Thesis (MBA (Business Management))--Stellenbosch University, 2008. / Financial services and in particular the insurance industry, has been exposed to large-scale pressures and challenges from various fronts. For the past few decades, the life insurance industry has been self-regulated through the Life Offices Association (LOA). The LOA, representing life insurers, however never succeeded in keeping the industry abreast of market, and the needs of the role players' (authors' opinion based on interaction with in the industry and supported by the implementation of consumer-driven legislation). The LOA together with a range of other financial services industry bodies have since been disbanded (2008) and will in future form part of the greater industry body ASISA (Association for savings & investment South Africa) Over the past 10 years the slow transformation caught up with the insurance industry. Life insurers wanting to satisfy their shareholders focussed on the generation of new business, often to the detriment of the consumer. Consumer understanding of what they bought increased at a faster rate than the knowledge of many of the brokers selling these products, partly due to the information era and the free availability of information. Lack of transparency, misrepresentations and bad advice from insurers and brokers have been exposed at an increasing rate since the late 1990s. The South African government decided to correct the wrongs of the past by taking control of the situation, copying the UK model on Financial Services. Government instituted the Financial Services Board and implemented a number of regulations to ensure compliance to set criteria. If compared to the regulatory model and processes applied in the UK (FSA), the insurance industry can expect more regulatory pressures in the immediate future. The increased regulation will increase the cost of doing business for all role-players. A reduction in broker numbers can also be expected. Insurers will have to find new ways of increasing production with a reduced distribution capacity. Insurers need to produce sufficient returns on investment for their shareholders to ensure continued capital. By being creative and partnering existing distribution structures, such as distribution networks, bank brokerages, etc., insurers will be able to lock-in distribution capacity without incurring excessive costs. It is undeniable that insurers will have to revisit their distribution strategies if they are to survive the next few years. At the current cost of distribution, insurers will not survive the changing environment. Distribution through existing internal distribution structures will continue to be under severe cost pressures in servicing brokers with low to average production levels. If the international trends are to filter through into the South African insurance industry, larger number of brokers will join networks merely to limit the impact the changing environment has on their practices. Such a move works in favour of all role players: • Insurers are able to reduce/restructure their costs and lock-in distribution capacity through singular points of entry. • Brokers are less fragmented and so improve their ability of being heard, through a greater unified voice. • Regulators can drive change and compliance through singular points of access to multiple brokers. • The industry is able to retain the knowledge and expertise to deliver their products and improve its overall public image. • Government are assured of a larger part of the population having access to financial services and in particular life insurance. • Clients would experience improved and standardised service levels from the brokers. Insurers unable to lock-in distribution capacity will find it extremely difficult to survive the changing climate. Insurers have been locking-in distribution capacity by means of: • agency forces that write products of the specific insurer • bank-assurance agreements where insurers and banks have cross shareholding • franchise agreements where the sales people are in fact agents of the franchisee • call centres either owned by the insurer or having dedicated seats selling products of the insurer • loyalty programmes aimed at gaining a larger portion of the brokers production • recently the formation of distribution networks provide insurers on the network platform access to affiliated brokers. The formation of networks and distribution networks counteracts the constrictions these structures place on broker independence by providing increased operational freedom to their affiliated brokers. The choice of partnering a distribution network needs to be supported by the following: • The choice of partner • A cost-benefit analysis • The timing of entering the partnership • The resources and supporting structures • The communication of the change • The preparation for the change • An approach in support of the partnership Partnering with a network is a strategic initiative as it involves outsourcing what was previously thought to be a core function of the insurer. This change in approach impacts many of the current structures and various people at all levels of the operation. How to approach partnering and implementing a model to support outsourcing to external distribution networks is dealt with in this study. The success of partnering with external distributors is reliant upon eight identified critical factors. These relate to: • fit, management, formalities and relationships of the partnership • systems, processes and support structures in support of the partnership • management of risk, control and growth within the partnership. The changing business environment will continue to increase the attractiveness of distribution networks to brokers. A shift in distribution capacity demographics towards distribution networks can thus be expected. In order to maximise their distribution capacity life insurers will need to embrace the change and adapt their approach towards the partnership. Without understanding, managing and finding solutions to each of the critical success factors (CSFs) an insurer will find it extremely difficult competing and increasing market share within the distribution network. The findings indicate a realistic probability that insurers are able to adapt to the changing environment. This however requires a change in style of management from one of control towards one of influence. Effectively, each partner should be treated as partners.