Friday, December 30, 2011

Life Insurance Product Development Process - Winning Through Product Innovation

Life Insurance Product Development Process

We have already talked about the shift across Asia from traditional life products to investment-linked vehicles, along with the need to tailor products much more to the needs of individual channels and customer segments. All this requires an upgrade of product development capabilities at life insurers across Asia.

First, life insurers need to link product development much more closely to channels and customer segments, systematically understanding their specific needs better and incorporating their insights into the product development process. For example, Prudential (UK) has been very successful in South Korea with products that are linked to specific investment themes that hit the nerve of the market - such as a Viemam fund incorporated into a investment-linked policy in 2007 (although given the volatility in these emerging markets these products obviously have a highly speculative element and can pose large risks mis-selling).
Second, many life insurers need to upgrade their skills in understanding the value creation of individual products and product components. The more complex products are becoming more important and it will be vital to fully understand their economic impact. For example, in South Korea many life companies are selling riders with such additional protection elements as health insurance - but without the data and experience to price these riders adequately. And more often than not, it is unclear if the additional benefit is worth the cost from the customer perspective.
Many life insurers today have no clear understanding of the exact value contributions of the different products they are selling and the channels they are using to sell them. Revisiting the product portfolio through a "value lens," pruning less profitable products, and adjusting product features to enhance value contributions, (for example, through riders or longer durations), are often sources for major improvements in the value of new business. Life Insurance Product Development Process

Analyzing the channels with regard to their value contributions, adjusting commissions to align with product profitability, and defining clear targets for value improvements by channel are also major value drivers. We often hear the argument that this is a clear trade-off between profitability and growth - but frequently companies are claiming this without having a full understanding of the value drivers they could leverage in the product and channel composition. This is not about closing channels or product families, but about the transparency of economics and the alignment of value creation and incentives. Better understanding leads to a multitude of little changes that add up to significant value creation over time.
Third, life insurers need to think through the organizational implications of product innovation. Many global insurers have begun to drive the actuaries out of their ivory tower and marry the product development with a strong product-management function. This integrates marketing, channel management, and actuarial skills. It also allows for more rapid reaction to changes in market trends and for constant re-evaluation of the product portfolio in terms of sales effectiveness and value creation. However, many Asian life insurers have yet to build up the talent pool and the cultural readiness to adopt these types of organizational changes.
Revolutionizing IT and Operations
The life insurance industry around the world is not well known for world class IT and operations skills. This is often a neglected function that suffers from a dependency on legacy systems and that is not recognized as a source for value creation. Asia is no exception - but we believe this might change. First, in the vast markets of China and India, IT and operations play a crucial role in allowing continued fast growth by running massive distribution networks across enormous countries, delivering customer and agent service to the most remote places, and tapping into rural opportunities. Life Insurance Product Development Process

The large local players in these markets have begun to realize that they need very strong IT and operations functions to gain full control over their networks and to guarantee customer satisfaction (and lower churn rates) across geographies. Most of the time, they realize quickly that gradual improvement is not sufficient to address these challenges. Some players in these markets will jump directly to state-of-the-art IT and operations models to cope with the enormous challenges resulting from their size and growth. Ping An in China has already embarked on this journey of revolutionizing IT and operations by centralizing the back-office functions in a nationwide operating center and by centrally building and managing customer service and call centers. 

Second, as more insurance companies operate across Asia they are looking at ways to create synergies across the region. This is a huge challenge given the different regulations, languages, and maturity of the various markets. But the case is compelling for the few players who have sufficient scale to build some key functions centrally that will allow for more control and quality. AIG is the natural leader in this field, given their footprint across the region. They have already begun to operate some back-office functions across Asia and are continuing down this path. Others will follow.
Third, IT and operations are, of course, key enablers to control cost. While most life insurers have not focused on this topic in the past, given the priority to grow the top line during the landgrab stage, this is likely to change with increasing margin pressure. In particular, in markets where growth rates are coming down, fierce competition requires tight cost management to maintain margins. In a similar fashion to Western life companies only a few years ago, many Asian life insurers measure operational efficiency by cost ratios only. This is a highly misleading indicator, and best practice globally has moved to more industrial measures like unit cost.
Given that centralization, or even regionalization, of operations, streamlining of processes, and effective operations management take time to achieve, the leading life insurers of tomorrow have to start to address these issues today. To find out more, you can check out Life Insurance Product Development Process.

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