Distribution is make or break for life insurers

Gareth Stokes, FAnews Online Editor

Financial advisors rely on product providers for innovative risk and savings product to meet their clients’ specific needs. The acid test of a new product is whether its myriad features sufficiently differentiate it from the ‘crowd’. To find out how the l

A consistent result was ensured by limiting the survey to fully underwritten individual risk products, sold by advisors, to mainly middle and high income earners. Although the survey size was small, he was able to draw some interesting conclusions. He was also able to flesh out his findings by cross-referencing a 2008 Deloitte study, first presented to the Society of Actuaries, which surveyed 20 large US insurers across 145 new product launches. These US companies represented approximately 30% of the US market by new premium. Among the first questions posed was whether or not the respondents felt their new product launches were successful. Porter requested that they reflect on new business targets and post-launch client retention. By these measures as many as a third of new products were labelled unsuccessful.

Market leaders have the edge in the product development race

The success or failure of new product hinges on a number of factors. Porter set out to determine whether the insurers in question had clearly documented product development processes. Only half of the respondents answered in the affirmative. “Even so, the five companies that said their strategy was not clearly documented had some of the best [in my opinion] products in the market,” he said. There were contradictions in the industry’s response to his interrogation. While the majority claimed to have a predictable product development cycle, only 2% indicated they were able to commit to a ‘go live’ date early on in the process. Knowing when your product will be ready for market is critical for both marketing and distribution!

Another interesting consideration in the life space is whether the companies are market leaders or fast followers. Market leaders are companies that research, innovate and develop product not yet available in the domestic market – whereas the followers latch onto their idea and bring an equivalent product to market as quickly as possible. Most domestic insurers fall into the market leader category. In contrast, the Deloitte study of US insurers indicated a mere 20% of product providers were market leaders… “It is difficult to have a lot of market leaders in a highly competitive environment,” observed Porter. Although insurers should focus on delivering quality product ‘on time’ over getting to market first, there are benefits to the market leader approach

In the US, the market leaders’ self-reported success rate is a staggering 90% versus just 50% from the market followers. “I am not saying you should change your market philosophy to be market leaders, but US experience shows this to be more successful,” he said.

On factors for success – and how many actuaries does it take to…?

We can identify three factors that contribute to life product success. Product providers should strive to be market leaders, define the product development process and commit to a launch date at an early stage by following a defined development cycle. “If you can work with the market, manage their expectations and get them excited about what you are doing then that does a lot of good,” said Porter.

How many actuaries does it take to bring product to market? The survey showed that the distribution, in terms of actuarial resource, is quite wide from one company to the next. Some companies reported 12 actuaries in their product development area and others only one or two, though not all of these employees were full time on a single project. On average there were four actuaries per respondent... But the bulk of product development human resource remains in the IT & Systems and Administrative and Operations categories. Ironically it is in these heavily resourced departments where things go wrong. Porter noted that most companies singled out IT & System issues as the number one obstacle to get product to market on time. Difficulties centred on legacy rather than staff issues!

Local life insurers consistently involve actuaries and underwriters early on in the product development cycle. But it seems claims assessors – the guys at the coal face of product performance – are brought in third last. Involving both IT staff and claims assessors earlier in the development cycle would be of great benefit. Actuaries flagged new business volume, retention and regulation as their top three concerns over future product development. They were also worried about what product they would launch next and the emergence of an aggressive underwriting mortality trend.

It is time to turn to brokers for new ideas

Idea generation can be tough… Local respondents favour in-house product development teams, competitors and actuaries for the ‘seed’ for a new product. Surprisingly, brokers did not get much of a mention. “We are getting a sense that brokers are not being listened to,” said Porter. There is no better place for a product idea than from the person liaising with the end consumer. Aggressive underwriting practices reflect clearly in recent life insurer statistics. “There is a lot of pressure to keep new business volumes up, but this is having an impact on underwritten mortality experience – more and more non-accidental claims in first few years point to underwriting leniency,” noted Porter.

While his presentation was “all about product”, Porter concluded that the fundamental truth in life insurance is that it is “sold and not bought”. In his view Distribution (and that means brokers) is more important than Process & Service, which in turn is more important than Product. We cannot forget about product – but distribution is the make or break of industry success.

Editor’s thoughts: Product providers spend millions researching and developing new life products. Based on Michael Porter’s Viewpoints of a Product Development Actuary presentation there are some aspects in the product development cycle that could be improved on. Do you think that life insurers do enough to incorporate broker views and opinions in new product design? Add your comment below, or send it to gareth@fanews.co.za