Health Insurance Deductible Self Employed - Sustaining Margin Pressure

Health Insurance Deductible Self Employed

We believe it is unlikely that the current high levels of profitability in Asia's life insurance business, relative to the more developed Western markets, will be sustainable in the long run. Competition is already eating away at profit margins and will continue to do so. This has been most visible in bancassurance, where the banks have squeezed the margins of the Life insurers. On the other hand, in the agent channel and in more traditional life insurance, many of the features of life insurance products continue to be opaque to customers, so the compression of margins will most likely be a much slower process. While the margins of Asian life insurers will gradually decrease in the long term, in the context of global Life insurance, this region will still be significantly superior in terms of profitability in the years to come.

What we do not anticipate in the next several years is major consolidation in the industry. Asia is still very much a growth market, and for many of the players, throwing in the towel and selling to competitors is not an option. In fact, the slowdown in their home markets has prompted many international players to double down on their Asian efforts. In the longer term - and it may be quite a long term - consolidation in the industry may happen, but no one should be waiting for consolidation to play their cards.

In this market context, life insurers across Asia in particular, many of the local players need to shift from a growth to a value paradigm. Many life companies are still mainly focused on growing the top line. This is only natural, since the current market valuations of these companies assume that 70-80 percent of their value will be from future growth expectations. But even in markets such as China and India it is becoming increasingly clear that high growth alone is not sustainable in the long term, and is no guarantee for success. What investors are looking for are sustainable business models and long-term, value creation opportunities. To take a value perspective, life companies will need to adopt some of the initiatives described above, which include maximizing the product and channel economics, introducing a cost perspective into operations management, and rationalizing investment decisions from a risk perspective.

Challenges and Opportunities for Life Insurers in Asia
Above we have looked at the five key success factors for winning in Asia. The following section will describe the specific challenges and opportunities for life insurers in Asia. The strategy for every company will of course be different and each one's success will depend on its ability to leverage its natural strengths and adapt its competitive positioning to capture value creation opportunities. The nature of the response will very much depend on the starting point of the many players in the market. At the risk of over-generalizing, the starting point of life insurers in Asia can be roughly divided into four groups:

• Large local incumbents - Characterized by major market positions, first-mover advantage, close regulatory relationships and seen as national champions, these organizations usually have a large agency force with numbers in the tens or hundreds of thousands.
• Smaller foreign and local players - These are usually companies which are much smaller and nimbler than the large local incumbents, burdened with far fewer historical legacies, and have strengths in particular localities or product areas.
• Well-established foreign multinational companies - These are companies with long experience in Asia, usually the first overseas movers in local markets, well-positioned across several Asian markets, and operate a well-staffed Asia headquarters.
• Emerging foreign multinational companies - These are small latecomers to individual markets and typically have a limited footprint, focusing only on a few markets.

The following details the top strategic priorities for each of these types of players.

Large Local Incumbents
Most Asian markets are dominated by a handful of large local incumbents. These companies are very well established and often had a near, or actual, monopoly in the past. Their corporate culture and practices were nurtured in a time when they faced little competition. Among the many advantages they retain are: strong relations with a range of partners and official bodies, strong brand awareness, and large sales forces. Companies that fall into this category are China Life in China, Samsung Life and Kyobo in South Korea, Cathay Life and Shin Kong in Taiwan, LIC in India, and Nippon Life and Dai-ichi in Japan.

These local incumbents are increasingly being squeezed by more nimble foreign players and local competitors. As deregulation accelerates and competition intensifies, this pressure on the incumbents will continue to build up and a proactive response is needed. In general, we believe that these incumbent players have two broad priorities: transforming the core, and creating new growth horizons.

Transforming the Core
Many of Asia's local incumbent life insurers have enjoyed a quasi-monopoly, or at least a dominant market position, in the past. This has led to very large sales forces, but also to more bureaucratic and hierarchical organizations, slower decision-making, and often lower productivity. As a consequence, many of these incumbents have continually lost market share to smaller attackers and foreign entrants when their home markets were opened up. Many of them are now in need of a massive transformation program to protect their market position buttons outlined above - they need to perform a fundamental and extensive upgrade of their sales forces and create a more sustainable model. Furthermore, they need to systematically address weaknesses in other parts of the business system - for example, in IT, operations, and investment management. And they need to strengthen the management bench - renewing the top team and hiring and developing top talent at all levels of the organization.

Given the scale of these companies, this is an enormous task - but it can be done. We have found that a strong leader, a clear vision, a detailed road map, and a strong implementation setup are the ingredients required to succeed. This kind of transformation program usually takes three to five years and requires the whole organization and key stakeholders to be aligned behind the ultimate goals. There has yet to be an example of a completed transformation of an incumbent life insurer in Asia, but there are some encouraging signs. For example, Samsung Life has made remarkable progress in increasing the productivity of their housewife sales force.

There are also success cases in other financial sectors, for example, the transformation of ICICI Bank into a market leader in India. We believe some of Asia's incumbent life insurers will follow this path and a few will regain their strength and market-dominating position. Just as many incumbents though, will not be so successful - it may be difficult to imagine now - but in 10 years time, it is possible that some of these incumbents may become marginal players in their own markets. This in turn will open up new opportunities for smaller attackers and foreign players. Next post, we'll talk about creating new growth horizons. At mean time, you can check out Health Insurance Deductible Self Employed.

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Insurance Agency Acquisition - Organic Growth Or Acquisitions

Insurance Agency Acquisition

We are often asked whether an organic expansion or an acquisition is the best entry model in Asia - and obviously there is no single answer. First, it depends on the market. In general, acquisitions are the preferred option in the more mature markets where organic expansion is very difficult for latecomers and will take a long time. In the high-growth markets on the other hand, such as China and India, and also Vietnam, organic growth is a more likely vehicle for success.
 

Second, it depends on the availability of acquisition targets - which are generally scarce in Asia. Against the backdrop of high industry growth, consolidation in most markets might still be many years away. And valuations continue to be very high - despite the recent volatility in equity markets. On the other hand, life insurers in many Asian markets are still suffering from high-interest-rate guarantees on their in-force books and are, subsequently, taking on a lot of risk on the investment side (Taiwanese insurers are a good example). This dramatically increases their exposure to market volatility and might open up opportunities. The acquisition of ING's Taiwan business by Fubon is a prime example of such opportunistic acquisitions.
 
Third, timing is an important factor for consideration. Given the lack of availability of attractive targets, we often find strategies successful where life insurers start building a business organically and use this as a bridgehead to prepare for future acquisitions. This has the advantage of building a network within the industry - rather than just relying on investment bankers - by establishing relationships with local regulators and building a local management bench that will be required in case of a later acquisition anyway.
 
Finally, players should be very clear about their acquisition objectives: Is this "to get a toe in the water" or is it a transformational deal? In many markets in Asia, there are some small local, and also foreign, companies that might be up for grabs for the right price. The logic for such a deal is not so much the attractiveness of the target itself, but the timing of entry for players who have decided to enter the market. Buying into an existing company can often accelerate the start of operations in a specific life market, and the value is mostly derived from obtaining a license and accelerating the business plan rather than from the existing franchise. At the other end of the spectrum is the possibility of making a transformational move. Insurance Agency Acquisition

Local Asian companies who want to branch out of their local markets should consider a substantial acquisition. Given that their home management teams may lack the experience of operating in foreign markets, a major acquisition of a player with a good management team could be a transformational move to internationalize the company. Often, taking some minoriry stakes to get to know the target better is a good way to start this journey. We have not seen any examples yet for this kind of bold move in the Asian insurance industry, but the aspirations of many of the local Asian players suggest it is likely that over the next several years we will see some of these transformational deals.
 
Regardless of whether organic or inorganic measures are employed to build a pan-Asian footprint, winning players will be those who systematically build on their strengths while expanding. Whether this is a particular skill in channel management, (for example, agent management, experience in bancassurance), or know-how in direct-response models, or product know-how - such as The Hartford with its variable annuities that led to a market-leading position in Japan - building on existing strengths is a good recipe for success.
 
Cultural Adaptation
 
One of the key challenges for a successful expansion is managing cultural differences. This is as true for local Asian companies expanding across the continent as for multinationals. In particular, Asian companies from markets such as China, South Korea, and Japan find it very hard to operate successfully outside their own territory. Why is this? First, there is a language problem. Many top executives, not to speak of the more junior levels, are not comfortable in English, which makes an international expansion much more difficult. Second, the business culture in these markets is substantially different from international practices in many aspects.
 
The communication style, the organization model, and the decision-making processes are highly idiosyncratic - they are grounded in the cultural and historical context of these countries, but very hard to apply in other markets. Third, many companies in these markets have no history of making foreigners successful in their own organizations - which is a major obstacle when setting up an international operation. But this does not mean that it is impossible to change. 

In all three of these markets there have been initial moves from the leading incumbent players to set up businesses outside their home markets. For example, Dai-ichi in Japan has decided to demutualize and to deploy more capital in other Asian markets; in South Korea, Samsung Life has started to build businesses in China and other markets; in Taiwan, Shin Kong has begun hiring non-Taiwanese for its top executive team and has started to expand into China and Vietnam; and Ping An of China has acquired stakes in foreign companies while building the most international management team in the region, with three-quarters of the top 100 having a foreign passport - many of them have an ethnic Chinese background, but not all. Insurance Agency Acquisition
 
Compared to the Asian incumbents, multinational life insurers have much more experience in building international operations. Nevertheless, many of them have struggled to adapt to the Asian environment. This has much to do with the cultural differences described above. Many MNCs also struggle with building a local management team. It is a common perception within MNCs that they can trust Western managers more - in particular, those from the same country of origin - which, true or not, is often an obstacle to putting the best management talent on the ground to do the job. Furthermore, many MNCs find it hard to adjust to the highly entrepreneurial environment in high-growth markets such as India or China. 

In India for example, almost all private life companies set up since deregulation in 2000 are foreign-local joint ventures. But in most of them the Indian partner took over full control and currently runs the operation. The foreign partners were often unable to put the required management talent on the ground to manage the enormous entrepreneurial task of building huge agent forces, numbering hundreds of thousands, in only a few years. Some blame the 26 percent cap on foreign shareholdings for making it not worthwhile to the MNC partner to do all the work but only receive a quarter of the rewards. However, it is unlikely that this is the full story; there are successful examples such as BAJAJ-Allianz, where the German insurer is clearly in the driver's seat and has created one of the largest life insurance joint ventures in India.
 
One way for MNCs to improve the leadership and management of their local Asian operations is to set up a strong Asian headquarters. AIG and Prudential (UK) have led the way here, with strong Asia CEOs running the Asia business from their respective Hong Kong headquarters. But many other multinationals have not created this management layer, and still have their various Asian country operations reporting directly to a global head office. This often slows down decision making, makes it difficult to build market insights and understanding at European or US headquarters level, and often leads to frustration on both sides. These MNCs should ask themselves if they are really the best owner of these Asian businesses in this kind of set up - and what is the group adding to the individual country operations? 

Strategic decisions on the expansion of the footprint across Asia, capital allocation across markets, product guidelines and margin requirements, centralization and regionalization of operations, and talent management are topics where a regional headquarters can add a lot of value - as long as this management layer has real market insights, still encourages local entrepreneurship, and stays close to decision-making in these fast-moving markets. The Asia CEOs of AIG and Prudential (UK) are both members of their global executive board and others will surely have to follow this pattern if they want to become successful pan-Asian players. To find out more, you can check out Insurance Agency Acquisition.

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Management Roles In Business - Strengthening the Management Bench

Management Roles In Business

The insurance industry has under-invested in management talent for decades. This contrasts sharply with the banking business. Until very recently, no insurance company would have shown up on a list of preferred employers at top business schools. Furthermore, compensation was generally less attractive than in other parts of the financial services industry. This is driven partially by the retail nature of the business with a strong focus on mass operations - but it has clearly become an issue for the industry at large, and Asia is no exception. The most aggressive players have already begun to change - globally and in Asia - and have identified talent as a key success factor for further growth and value creation.
 

In many Asian markets the situation is aggravated by the fact that the insurance industry is still very young and, therefore, lacking a whole generation of managers with more than 5-10 years of experience, notably in India and China. But even here the winners are already pulling away from the pack. Ping An of China now has 74 expats within their top 100 executives - mostly, but not all, with a Chinese background. And ICIC - Prudential is attracting top talent in India, capitalizing on the strong brand and image of the group and a sense of national pride. Management Roles In Business
 
The key to developing and attracting top talent to life insurance companies is taking a holistic approach. Compensation, although important, is certainly not the only element, and in the eyes of young managers also not the most crucial. For example, graduates from top business schools regularly cite attractive career opportunities and corporate culture as more important than compensation. According to a Hill & Knowlton study, which surveyed 527 MBA students at 12 top-ranked international business schools, 95 percent of the students ranked career opportunities as "extremely" or "very important" factors in selecting an employer, while 86 percent of them ranked corporate culture as equally important. 

Life insurers should look at best practices from other industries to upgrade their human resources and talent management functions. Companies such as GE demonstrate that hiring the best, giving them great responsibility early on, and actively managing their professional development through systematic training, career paths, and mentoring is key to building a strong management bench. This is particularly important in Asia where management talent is scarce, and a culture of poaching people from competitors often starts a downward spiral of overpayment and frequent job hopping. Building a strong management bench will be a key success factor in life insurance in Asia for the next decade.
 
We believe that this challenge - the need to upgrade and professionalize all key functions of the business system - gives the multinationals a substantial competitive advantage. In general, MNCs have put a higher emphasis on quality than many of the purely growth-focused local players. This has sometimes limited their growth ambitions in the last decade, but increasingly, should become a strength going forward. Furthermore, they have the option to adapt best practices they have learned from their mature home markets, as well as their operations in Asia, to the Asian marketplace. 

Over the next several years, we may even see some of these multinational insurers deriving more value from their Asian operations than from their home markets. From nascent markets, such as India and China, to the maturing markets of South Korea and Taiwan, to the "post-mature" Japan market, we can expect to see some MNCs significantly raising their game to gain market share from the local incumbents.
 
Capturing the Pan.Asian Opportunity
 
Almost all multinationals are already playing a multi-country game in Asia - but most of them are still operating in just a handful of these countries, leaving significant opportunities on the table to broaden their footprint. Meanwhile, most of the Asian incumbents are still confined to their home markets, with no, or just a few, businesses outside their country of origin. We believe this will begin to change: we will see some of the more adventurous Asian players branch out of their home country to capture opportunities in new markets. While some of them will see neighboring Asian markets as the next stepping stone, some of the players will aim even further and enter the Western markets. Management Roles In Business

Given the difficulties of going global, it is unlikely that all of these moves will be successful. However, it is also important to note that many of these Asian insurers have significantly upgraded their management capabilities in the past decade, and riding on the strength of their successful domestic business, there will surely be a few winners who will be able to force their way into the global elite. In fact, a few Asian players have already risen to the top of the global elite by value, including China Life, Nippon Life, Meiji Yasuda, Ping An, and Millea. We see three main ingredients in a successful recipe to capture the pan-Asian opportunity.
 
Market Prioritization 

As described in earlier posts, Asian markets have very different characteristics and, therefore, very different risk-return profiles from an investment perspective. From "high-risk, high-return markets" such as China and India (markets with enormous long-term growth potential but high regulatory constraints and tough competition), to Japan with its enormous size but little growth, to some of the Southeast Asian markets which offer free entry to foreign insurers but are relatively small in size, the landscape could not be more diverse. Hence, an entry into these markets has very different capital requirements, break-even scenarios, and skills needed to become successful. 

For MNCs and Asian life insurers who want to expand in the region, it is very important to understand these trade-offs and requirements before making an investment. For example, we have too often seen Western companies entering China with huge growth expectations, only to be disappointed by the required time horizon and the slow pace of development in the short term. Similarly, we have seen several MNCs entering india through joint ventures, only to witness themselves becoming a very passive partner with little value added to the local venture. Also, previous attempts by many Asian players to expand in the region (mostly from Japan and South Korea), have been met with disappointment. Therefore, fully understanding the realities on the ground, identifying the right entry options and expansion plans on a market-by-market basis, and utilizing the experience and skills learned from other markets in the local context are vital to building a successful pan-Asian footprint. To find out more, you can check out Management Roles In Business.

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International Investment Strategy - Professionalizing Investment and Risk Management

International Investment Strategy

Investment management is a critical pillar of the insurance business, and one that is particularly important for large incumbents who have significant assets under management. The stakes are high. If they get this right it can serve as a structural advantage; on the other hand, the risk of not getting this right can be fatal - Asian life insurers are under tremendous pressure due to the high cost of their liabilities and, thus, any mis-steps in investments can ruin the entire franchise.

Local incumbents have traditionally viewed investment management as an afterthought. For decades, in many companies, the investment function has been organized as a department under finance. This is because for a long time, in most Asian markets, investment options have been rather limited by regulation and an immature capital market. Hence, the investing of insurance assets has been rather straightforward, mostly involving fixed deposits, government bonds, and in some cases, large real-estate holdings. During long periods when interest rates were high, this investment strategy served the incumbents well. However, the situation has changed considerably in recent years.

First, many insurers have issued long-term, high-guaranteed products in periods when interest rates reached heady levels (mostly during the late 1990s). However, during that period, there were not as many long-term assets, such as 20-year government bonds, to invest in - most insurers held their assets for a significantly shorter duration, assets such as short term government bonds and bank deposits. Therefore, as interest rates declined insurers were landed with a big problem - their investments yielded less than the cost of their liabilities. International Investment Strategy

This negative spread is a very serious issue - as is well known, it has brought many Japanese life insurers to the brink of collapse. But this is not just a Japanese phenomenon. For example, the average liability of Taiwanese insurers was in the region of 6.5 percent in the late 1990s while returns on their own investments were around 4.5 percent resulting in a 2 percent gap. South Korean and Chinese insurers have similar legacy issues.

Second, regulators have loosened restrictions on insurers, allowing them to invest in a greater variety of domestic and foreign asset classes, Much of this deregulation is due to the realization of regulators that insurers needed to find ways to alleviate their negative spread problem and to generate attractive returns for policyholders in low-interest-rate periods.

For example, in Taiwan the restrictions on investments in foreign markets have been raised from 5 percent of total investments in the 1990s to 45 percent in 2007. China now allows companies to invest in domestic equities and domestic alternative asset classes, particularly infrastructure products. And in 2006, the Qualified Domestic Institutional Investor (QDII) scheme was launched allowing Chinese insurers to invest part of their assets overseas. The pressure of the negative spread and the opportunity to diversify investments into new asset classes are creating an urgent need for Asian insurers to professionalize their investment management function. The urgency is not only in investment management, but also in risk management, since investing in these new asset classes brings a lot more volatility to the insurer.

There are three ways for Asian life insurers to make their investment management function more professional in the short term.

First and foremost, they need to upgrade their investment management talent. This sounds obvious until one realizes the extent of the culture changes that need to happen in an incumbent insurer. Investment management is a very talent-intensive business, which is not something that insurers are good at managing (retail insurance is much more about size and scale). In particular, domestic insurers have a very tough time attracting the best investment talent since they are competing with local and foreign fund management houses as well as hedge funds. Part of the problem is the pay scale - many Asian life insurers have adopted a very rigid compensation structure and hierarchy over the years, and their approach to investment management falls within that construct. 

Compared with the much more flexible and professional environment that fund houses provide, it is not surprising that insurers are far behind in this war for talent. One insurance executive mentioned to us that he had to go through layers and layers of paperwork just to hire one portfolio manager, and there were so many constraints and so much bureaucracy that the new hire just gave up and went to a foreign fund-management company, The asset-management pay structure has also increased substantially in recent years, and presents a shock for most local insurers. In the past, investing was a low-cost activity, where the life insurers would find investment professionals to place their assets into long-term government bonds or they simply negotiated bank deposits. However, as the insurers venture out towards hiring professionals to manage more international asset classes, they are finding that salary expectations are often significantly more than the company's culture and bureaucracy can absorb.

Second, with the right talent in place, life insurers in Asia will need to significantly upgrade investment, asset liability management (ALM), and risk-management processes by learning from best practices. Despite all the peculiarities of the Asian markets (for example, lack of deep fixed-income markets, a legacy of high-guaranteed policies, structural mismatch of assets and liabilities), there is no excuse for not adopting some of the best practice tools that are used by many of the leading global players. 

Life insurers in many mature markets have learned the hard way that excessive risk-taking can endanger the very existence of the company. Asian life insurers are well advised to learn from those examples and build the analytical tools required to assess the economic value that is created with more risky investment strategies. The accounting-based, absolute-return number that most insurers focus on - even if required to service liabilities from high-guaranteed, interest rate products in the in-force book - is not a good measure to determine value in the investment function. International Investment Strategy

Using modern analytical tools to derive investment decisions from a rigorous strategic asset allocation is key to improving investment decisions. Many consulting firms and insurance IT vendors can provide the tools and processes that can be adapted to local Asian market situations. While localization of these tools is a significant effort, it is a necessary process that can involve quite a bit of learning for the local insurer. Controlling risks and increasing risk-adjusted returns can be facilitated in a number of ways including ALM, strategic asset allocation (the science of allocating the asset base to different asset classes), stock picking, and running a professional and systematic investment process. 

Having a proper risk management process is also critical. The combination of chasing returns to minimize losses on the negative spread and investing in unfamiliar foreign asset classes can be lethal in terms of risk management. For example, a few of the Asian life insurers invested in subprime assets, which led to significant write-offs and subsequent capital calls. Another significant risk is currency exposure - with substantial volatility in currency markets, investing in foreign asset classes can lead to a myriad of new exposures that are very complex to manage. The foreign currency exposures of many assets cannot be easily hedged, and there are also market circumstances where the hedging costs are prohibitively expensive and will take away any incremental gain from the investments. For these incumbent insurers, hiring a proper chief risk officer could be one of their most worthwhile investments at the start of their journey toward upgrading skills and practices in investment and risk management.

The risk of not getting this right is huge. From Japan to South Korea to Taiwan, the contribution of investment management to total returns is higher than it has ever been, and, subsequently, risks have also increased significantly. For example, in October 2008, Yamato Life in Japan filed for bankruptcy after significant losses from its securities holdings. Life insurers have a disproportionate value at stake due to the large sizes of their portfolios, and it is imperative that they upgrade this area as quickly as possible.

Some insurers, once they have successfully professionalized their investment management function, may consider taking the next step - separating the asset-management unit into its own profit center and expanding into third-party asset management. Many European and US insurers have made asset management an important, independent part of their business. Global insurers such as Allianz, AXA, and Prudential (UIO have sizeable asset-management businesses with assets under management (AUM) in the hundreds of billions of dollars. 

A significant part of this business comes from third-party institutions and retail investors. Some of the players in Asia have started on this trend. In China, Ping An and China Life are seeking to replicate the Western development and have started to build their own asset-management businesses. In January 2007, China Life announced a partnership with Franklin Templeton to form a joint venture in Hong Kong for its overseas asset-management business. Ping An announced a joint venture with Singapore's UOB to create a new domestic funds business in China, and paid US$154 million for a 9 percent stake in Value Partners, one of Hong Kong's leading asset managers in November 2007.

Building a brand in the third-party, asset-management business will take time and a track record. On the retail side insurers need to develop distribution channels with banks and other distributors (for example, securities brokers) in order to reach customers. In most Asian countries, banks dominate mutual fund distribution; a strong distribution team that can work closely with banks will be one of the critical factors for success. It typically takes over five years to achieve the required scale when building a third-party, asset-management business (meaning that as a percentage of total assets, third-party assets need to reach 20 percent or more), and insurers embarking on this road should ready themselves to learn quite different skills in order to compete. 

Acquisitions may be a way to accelerate this process; indeed most leading global insurers with sizeable asset-management businesses have at some point relied on acquisitions to grow. For example, Allianz bought PlMCO in the US, while AXA bought Sanford Bernstein's asset-management businesses and Rosenberg, a well-regarded, quantitative asset manager. To find out more, you can check out International Investment Strategy.

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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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