COM4 PRODUCT DEVELOPMENT CAS Ratemaking Seminar Philadelphia March

COM-4 PRODUCT DEVELOPMENT CAS Ratemaking Seminar, Philadelphia March 12, 2004 Dave Mc. Laughry, 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/product lines

Larry Keeley -- Doblin Group www. doblin. com

10 types of innovation Finance Process. Offering Delivery 1. Business model How you get paid 3. Core process How you add value to what you offer 8. Channel How you get your offering to market 2. Networking How you structure ownership 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. 9. Brand How you communicate the offering 10. Customer experience How you integrate the entire customer relationship 4

Computers & peripherals Technology-driven multimedia enhancements e. g. Intel 486, Windows 3. 0, Adobe Postscript Low-cost home PC’s e. g. Windows 95, Intel Celeron Emerging standards, specialization e. g. Power. PC (IBM, Motorola, Apple), Zero inventory assembly Networked organizations e. g. Dell paperless purchasing, Intra/Extranets Going direct e. g. Dell, Gateway Country Stores Flexible financing e. g. Free. PC, Gateway Your: )ware, Compaq leasing 5

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 IT integration allows bundled services - Zurich Technology Risk Services - Cigna solutions and XL Risk solutions Alliances open new markets and channels - car insurance through Thailand 7 -11 Technology increasing direct channels 6

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

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 Underwriting Policy Processing Marketing Distribution • • • Systems Billing Accounting Legal 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? ?