COM-3 PRODUCT DEVELOPMENT CAS Ratemaking Seminar, San Antonio March 27, 2003 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 • Converging industries Larry Keeley -- Doblin Group www.doblin.com 10 types of innovation Finance Process. Offering Delivery 1. Business 3. Core process 5. Product 8. Channel model How you add value performance How you get your How you get paid to what you offer How you design offering to market your core offering 2. Networking 4. Enabling 9. Brand How you structure process 6. Product How you ownership How you support the system communicate the . core processes How you enhance offering your core offering 10. Customer 7. Service experience How you stay How you integrate connected with the entire customers after customer purchase relationship . 4 Computers & Technology-driven multimedia enhancements e.g. Intel 486, Windows 3.0, peripherals Adobe Postscript 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 1988 e.g. Dell paperless purchasing, 1989 Intra/Extranets 1990 1991 Going direct e.g. Dell, Gateway Country Stores 1992 1993 Customer Experience 1994 Flexible financing e.g. Brand Channel FreePC, Gateway Your: )ware, 1995 Service Compaq leasing Product Systems 1996 Product Performance Core Processes 1997 Enabling Processes Networking Business Models 1998 5 Innovation landscape: Non-life IT systems speed insurance New channels reinvent the industry service and lower costs and make it more efficient - Progressive's immediate - Direct Line bypasses the response system agent and sells by telephone - CT Mutual One Image paperless electronic forms 1988 1989 1990 First wave of 1991 consolidation for 1992 efficiencies of scale and global scope 1993 Customer Experience Brand 1994 Channel Service 1995 Product Systems Product Performance 1996 Alliances open new Core Processes IT integration allows markets and channels bundled services Enabling Processes 1997 - car insurance through Networking - Zurich Technology Risk Services Thailand 7-11 Business Models - Cigna solutions and 1998 Technology increasing direct XL Risk solutions channels 6 1988 1989 1990 1991 1992 1993 1994 Non-life 1995 insurance 1996 1997 1998 Business Models Networking Enabling Processes 1988 1989 Core Processes 1990 1991 Product Performance financials 1992 Diversified 1993 Product Systems 1994 Service 1995 Channel 1996 1997 Brand 1998 Customer Experience Business Models Networking 1988 Enabling Processes 1989 1990 Core Processes 1991 1992 Product Performance 1993 1994 Product Systems 1995 Service 1996 Channel 1997 1998 Brand Customer Experience Business Models Networking Enabling Processes Core Processes Product Performance Comparing three sectors... Product Systems Service Channel Securities Brand 7 Customer Experience Larry Keeley -- Doblin Group Observations on Innovation • Target the White Space • Innovate across multiple dimensions • Systematize the innovation process Types of Product Development • Coverage changes • Product combinations • Unbundling coverage/service • New pricing approach • Additional services • Entirely new product Sources of Development Ideas • Competitors • Distributors • Customers • Exclusions in current policies • Alliance partners • Regulators • Claims personnel Multi-disciplinary process • Claims • Systems • Underwriting • Billing • Policy Processing • Accounting • Marketing • Legal • Distribution • Pricing 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 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? 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? Most new products fail “I have not failed, I’ve just found 10,000 ways that won’t work.” --Thomas Alva Edison 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 Pilot Program • Single state (preferably file and use!) • Short duration (90 days) • Limited distribution • Limited claims staff • Mocked-up system/manual processes Clear Expectations • Number of customer contacts • Number of quotes • Number of sales • Number of claims/utilizations THIS IS THE BIGGEST CHALLENGE! Measure everything! • Develop in advance method for tracking and reporting on all expectations • Daily/weekly status reports • Distributor feedback • Customer feedback Evaluate and Adjust • Scrap project • Extend pilot • Expand distribution to entire state or additional states • Full rollout (commit to major system changes, training, etc.) Questions??