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Insurance product development – all about upgrades and variations

03 July 2009 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

As insurance markets mature the product developer’s focus turns from design and development to product upgrade and variation. This is one of the trends discussed at a recent presentation by RGA research and development actuary, Daniel Stone. “The basics

First, it opens doors for sales and marketing professionals across the insurance industry. Second it brings previously uninsured (or uninsurable) consumers into the net. It’s hardly surprising that most of the factors influencing product design stem from the consumer environment. Stone talked the audience through a number of these factors.

Seven factors that dominate the product development space

Although its possible to conjure an insurance product in isolation there are numerous factors design teams need to consider. Once consumer desires are accounted for, the insurance product must accommodate a range of environmental possibilities:

1. Politics – product designers have to consider the political and legal requirements in the intended market.

2. Regulation and accounting frameworks – these frameworks influence the structure of the insurance products including benefits provided, acceptable premium levels and allowable selling and administrative practices.

3. Market maturity – the maturity of a particular market plays a huge part in defining the insurance product design. Mature markets are dominated by long guarantees and vigorous competition whereas developing economies such as Africa tend to “focus on bank assurance and simple life products.”

4. Pandemics – although recent outbreaks of bird flu and swine flu have been largely contained, a serious pandemic would wreak havoc with mortality rates. These possibilities have to be factored in along with the impact (and country prevalence) of other illnesses, such as HIV/Aids and malaria in Africa.

5. Terrorism and war – the entire globe was affected by the 911 terrorist attacks and the possibility of war and future attacks exert a heavy influence on insurance product design.

6. Medical advances – advances in the diagnoses and treatment of the most common dread diseases (cancer, heart attack, stroke and coronary artery bypass surgery) demand ongoing attention from product developers.

7. Actuaries and underwriters – have the power to influence product benefits and price.

The move to product commoditisation

Changes in the market for insurance products prompted a move to product commoditisation, said Stone. He notes that the US and UK markets have advanced the concept for standard insurance products with well-defined terms, simple benefits and comparable features. This allows consumers to purchase insurance ‘off the rack’ after scanning the insurance product space for similar product offerings. A product that boasts efficiency of operation, low margins and high volume targets is ideal for the commoditisation route. Success is guaranteed if the insurer can price accurately and dynamically. Stone mentioned a UK-based direct insurer that updated premiums on one of its products as often as 15 times per month. Such products needed robust distribution networks and efficient underwriting. “As things become more transparent underwriting levels are being pushed to the limit – simplified for increased sales,” said Stone.

One can view the impact of commoditisation by studying cost trends in the insurance product space. Over the last 20-years both management expenses and commission paid as a percentage of net written premiums is in decline, from 15% and 9% in 1997 to 6% and 3% today. There are other reasons, like increased regulation and aggressive market competition, but commoditisation plays a big part too.

Over the last few years the focus has turned to sub-standard insurance products. A range of products have been designed for people with Cancer and HIV/Aids for example. These consumers are charged higher premiums to accommodate risk. Stones noted that “the key underwriting challenge is to select the best risks from the substandard sub-group.” Sub-standard insurance is a growing market at this stage and is attractive to insurers because it provides an opportunity to improve annuities and expand their potential market. Most of these covers will become more affordable with medical advances. A typical sub-standard product can be tweaked by varying the cover term, reining in the total sum insured and limiting product options and opportunities for conversions.

The influence of target markets

Stone identified four market types and briefly shared an international product development in each. Poland services the mass market with simple funeral products that offer basic levels of cover and standardised premiums. These products are very similar to South African funeral cover policies. A middle market example comes courtesy of Mexico. This country provides basic life cover through a tied relationship between a leading telecoms company and an insurance company. Premiums are charged against the consumer’s telephone bill! Stone said the huge take-up of this offer confirmed the effectiveness of “simplified underwriting and loyalty to a brand.”

The high net worth target market example comes from Hong Kong. The country’s ageing population requires lifestyle protection and critical illness, and the best distribution channel seems to be the established relationships between private bankers and their clients. Stone said that HSBC Hong Kong’s innovation includes providing VIP services through a dedicated insurance hotline, among others. As longevity increases insurance product developers have to find ways to meet the needs of over 50s, over 60s and other niche markets. Stone mentioned a product developed for the UK-based Tescos supermarket chain. The product is sold through the Internet to over 50s and promises guaranteed acceptance, no medical and no complicated forms. Risk is mitigated by including natural cause abatement (two years) and pre-existing exclusions.

Editor’s thoughts:
Despite the raft of recent product innovation, most short-term and life insurance products satisfy a set of traditional insurance definitions. The world is clearly some way from a paradigm shift in insurance thinking. We’d love to hear your innovative insurance product idea. Add your comments below, or send them to

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