GD in the Insurance Industry pAl Makes the Difference

Wilson, Implementation Manager, Pacific Mutual Life Insurance Company

M Proceedings. 1992, pp. 223-31


At Pacific Mutual Life Insurance Company (Pacific Mutual), researching, developing, and implementing insurance products ranged widely—nine months to five years—before a product entered the market. But that was before. The marketing environment for insurance products began rapid changing in the late 1970s based on:

• population declines in the United States and Canada

• aging baby boomers

• changing family structure

• more affluent and better educated consumers.

Specializing in corporate owned life insurance (COLI) for businesses, as well as individually owned insurance, Pacific Mutual often was tardy taking advantage of marketing opportunities due to its cumbersome and lengthy research and development efforts. Looking ahead to the need to develop additional diversified products for its product portfolio to meet sophisticated consumer needs, Pacific Mutual recngineercd its research and development efforts.

Prior to 1987, the company experienced slow market introduction for its products whether designed for a specific client or designed for a broad client base. Development efforts swung back and forth between researching and designing a custom product for a specific individual or business to working on a non-custom product being designed for the general marketplace. Often the same staff working on a custom product was the same staff working on a regular product and morale suffered when priorities and work kept changing.

Questions were asked about the research and development efforts. Why don't products get to market on time and why aren't they complete? What needs to happen to help get products out the door faster yet achieve improved quality? How do we work on getting new products out the door and still maintain current servicing levels? How do we achieve a dramatic expansion of product portfolio while maximizing shrinking profit margins? What are the impacts on profitability?

This paper addresses the questions posed above. It also addresses the extensive reengineering effort which resulted in increased efficiency and effectiveness throughout the organization in its research and development efforts as well as the day-to-day functional service business environment. It will feature case studies of several types of products and how the use of cross-functional teams coupled with innovative project management methods continues to work in this service environment.

Industry Background

Insurance has been around for about 2,000 years first starting with propertv insurance in the Mediterranean area when ships and their cargos were jn sured. Shipping was at best a hazardous venture, especially when long ^ tances were involved and the likelihood of loss acted as a deterrent to tra^ The fact that cargoes and ships could be insured encouraged people to ri^ their money in overseas trade. The resulting investments helped the ship ping industry to flourish. The first life insurance company was called the "Corporation for Relief of Poor and Distressed Presbyterian Ministers and 0{ the Poor and Distressed Widows and Children of Presbyterian Ministers which was established in 1759. Now there are over 1,200 insurance compa. nics in the United States and Canada marketing property and liability jn. suranee as well as mutual funds and other investment products. This trend toward broadened financial services is having a continuous impact on even facet of the industry (1).

Today's marketing environment seldom permits a company's current product mix to remain effective for long. To stay competitive, a company must be able to adjust product mix so that it can continue to provide the kinds of products required to meet the changing needs of both current and potential clients and thus achieve the overall goals and objectives of the company. A company can change its product mix in three basic ways: develop new products, modify existing products, and delete weak or unwanted products (2).

In the early 1980s, when inflation was in the double digits and interest rates were there also, investors flocked to take advantage of earning high interest on their money, funk bonds abounded. Staunch, conservative insurance companies were guaranteeing 4-5 percent interest. Insurance policyholders drew out their money either by completely surrendering their policies or by taking out low-cost loans preferring investment elsewhere. Insurance companies felt compelled to take on riskier investments to maintain their client bases and to offer more diversified products to attract new clients. Society was also changing in the United States and Canada. Populations were declining. The largest portion of the population, baby boomers, were aging. The traditional family structure was splintering.

As the 1980s rolled on, insurance owners' needs became more sophisticated as the need to preserve savings became increasingly important in accelerating inflationary times. They began earning more and they also were living longer. They waited to marry and didn't always remain married as long as their parents did. They had less children or no children as the two-income family became more prominent. In case of death, they still wanted the death insurance benefits (funeral expenses and paying off the home mortgage), but now it needed to cover both wage earners' lives. And consumers also began seeing for the first time the benefits of an insurance contract for investment and for use while they still lived (e.g., college tuition-home purchase, retirement savings). Pacific Mutual began gearing up t() meet the new and rapidly changing consumer needs.

Products Didn't Get to Market Quickly

Slow Research and Development

Research and development in the company was conducted in a sporadic, unstructured way as it had been done in the past when the need to get a new product out on the market lacked a sense of urgency. Products were not market sensitive and were expected to have a long life; therefore, there was no rush to get them to market, as the consumer need was known and stable.

The designing engineer of an insurance product, an actuary, tended to fine-tune for a long time. When interest rates and inflation became volatile, affecting financial investment futures, pricing products also became more difficult and volatile. Product specifications changed as Wall Street changed, and products simply weren't getting developed in a timely, structured manner.

No Development Methodology

There was no development methodology employed to research and develop products in the company. The actuary, as lead, worked with each department independently, controlling the outcome of the overall effort, trusting each department to produce what was needed. Often this technical lead had all the expertise to price and design the product but lacked the overall view of the impact of implementing the product in the company With over twelve departments working on product pieces interpreting product needs differently, it was evident that the final product outcome was usually quite different from what the actuary had in mind.

Ineffective Timing and Resource Utilization

There were other signs that the way in which products were being researched and developed was not effective or efficient, creating increasing dissatisfaction at all levels of the organization.

Experienced and highly skilled staff members did not work together as a team; rather, they were expected to complete their pieces of the product using their interpretations of what needed to be done. The phrase "on time" meant different things to each group of workers. Marketing often communicated to the agent producers that the product would be out on a certain date without confirming that it could, in fact, be done by all the affected home office departments. This lack of shared vision was not uncommon in the insurance industry.

During the development effort, the various departments rarely consulted with each other, except through the actuary. There were no group meetings or overall communications on the product. Ownership of the new product was nonexistent. Staff was held accountable for the functional administrative work, and work on new products was to be done "as time permitted/' In short, appraisal of work performance emphasized day-to-day functional work—not new product work.

The level of satisfaction and cooperation between the functional departments at Pacific Mutual continued to decline-

Incomplete, Ever-Changing Product Specifications

Setting aside the volatility of pricing the product, the specifications were incomplete, non-specific, and not readily available to those who needed to know. They were usually developed with minimum interaction and dialogs with the affected departments. Initial specifications did not take into account the administrative data processing system, a major flaw in designing the product. And they kept changing—not only in the early stages of product development but even after market introduction of the product. This caused a backlog of modifications for the system and increasing burdens of manual work on the administrative staff.

Projects, Priorities, and Project Management

Projects and priorities revolving around the establishment and maintenance of automated data processing systems were recognized and firmly established in the data processing area of the company. Indeed, within the insurance industry, project management has existed for a long time when the earliest computers were eagerly embraced to handle the tremendous volumes of mathematical calculations and information handling prevalent in the insurance industry.

The systems department at Pacific Mutual had a system to define, prioritize, and maintain projects as negotiated by it with end-user departments for systems it developed and maintained. The system was the nucleus of the project. Less emphasis was placed on the business need resulting in the system being installed in the first place. The terms "project" and "project management" were exclusively associated with this department—and not always in a positive sense. As in other insurance companies, the data processing area was perceived as mysterious and foreign to its client departments. No one knew what the department really did because it was so highly specialized—everyone in it seemed to talk a different language. Its development methodology was perceived as too rigorous, too structured, and too inflexible.

Projects going on which were non-systems driven were not recognized as such and had little visibility,- however, they did impact the development of new products. Staff efforts were split between daily operations, departmental "projects," and new products, with priorities fluctuating depending upon who had what power to influence those priorities and work schedules.

Profitability Impacts

Intuition Carries a High Cost

In the 1970s and 1980s, new product development was justified primarily on marketing intuition with little or no attention given to the cost of bringing the product to market. And some products introduced produced little or no business. In recent years, the need for rapid-fire introduction of new products forced the research, development, and implementation functions at the company to come under intense scrutiny. Restructuring and streamlining were needed, while, at the same time, improving the quality and delivery merited the same intense review. See Figure 1 for the general shape of the product life-cycle for most products (2).

Soaring Development and Administration Costs

The cost to research and develop the product was also running out of control, eating into the shrinking profit margins of the product. Pricing assumptions mrnmmmmmmm

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Figure 1 Product Life^cycle

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Figure 1 Product Life^cycle used to design the product were outdated in relation to the time and effort needed to get the product to market. In between attempts to get products out the door loomed the day-to-day administration of sold products which needed to get accomplished. The day-to-day administration became more labor intensive, driving up the cost.

A typical insurance product, once sold, requires administration for twenty to forty years—until the death benefit is paid to the beneficiary. Over this lengthy period of time, there can be many changes in its administration including the typical changes in beneficiary, changes in face amount, premium mode payments, etc. (3). So the same outdated pricing assumptions on the product became more outdated, driving up the actual costs to administer business. Overly optimistic assumptions as to sales volumes and persistency also lead to non-recovery of expenses (4).

The investment of premiums by the company's asset managers was also affected. Risk identification is the first step in managing the investment process. Management made a conscious effort to define a general risk/return tradeoff for the company as a whole. Investment policy formulation was re-tailored to the company's risk management philosophy. Understanding the risk embodied in policyholder options and determining a company's tolerance for that risk is what drives investment policy (5) and, therefore, profitability. See Figure 2 for the relatibnships of liability and asset risk management.

Products which had been introduced years earlier still were being administered manually beyond initial issue of the policy. The levels of staff required to manually administer the policies continued to grow to take care of the ever-increasing number of products which were added but never fully implemented.

Figure 2

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