A shift in focus sees life look to product

Drivenby increasing pressure to achieve product profitability, insurance companies have significantly increased their development and launch expenditures, according to the latest Gerling Global Market Evaluation of Individual Risk Products.

The evaluation, which took the form of an industry survey, has revealed that 66 per cent of companies surveyed are now spending in excess of $300,000 on either upgrading or developing and launching new products, with 33 per cent spending over $500,000.

This represents one of the most significant shifts identified by the survey, with the number of companies spending in excess of $500,000 rising from seven per cent last year to 33 per cent this year.

What is more, the survey pointed to companies concentrating on major product upgrades rather than tinkering at the edges. Unlike the figures for major upgrades, the figures for minor upgrades showed little change from last year.

The survey has revealed that the main driver behind the increased expenditure has been the need to achieve product profitability, with 73 per cent of respondents confirming the profit motive.

“Product profitability has overtaken market forces and competitive positioning as the main driver for product upgrade,” the evaluation report says.

However, the drive for product profitability appears to have been undertaken at the expense of pursuing “recommended status” from the major research houses.

While 53 per cent of companies said they manufactured product to achieve recommended status, 93 per cent said they would not be prepared to manufacture product to achieve recommended status if it meant not achieving profit criteria.

Gerling’s Actuarial Services assistant general manager Tony Bofinger says that these results did not sit well with the survey’s other finding that only 31 per cent of companies had achieved profit criteria for all individual risk product benefits.

“This suggests that most companies should review their current product strategy to ensure it meets shareholder profit requirements,” he says.

Bofinger says there is no question that pressure is being applied to achieve profitability across all risk products, particularly in the area of disability products.

This pressure to improve the performance of disability products came against the background of only 39 per cent of companies achieving their profit criteria, despite an average 11 per cent increase in premium rates.

The situation surrounding disability products compares with trauma products where 64 per cent of companies reported achieving their profit criteria, despite an average increase in premium rates of four per cent.

Seventy-one per cent of companies reported achieving their profit criteria on Total and Permanent Disability (TPD) products, despite an average decrease in premium rates of three per cent.

“CEOs are making it clear that there is a need to return disability products to profitability on the basis that there is little point in writing loss-making business,” Bofinger says.

Bofinger also points to a divergence of views between the various sectors of the industry as a complicating factor in delivering profitable products.

He says the divergence in views between actuarial, claims, underwriting and product managers, underscored the degree of difficulty involved in the product development process.

“The results indicate that organisationally, there may be a lack of consensus on perceived customer needs,” he says.

“Companies could achieve a superior product development outcome by gaining a better understanding of their customers and share that information internally. The challenge is to strike a balance between price and benefits, remembering that they are not the only criteria,” Bofinger says.

The evaluation survey also suggested that with companies striving to achieve profit criteria, there was little likelihood of future premium decreases.

“The future might well see some premium increases and product modification followed by a period of product stability, as companies change the point of competition to other non-product areas such as service,” the survey says.

“Focus on service and sustainability of pricing and policy conditions for the security of policyholders, distributors and insurers alike will remain a priority.”

Looking at how a competitive advantage might be achieved over the next three years, most respondents indicated that service would be a key criterion, followed by distribution, marketing and product design.

On the question of profitability, the evaluation survey revealed radical differences in expectations for industry profitability when compared to the profitability of individual companies.

What is more, there was disagreement between various sections of the industry on the profitability outlook.

Actuarial opinion appeared “very stable” on industry trends, with 80 per cent of respondents nominating that profit would remain constant.

However, where their own companies were concerned, the actuaries were fairly evenly divided on either an increase or a decrease, with no expectation that profit would remain the same.

By contrast, respondents in the underwriting, product and claims areas indicated little expectation that profits would decrease in their own companies and were slightly more optimistic on the profit outlook for their companies when compared to general expectations for the industry as a whole.

There was more uniformity with respect to trauma products, with the most popular expectation for both the industry and individual companies being that profits were likely to remain constant.

The divergence in views did extend into term products, however, with 80 per cent of actuaries nominating that profit would remain constant across the industry, while being fairly evenly divided on profit expectations for their own companies.

Mike Taylor is a freelance journalist.