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Medium Profitability Organizational Changes

Vitality Insurance

#Financial Services
ProHub Comment

This case teaches the critical importance of aligning incentive structures with business objectives. Vitality's sales contests inadvertently created perverse incentives where agents 'gamed' the system by timing sales to maximize bonuses rather than generating genuine incremental value. The case demonstrates that bonus programs duplicating the underlying commission structure waste resources without adding strategic value.

Estimated Time 26 minutes
Difficulty Medium
Source Kellogg
20 / 100
Our client, Vitality Insurance, is a leading provider of supplemental insurance products in the United States. Vitality agents partner with companies to offer their employees optional, supplemental insurance for such conditions as life, long-term disability, etc. Vitality has undergone fairly steady growth in the past two years, but profit margin is decreasing. What should they do about it?

Clarifying Information

  1. Vitality is the leader in its category and has over 10,000 field sales agents (FSAs)
  2. Vitality sells all policies through FSAs who are solely compensated on a percentage commission of total new premium, (defined as premium from new customers or additional premium up-sell from existing policyholders)
  3. In addition to the commission, short term priorities are often communicated via sales contests that focus on a particular customer segment or activity and pay a bonus in addition to standard commission
  4. Major costs: sales, G&A, and advertising
  5. Competition: Few competitors in this mature market with similar growth. Vitality is a leader in the space; competition not the focus
  6. Industry: Agent turnover is very high on a yearly basis (though was lower during the recessionary period)
Mock Interview
Interviewer

Our client, Vitality Insurance, is a leading provider of supplemental insurance products in the United States. Vitality agents partner with companies to offer their employees optional, supplemental insurance for such conditions as life, long-term disability, etc. Vitality has undergone fairly steady growth in the past two years, but profit margin is decreasing. What should they do about it?

You

Thanks. Before analyzing, I'd like to clarify a few key questions...

Interviewer

Good question. Let me provide some background information...

You

Based on this, I suggest analyzing from these dimensions...

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Vitality Insurance faces declining profit margins despite steady revenue growth. Through analyzing cost trends, the case reveals that sales costs jumped 45% from 2009-2010 while premium only grew 10%. Root cause analysis uncovers that a new ‘Sweeps Week’ sales contest incentivized agents to shift timing of sales rather than create new business, and the contest’s focus on premium volume duplicated the existing commission structure, making it wasteful.

Key Insights:

  1. Misaligned incentive programs can drive undesirable selling practices (pushing/pulling sales timing) without creating genuine incremental value
  2. Sales contests should target activities not already covered by base compensation structures to avoid redundancy and waste
  3. Acquiring new customers costs significantly more than retaining or upselling existing ones—shifting incentives toward new account acquisition can erode profitability
  4. Contest design must be carefully analyzed to ensure it drives incremental behavior rather than merely shifting timing of existing sales