profitable to choose for the option that is apparently -at least from a strategic point of view- less favorable, but is more profitable for the single depending on the other players' behavior and choices.
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As for insurance companies, they have to implement strategies directed towards loyalty building within their agencies sales network, eventually choosing to assess alternative sales networks, depending on their competitive positioning. In general, network externality weakens the strength of the mechanism that leads to opt for the best per se choice. Furthermore, agents externality leads to the definition of strong and weak ties. Two actors that belong to the same system, depending on the multiple player model adopted, can interact with each other either rarely, or extremely often. Applying this model to agents, there is a difference between the bindings that occur among agents belonging to the same agency network, and the weaker ones (generally based on mere competition): the first example is about strong bonds, while the latter exemplifies a weak bond. Inevitably, agents will give significant weight to strong bonds when choosing between different options, being therefore particularly influenced by this type of bonds. In other words, the fact that agents can be strongly influenced by other agents' choices might suggest that opting for a multi-mandatory scheme or not might be biased in favor of the choice made by the agents belonging to the same agency network, and not only on the choice made by the majority of the agents in general. The strength of the bond depends on the frequency of the contacts between players: in brief, the probability of an agent choosing to broaden his offering from other insurance companies (within a multi-mandatory agreement) depends on the number of other agents with whom he has established strong bonds who are willing to opt for his same choice. In fact, numerous researches have proved that as uncertainty within competitors increase, together with a growing complexity of the information available, the more strong bonds will bias the strategic choices of the players involved (Hansen, 1999). The same happens with insurance companies: they communicate with each other, observe each other and, in some cases, adopt imitative behaviors. Nevertheless, there can be strong or weak ties also between insurance companies (Suarez, 2005; Cook, 1977; Kraatz, 1998). References Marvel, Howard, 1982, Exclusive Dealing, Journal of Law and Economics, 25: 1-25. Grossman, Sanford and Oliver Hart, 1986, The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration, Journal of Political Economy, 94: 691-719.

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