Group Chap 3: Product Development

Question 1

What is Product Development?

1. Innovate
2. Design the Product
3. Build the Product
4. Sell the Product
5. Assess the Product
6. Revise the Product

Answer 1

Process by which new products are created, and existing products evolve

Question 2

Product Development Cycle - Innovate

1. Understanding a company’s strategic perspective
2. Drivers of Product Ideas
3. Ideas Screening
4. Market Assessment

Answer 2

1. Innovate
a. Understanding a company’s strategic perspective
▪ Helps reduce unnecessary work
▪ Focus the product development department on ideas that are aligned with the company’s goals
▪ Narrow the potential scope of ideas

b. Drivers of Product Ideas
▪ Innovator or Follower
* There are costs incurred by innovators that followers do not pay
* Innovator will have access to a larger initial market since they will be the only company with a particular product for a limited time

▪ Changing Laws and Regulations
* When laws or regulations are changed, products are developed to operate within these new sets of rules

▪ Consumer Demand

▪ Marketing and Sales Demand

▪ Leveraging Insurer’s Capabilities
* Understand what the insurer does well
* Find ways of growing in those areas

▪ Competitive Advantage
* Advantage may be in a particular geographic area or within a particular demographic

▪ Technological Advances
* InsurTech – technologies that are evolving in the insurance industry
* Use of wearable devices, predictive analytics and artificial intelligence (AI)

▪ Social Need
* Products are developed to address specific social needs

▪ Changing Demographics
* Product development teams generate ideas that address the shifting markets needs

▪ Changing Economy and Financial Markets

c. Idea Screening
▪ Processes used for screening (size and scope appropriateness, fit with corporate goals, resources and cost)

d. Market Assessment
▪ What exists in the market today?

▪ What is the product objective for the consumer?

▪ What is the regulatory environment for this product?

▪ Financial value and other benefits for the consumer

▪ Price Targets
* A market assessment may indicate that range of prices are acceptable; use that range to back into a plan design
* Alternatively, market may be more sensitive to the product features; develop the desired product features and then determine the price to make plan profitable

▪ Competitor’s likely reaction

▪ Sales reaction
* Determines whether the sales team thinks that such a product is saleable at the price targets

Question 3

Product Development Cycle - Design the Product

1. Product Structure
2. Contribution Requirements
3. Regulatory Compliance

Answer 3

a. Product Structure
▪ Features that they want to include with the product

▪ The Product type

▪ Risk mitigation features
- Variables in Design

▪ Coverage duration

▪ Member cost share

▪ Defining the scope of coverage is also considered in this step

b. Contribution Requirements
▪ Decide if it can be a voluntary benefit (100% paid by the employee) or if employer will be required to contribute to the premium

▪ Create marketing and underwriting requirements around these options to manage the risk

c. Regulatory compliance
▪ Critical that the proposed plan be reviewed by someone versed in the applicable regulations, to verify that the product will comply

▪ Also, be aware of minimum loss ratio requirements or benefit mandates

Question 4

Product Development Cycle - Building the Product

1. Project Enrollment
2. Price the Product
3. Financial Assessment
4. Implement Necessary Infrastructure
5. Senior Management Approval

Answer 4

a. Project Enrollment
▪ How many members they think they can attract to this new product helps management decide whether the product is worth pursuing and can be sufficiently capitalized

▪ Estimate the volume of claims

b. Price the Product
▪ Finding appropriate sources of data

▪ Determine assumptions to translate the source data into a claim projection

▪ This is an iterative process since membership will impact pricing, which will in turn impact projected membership

c. Financial Assessment of Product
▪ Common measures include return on investment (ROI, the lifetime projected profit over the total investment required to build and sell the product) and the return on equity (ROE, annual projected profit over the amount of equity that will be allocated to the product)

d. Implement Necessary Infrastructure
▪ Includes abilities to process claims, to bill and collect premium, service member inquiries, marketing materials, website development

▪ Product team oversees a cross functional group that includes finance, pricing, information technology, sales, marketing, compliance, and actuarial

e. Senior Management Approval

Question 5

Product Development Cycle - Sell the Product

Answer 5

a. Test marketing is done to
▪ Ensure that the infrastructure is functional
▪ Incorporate consumer feedback
▪ Refine pricing assumptions
▪ Generally improve the product so that it will be more successful

b. Once the revisions are complete, the product will be mass marketed

Question 6

Product Development Cycle - Assess the Product

Answer 6

a. As soon as actual experience becomes available, begin “actual to expected” studies

b. These studies can indicate that a product was overpriced or underpriced

c. The sooner the actuaries realize that there is a pricing problem, the sooner they can adjust their pricing assumptions

d. Assess the ongoing consumer and market feedback, to determine if revisions could enhance the performance

Question 7

Product Development Cycle - Revise the Product

Answer 7

a. This may include changes to the product features, plan design, or pricing

b. Regulatory requirements must be monitored

c. Consumer demand will often dictate elements of the product that must be changed

Question 8

Teams Involved in Product Development

Answer 8

1. Senior management
a. Set the tone and general direction for new products

b. Set the goals that determine if a product meets minimum requirements to be worth pursuing

c. Ultimately responsible for making the decision to pursue a proposed idea

2. Marketing
a. Focused on advertisements that will attract customers

b. Build name recognition and branding for companies

3. Sales
a. Work directly with customers and brokers to sell products

b. Focused on a particular customer and a particular sale

c. Have insights into the price sensitivity as well as types of products customers have been requesting

4. Underwriters
a. Help to quantify the risk associated with plan features

5. Information technology (IT)
a. Provide critical insights about insurer’s technological advancements that create opportunities to innovate

b. Help team understand the feasibility of the infrastructure needed to administer a product

c. Help team understand the risks associated with the launch

d. Can estimate costs associated with building the required infrastructure

6. Operations
a. Work with IT teams to create claim processing, billing and collection, and policyholder administration

7. Compliance
a. Ensure that the product is compliant with laws and regulations

8. Actuarial
a. Works on projections and feasibility studies
b. Perform pricing and reserving operations that keep the product profitable

9. Finance
a. Determine whether projections meet corporate targets

Question 9

Product Development Conisderations for Various Insurance Lines

Answer 9

1. Group Medical, Prescription Drug, Dental, Vision
   a. Are marketed both to the plan sponsor and the consumer
   b. Health care reform is dramatically impacting these product lines
2. Group Disability
   a. Must be integrated with the plan sponsor’s sick day policy
3. Group Life
   a. Can generate taxable income for some individuals in the group
4. Group LTC
   a. Policies are purchased for events that may not happen for decades
   b. Educational materials are essential
   * Retiree healthcare benefits
   c. Must comply with accounting standards that report post-employment benefit obligations