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COM-4 PRODUCT DEVELOPMENT CAS Ratemaking Seminar, Philadelphia March 12, 2004

COM-4 PRODUCT DEVELOPMENT CAS Ratemaking Seminar, Philadelphia March 12, 2004. Dave McLaughry, FCAS, MAAA Senior Actuary and Product Manager Farmers Insurance Group. Product Development - more relevant now than ever. New technologies and exposures Active regulatory and judicial environments

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COM-4 PRODUCT DEVELOPMENT CAS Ratemaking Seminar, Philadelphia March 12, 2004

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  1. COM-4PRODUCT DEVELOPMENTCAS Ratemaking Seminar, PhiladelphiaMarch 12, 2004 Dave McLaughry, FCAS, MAAA Senior Actuary and Product Manager Farmers Insurance Group

  2. Product Development - more relevant now than ever • New technologies and exposures • Active regulatory and judicial environments • Converging industries/product lines

  3. Larry Keeley -- Doblin Group www.doblin.com

  4. 10 types of innovation Finance Process. Offering Delivery 1. Business model How you get paid 2. Networking How you structure ownership . 3. Core process How you add value to what you offer 4. Enabling process How you support the core processes 5. Product performance How you design your core offering 6. Product system How you enhance your core offering 7. Service How you stay connected with customers after purchase . 8. Channel How you get your offering to market 9. Brand How you communicate the offering 10. Customer experience How you integrate the entire customer relationship 4

  5. Technology-driven multimedia enhancements e.g. Intel 486, Windows 3.0, Adobe Postscript Computers & peripherals Low-cost home PC’s e.g. Windows 95, Intel Celeron Emerging standards, specialization e.g. PowerPC (IBM, Motorola, Apple), Zero inventory assembly Networked organizations e.g. Dell paperless purchasing, Intra/Extranets Going directe.g. Dell, Gateway Country Stores Flexible financinge.g. FreePC, Gateway Your: )ware, Compaq leasing 5

  6. Innovation landscape: Non-life insurance IT systems speed service and lower costs - Progressive's immediate response system - CT Mutual One Image paperless electronic forms New channels reinvent the industry and make it more efficient - Direct Line bypasses the agent and sells by telephone First wave of consolidation for efficiencies of scale and global scope Alliances open new markets and channels - car insurance through Thailand 7-11Technology increasing direct channels IT integration allows bundled services - Zurich Technology Risk Services - Cigna solutions and XL Risk solutions 6

  7. Comparing three sectors... Non-life insurance Securities Diversified financials 7

  8. Larry Keeley -- Doblin GroupObservations on Innovation • Target the White Space • Innovate across multiple dimensions • Systematize the innovation process

  9. Types of Product Development • Coverage changes • Product combinations • Unbundling coverage/service • New pricing approach • Additional services • Entirely new product

  10. Sources of Development Ideas • Competitors • Distributors • Customers • Exclusions in current policies • Alliance partners • Regulators • Claims personnel

  11. Claims Underwriting Policy Processing Marketing Distribution Systems Billing Accounting Legal Pricing Multi-disciplinary process

  12. What is the Actuary’s role? • Could be anything, ranging from pricing expert to project leader • Minimum: • Consider ALL costs in setting rates • Compare with pricing of similar products within and outside your company • Ensure data will be available to measure performance • Understand the full context of the product

  13. Claims Hot Issues • Is special expertise needed to handle new kind of claims? • Does company have this expertise? • Should you outsource, specialize internally, or train everyone? • Will adjusters have access to coverage information at time of loss?

  14. Distribution Hot Issues • Any special licensing requirements? • Are distributors already selling similar product? How does yours compare? What about compensation? • How/when/who will train distributors on new product?

  15. Most new products fail “I have not failed, I’ve just found 10,000 ways that won’t work.” --Thomas Alva Edison

  16. How to minimize risk/cost? • Depends on scope of the change • For significant development projects: • Start with PILOT • Develop clear expectations • Measure everything • Evaluate and adjust based on results

  17. Pilot Program • Single state (preferably file and use!) • Short duration (90 days) • Limited distribution • Limited claims staff • Mocked-up system/manual processes

  18. Clear Expectations • Number of customer contacts • Number of quotes • Number of sales • Number of claims/utilizations THIS IS THE BIGGEST CHALLENGE!

  19. Measure everything! • Develop in advance method for tracking and reporting on all expectations • Daily/weekly status reports • Distributor feedback • Customer feedback

  20. Evaluate and Adjust • Scrap project • Extend pilot • Expand distribution to entire state or additional states • Full rollout (commit to major system changes, training, etc.)

  21. Questions??

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