Insurance is about managing risk. In the event of a loss, an insurance policy provides a dollar-denominated replacement value to the insured for the market value of the loss.
Part four of a series.
To calculate insurance premiums, companies hire talented actuaries who undergo rigorous actuarial exams to develop complex pricing models.
Yet, many of those same companies don’t include basic tools and capabilities to adequately monitor product development projects and measure both product and project success. In an era of commoditized pricing and squeezed margins, extending individual policy risk metrics to include a robust set of product and project success metrics will allow carriers to self-assess, adjust and achieve better competitive positioning and profit margins.
What does product development success look like? In this series, Centric’s Insurance experts uncover product development challenges. In previous articles, we defined six common challenges associated with product development, creating a culture for product innovation and the building blocks for sustainable and competitive products.
Defining Product and Portfolio Success
Every carrier must define its strategy for developing and marketing products to achieve top line growth. While products should be designed as part of a portfolio that supports the overall corporate strategy, each product or enhancement should have explicitly defined success measures.
Success is often not a singular definition. Top line premium revenue growth is often a motivating factor; however, success may also be defined by one or more of the following:
- Competitive positioning and profitability
- The ability to attract new producers
- Expanding into new states or territories
- Capturing new or underserved market segments
- Improving the quality and accessibility of products
- A defensive play to maintain existing market share
Clearly defining and articulating product success measures when evaluating a new product or a product enhancement is critical to assessing, on the back end, whether the product achieved its intended purpose. Below are some additional considerations to keep in mind when evaluating products.
Determine the Breakeven Point
In manufacturing, companies leverage cost accounting principles to identify the inflection point at which new products will generate a profit. Companies must capture costs associated with research, design, production line set up, labor, raw materials and ongoing operational support to calculate how many units must be sold before the product can begin contributing positively to the bottom line. Net present value (NPV) and internal rate of return (IRR) overlay a time component to weigh the investment of one product over another and for clearing defined hurdle rates.
Unfortunately, these fully-loaded costs are consistently not measured in the insurance industry. Actuaries analyze historical loss information, project future loss forecasts and determine ongoing operational costs when pricing premiums. Often, industry average costs are used during this analysis. However, the all-in cost to develop the product and introduce it into the marketplace is either not factored into these pricing models or, if it is used, the cost information is incomplete.
For many carriers, product development costs are limited to time spent by information technology, or direct vendor costs, in defining requirements, designing, building and testing the new or enhanced product. Costs and time invested by other areas are often not captured and tracked. This can include:
- Soliciting agent feedback, analyzing digital marketing activities and performing additional market research to generate new product ideas
- Defining requirements from insurance operations functions to generate new business, service policies and process claims
- Pricing and actuarial-related activities
- Researching a potential legal and/or compliance risks
- Product filings and ongoing correspondence with state departments of insurance
- Marketing, training and sales-related efforts leading up to product deployment
Internal costs, generally quantified as hours spent multiplied by the employees’ cost rate, can constitute over half of overall product development project cost. Adopting robust cost accounting practices may provide additional insights related to NPV/IRR, return on investment (ROI) or the number of policies to be sold to breakeven.
Assess Automated vs. Manual Processes
Product development projects, as with all software development projects, manage four major pillars: time, cost, scope and quality. When projects become challenged, sales cycles and budgets often make it difficult to adjust a project’s allocated time or cost. When choosing between reducing the scope and risking poor quality, quality becomes a focus and carriers look for opportunities to reduce project scope. The result is that the carrier rationalizes why aspects of servicing policies can be handled manually. Although the project cost is maintained, the ongoing operational costs inevitably increase.
It is important for product sponsors and insurance operations to understand potentially hidden costs. Although quality objectives have been met, significant increases in manual efforts command a corresponding increase in support staff. The operational support costs could far exceed any incremental costs of automation during product development.
Ultimately, the project team must understand the trade-offs between automating aspects of product development and handling those processes manually post-implementation. These trade-offs should garner increased scrutiny should a project become challenged.
What’s measured gets done. It is important to establish measureable expectations early in the project lifecycle and to establish appropriate governance and oversight to monitor project success.
In many organizations, incentives result in competing priorities that must be balanced. Sales and marketing functions are incentivized to maintain and grow agency relationships, with the goal of increasing premium revenue. Conversely, information technology, insurance operations, actuarial, legal and compliance are all cost centers with organizational pressure to manage or reduce costs. Overly lean cost centers can be too anemic to rally around product development.
From a project portfolio perspective, it is important to understand the project’s priority level relative to competing priorities and the organization’s ability to staff its strategic priorities. Product development projects may not have adequate internal resources, which can result in tensions between sales functions and internal support functions such as IT. Well-defined cost metrics may justify hiring external consulting resources or leveraging staff augmentation to successfully deliver projects while still achieving targeted returns on investment.
Finally, existing products should be measured on an ongoing basis (e.g. annually) to assess which products are selling well in the marketplace and which products are contributing positively to the bottom line. Products that are not positively contributing should be evaluated, from a portfolio perspective, to determine whether the product is still needed as part of a suite of offerings or should be discontinued in favor of more profitable projects.
Investing for the Future
History is littered with companies that, in lieu of innovating on new products, continually tried to squeeze margins out of existing product lines. Inevitably, either those existing products no longer met the needs of customers or the companies that failed to innovate lost market share to competitors whose products evolved or transformed the marketplace. Innovation is key to remaining relevant, regardless of industry.
When innovating on new products, it is important to recognize that those new products may not achieve profit margins of more mature counterparts. Innovation requires a disciplined approach to experimentation and each experiment must be assessed based on its ability to achieve targeted objectives. Because innovation involves a high degree of uncertainty, preliminary objectives should not directly or exclusively include profit targets; objectives should, however, achieve some learning objective, such as insights into market interest or customer preferences, which eventually lead to more profitable products.
Throughout this series, we have highlighted some of the challenges and corresponding steps required by insurance carriers to achieve their product development goals, including establishing appropriate governance and oversight, building a culture of innovation, aligning organizational support and integrating with other strategic goals, such as digital strategies. Carriers that define appropriate metrics and success criteria throughout product development stages will be well-positioned to compete in tomorrow’s insurance marketplace.