Life Insurance Products and Financing (Atkinson/Dallas) - Chapter 16 - FINANCIAL MANAGEMENT
introduction
- fin goals vary widely from co to co in ins industry
- focus on ROE, embedded value, consistent growth in earnings & revenues, total return to stockholders, total return to PO
- factors influencing choice
- type of co
- co tradition
- company strengths and weaknesses
- past co results
- competition
- regulation
- fin mkts
- personalities and beliefs of senior mgmt
- need to activley monitor and manage finances in 3 braod areas
- risk management
- earnings management
- capital management
- in most cases - risk mgmt motivated by desire to stabilize earnings
- protects company's solvency
Tools of Financial Management
- overview
- Informational Tools - Financial analyasis and modeling
- Risk transfer options - reinsurance adn acq of business
- Finanacial Analysis
- worthwhile analysis provides info that leasd to decisions
- I/S & B/S results (broke down by LOB or finer)
- mortality and lapse studies
- inv results, including net int rates and default costs, inv expenses, cap g/l by asset class and segment
- distribution fo sales by product, risk class, gender, etc
- relevant unit costs for vaious levels fo decisions
- by reviewing past, learn from mistakes, see where doing good and adjust accordingly
- Modeling
- ability to project future financial results
- results need to be at least as detailed as various summaries avail from fin analysis
- useful for testing effect of various decisions on future earnings and other results
- can be used to produce PV of future results
- Embedded Value(begyr) = sum(DistEarn_tot(calyr)*1+i)^(begyr-calyr))
- allows determination of which products/pkts/other factors contributing/detracting from goals
- can be used to roughly estimate costs and potential value of adding new markets, new dist systems, new products
- Combined Financial Analysis and Modeling
- connect teh past and future - giving more complete view
- combined results can help w/ questions such as
- to stop offering certain products
- exit certain markets
- sell or close down LOB
- keep co independent or seek affiliation via merger/aquisition/being acquired
- can calc LT performacne measures such as ROI or wtg avg ROE
- solve 0=sum(DistEarn_tot(calyr)(1+ROI)^(-calyr)) across all years for ROI
- remember: simple ROI can be misleading, esp if multiple sign changes
- Reinsurance
- possibly most flexible tool for managing financial position
- in addition to transferring risk, it can shift earnings, capital, revenue, benefits, expenses, assets adn liab from one co to another
- Effect on Stability of Earnings
- can be used to stabilize earnings - more than any other tool
- can be used ot offest virtually every kind of risk
- usually used to stabilize mortality risk
- Effect on Pattern of Earnings
- pattern of YRT prem rates often doesn't match pattern of exp mort
- difference in patterns can affect incidence of earnings by yera
- varying term adn features allow possibility of many diff fin objectives
- when risk is transferred, req'd capital also transferred
- pattern of earnings can be shifted or left alone
- can be designed to have benef effect on taxes,esp when unused tax losses about to expire
- usually affects timing of solvency earnings adn taxable earnings (including current period earnings)
- effect of reins on expected stockholder earnings usually spread over dur of agreement
- sometimes designed specifically to ahve desired effect on solvency or taxable earnings
- Reinsurance as Capital
- can be used to obtain financing more quickly, often cheaper, compared to debt/equity
- since risk transferred, also financies strain of new business and lowers ceding co's capital req
- allows co to write higher levels of NB if sales take off
- can assume reins to put excess capital/dis earnings to work
- may be possible to generate tax losses
- every reins trx has same effect on capital of both cos
- possible to construct reins to accomplish several targets, such as
- transfer of targeted risks
- transfer of a targeted amt of cash (including none)
- targeted increase/decrease in
- solvency earnings
- solvency capital
- assets
- liab
- req'd capital
- not only increase co's capital, but decreases need for capital by reducing risk and req'd capital
- some countries limite reins severely
- reins as capital can behave more like equity or deby
- if amoutn of reief is large in relation to future earnings, like equity, small, more like debt
- Reinsurance Leverage
- can be used to leverage a co's returns
Acquisition or Sale of Business
- Overview
- most complex & difficult way to affect co's fin results
- sometimes sell blocks of business to raise capital
- usually dispose because does not have econ of scale, not a stategic fit, low rate of return
- buy blocks to build econ of scale, add value by cutting expenses, put idle capital to work, grow co for benefit of owners
- excess capital amoung life ins often leads to fierce price competition for acquisitions
- Assumption Reinsurance and Indemnity Reins
- acq or sale of blick of business usually accomplished by special form of reins
- reins not needed for sale of entire co
- Assumption Reinsurance - company that issued policies is removed from liab after block of business sold
- some jurisdictions require PO approval for assumption reins
- in those cases, use indemnity reins w/ transfer of admin
- no right to recapture for any reason
- Indemnity Reins - company that issued policies is NOT removed from liab stream
- seller relys on reinsurer to reimburse for all benefits paid
- admin typically transferred to buyer
- buyer handles all transactions
- seller still has to reflect business on books (w/ 100% offset)
- accomplishes most of toals of assumption
- seller receives fair value and no longer has to admin pols
- however, since still on books, ultimately liable if something happens to reinsurer
- this risk is usually better than deling w/ requirements that might be imposed in assumption situation
- seller has no right to recapture, except for breach
- Prerequisites for an Acquisition
- number of conditions
- buyer must have access to capital necessary to complete acq
- must be likely to improve buyer's earnings
- "buyers curse" - historically, results of most acq significantly worse than orig expectations
- buyer must have resources to complete acq
- need staff capable of handling integration from start to finish
- differences in business practice can force complex choices
- most difficult aspect -> people
- if acq driven by expense saving from combining operations -> downsizing
- better integration strategy is very few changes immediately after acq
- gradually institure changes that buidl on strengths and bring orgs closer together
- Prerequisites for a Sale
- seller must have use for capital raised by sale
- sale must be likely to improve seller's earnings
- seller s/b aware of pirce currently avail for business (might not be right time to sell)
- what effect will sale have on remaining staff if only part of co sold
- Determining the Purchase Value of an Inforce Block
- when block of inforce purchased, need to agree on two things
- what amount of liab will buyer assume? Typically solvency reserve of block
- what amount of assets will seller transfer to buyer in order for buyer to assume liab
- Typically assets transferred < liab transferred
- Purchase Value = liab transferred less assets transferred
- = SolvRes(0) - Assets(0) wehre time 0 is purchase date
- Assets(0) most difficult part of negotiations
- typically begin w/ EV(0) using buyer's desired rate of return
- = SolvRes(0) + ReqCap(0) - EV(0)
- Purchase value typically tax deductible, but still may be tax impact @ time 0
- Tax(0) = (SolvRes(0) - TaxRes(0) - PurchaseValue - TransCosts)*EarnTaxRate
- other items might affect Tax(0) and need to be taken into account
- Assets(0) = SolvRes(0) + ReqCap(0) + Tax(0) + TransCosts - EV(0)
- PurchaseValue = EV(0) - Tax(0) - TransCosts - ReqCap(0)
- EV(0) = PurchaseValue + Tax(0) + TransCosts + ReqCap(0) (rearranging prev formula)
- New Business and Goodwill
- closed block = no new business
- if block sold still has NB coming on (and sale assumes will continue), results in intangible asset on B/S
- often reflected only in stockholder acctg
- Goodwill
- value of future new business
- a risky asset for stockholder accounting
- value of intellectual capital, reputation, brand name, and other intangible assets
- for stockholder acctg, balancing item to force assets = liab @ purchase
- Amortization of goodwill reduces earnings
- straightline over X years (10-40 typically)
- some countries allow goodwill to be expensed immediately
- can have major effect on acq, depending on how quickly amortized adn tax deductibility
- no simple formula for determing purchase value for an ongoing business
- usually only include 3-5 year NB in purchase value b/c of risk and uncertainty
- Purchase Price and Purchase Value
- no consistent def of purchase price
- press release version is typically some function of public acctg stds used by cos involved
- purchase value defined b/c of lack of definition
- other considerations - stock co
- effect of acq on stockholder EPS & ROE
- if dilutive for more than S/T, might not be attractive
- wtd avg ROE < target b/c of acq might not be attractive
- Earnings Mgmt
- Act or sales of business can help manage earnings
- can sell loss-producing business. Loss now, but avoids future losses
- can buy business - usually moves it earnings up a notch (or more depending on size)
- strategy of growth primarily through acquisition
- need confidence and backing of fin mkts to raise capital necessary
- or convince sellers to accept buyer's stock
Risk Management
- Overview
- understanding, balancing, and controlling the risks inherent in a LIC
- Market Risk
- Int Rate Risk Asset Valn Risk SubOptimal asset allocation
- Mkt Fluctuation Risk Spread widening risk currency fluctuation risk
- Interest Rate Risk
- discussed previously
- fin derivatives can be purchased as int rate hedges
- even matched A/L can have risks b/c of acctg quirks
- some assets marked to mkt and liab not
- ways to control risk
- encourage saels of products w/ MVA, incl variable products
- limit sales of products w/o MVA
- hold extra capital to be able to withstand int rate fluctuations
- work w/ regulators & acctg bodies to bring acctg fo rliab in line w/ acctg for assets
- Market Fluctuation Risk
- MV of volative assets (CS & Real Estate) subject to considerable fluctuations over time
- 3 main strategies for managing risk of loss do to a fall in mkt values
- use volatile assets mainly to back products w/ MVA (incl variable products)
- otherwise limit volatile assets to small percentage of overall assets
- hold extra capital to be able to withstand mkt fluctuations
- Asset Valuation Risk
- risk of overly agreesive valuation of assets
- difficult to determine MV is not an active mkt for a particular type of asset
- sometimes person who purchased asset is same person who asked to provide MV
- if significant portoin of co's capital in affiliated co, need to take extra precautions to ensure unbiased estimate
- undervaluing assets can also be a problem
- step to reduce asset valuation risk
- majority of funds in assets w/ readily available & verifiable MV (such as publicly traded stocks and bonds)
- ensure controls exist so that those determining MV of assets do so independently
- independent audits should reinforce these controls
- for large inv in an affiliate, consider IPO to sell parot of the affiliate to public and establish an independent mkt value for it
- Spread Widening Risk
- an asset class can fall out of favor, resulting in spread widening
- spread widening is a function of supply and demand
- strategies to control spread widening risk
- invest mainly in assets w/ small risk of spread widening - high quality, heavily traded, widely held securities
- use assets w/ large spread-widening risk mainly w/ products that have MVA (including variable products)
- otherwise limit to small % of total assets
- hold extra capital to be able to withstand effect of spread widening
- SubOptimal Asset Allocation
- level of asset risk s/b tied to capital position
- extra capital -> take on more risk
- is enough risk being taken given the co's capital position?
- Currency Risk Fluctuation
- balance sheet risk and i/s risk
- B/S risk - a/l significantly out of balance by currency
- currency change could reduce co's capital
- managed by balancing a/l by currency
- I/S risk - income, benefits & expenses significantly out of balnace by currency
- currency change could reduce co's net income
- buy currency hedges, but not common
- normal fluctuations in earnings often > fluctuations due to currency changes
- might not make sense to stabilize relatively small currency risk
- Credit Risk
- overview
- several categories (first 3 asset related)
- asset default risk
- concentration risk
- risk of inadequate spreads
- counterparty risk
- Asset Default Risk
- excessive asset defaults that may result from prolonged poor economic conditions or poor asset selection
- managed by
- share risk of default w/ PO via MVA and variable products
- invest in mainly inv grade assets
- limit investments that are below inv grade to a small % of assets
- hold extra capital to withstand effect of excessive asset defaults
- Concentration Risk
- risk associate w/ large protion of co's investments concentrated in a particular issuer/sector/industry/part of country/part of world
- can be controlled by adopting (and following) a strick policy of diversification of risk
- Risk of Inadedquate Spreads
- credit-realted spreads may not adequately compensate investor for credit risk assumed
- risk is smaller where reliable info is available over a long period
- controlled by limiting % of assets invested in newer/less familiar issuers/sectors/countries/classes of assets
- Counterparty Risk
- risk that outerh parties not able to fulfil their obligations
- controlled by only dealing w/ high-quality business partners or diversify by spreading risk w/ multiple business partners
- for reinsurance, YRT and Coins Term largely "paygo" so minimal risk
- larger risks can be reduced by placing assets in trust or securing letters of credit
- Liquidity Risk
- overview
- risk of not being able to meet the cash flow obligations on time
- types of liquidity risk
- "run on the bank"
- holding co
- risk of excessive liquidity
- "Run on the Bank" Risk
- risk that ratings dwongrade or other adverse publicity could cause many of co's PO to simultaneously demand cash from the co
- strategies for dealing w/ run-on-the-bank risk
- give co an option to delay payments when designing ins contracts
- avoid "hot money" products - products sold to those who quickly move their money when conditions change
- maintain some % of co's portfolio in highly liquid asses/gov't securities/st investments/cs)
- establish credit facilities that allow co to raise cash immediately in a time of need
- Holding Company Liquidity Risk
- applies to LIC owned by holding co
- LIC may have adequate liquidity, but holding parent may not
- holding co needs $ to pay divs, int on debt, cover expenses, etc
- holding co only regular source for additional cash if divs from subs
- if subs growing and need add'l capital - could be problematic
- regs often limit amt of divs that can be paid by LIC (to protect solvency)
- other source for holding co $ is capital mkts
- holding co liquidity risk best managed by planning well ahead
- Risk of Excessive Liquidity
- could maintain too much liquid assets and not get enough yield
- determine optimal level of liquidity
- credit may provide liquidity protection cheaper (compared to loss of yield w/ liquid securities)
- Pricing Risk
- Mortality/Morbidity/Longevity/Pricing Assumption/Liability option
- Mortality Risk
- RBC factors for mort risk based on 1918-1919 flu epidemic
- advances in medical science, but partially offset by potential to spread quickly (air travel and increased mobility)
- natural disasters
- man-made disasters
- selective lapsation - genetic testing
- should take measures to protect against - w/in reason
- hold extra capital
- reinsurance - regular and cat
- Morbidity Risk
- primary cause of unexpectly hig morbidity cost - ability of insured to outwit ins co
- us economy of 80/90s let to situation where more attractive to be disabled than working
- liberal u/w & loopholes in definition of dis allowed relatively healthy insureds to make legitimate claims against policy
- controlled through
- careful u/w
- diligent handling of claims
- clear and verifiable benefit provisions
- designing benefits that encourage beneficial behaviour (partial dis benefit)
- Longevity Risk
- annuitiants living longer than expected (reverse mortality risk)
- little can be done to cotrol risk
- allow fo rgreater mort improvement when pricing
- attractive priced reins hard to find - reinsurers have similar concerns
- Pricing Assumption Risk
- danger pricing assumptions wrong
- new mkts/new products/new u/w stds/new dist systems
- inadequate experience to base assumptions
- unlikely to happen when pricing assumptions based on credible experience
- sometimes price below cost in anticipation of being able to reduce cost
- good ways to reduce pricing risk
- reinsure business that has worrisome levels of pricing risk
- work w/ pricing experts (consultants/reinsurers) to develpo assumptions that reflect latest information/techniques available
- Liability Option Risk
- improperly priced options given to PO
- perhaps greatest shortcoming in life ins pricing
- cost of most options is never quantified and never explicitly reflected in pricing
- to manage risk
- greater level of awareness and cost of such options
- use of reinsurance
- consciously avoid too large a concentration of option risk
- manage concetration of risk similar to how done for assets
Earnings Management
- overview
- decisions and actions a co can take to influence FUTURE earnings (usually too late to affect current period earnings)
- two common goals
- grow earnings over time - usually @ targeted growth rate
- minimize unexpected fluctuations in earnings
- Product Management
- managine inforce products and design adn intro of new products to help co better meet fin goal
- essential for good earnings mgmt
- limited ability to adjust inforce products to achieve fin goal and manage earnings
- divs/non-guar prem/credited int rates/COI rates all changeable
- considerations when making these adjustments
- delivery on promises
- equity among policyowners
- effect on persistency
- regulatory restrictions
- pricing of new prducts - most imprtant tool to drive future earnings
- increase profit margins on new products
- introduce productw w/ features that reduce risk, increase earnings, improve competitiveness and sales levels OR reduce capital needs
- Asset Management
- Inv strategies can be shifted
- Avg yields and earnings increase by shifting to riskier (or less liquid) investments
- if in position to easily handle greater risk, wise to improve yields
- could focus on reducing volatility of earnings
- usually not possible to both increase yield and decrease volatility
- A/L matching strongly encouraged
- reasons why mismatching occurs
- liab CF too unpredictable to match, except over short horizon
- A/L purposely mismatched to improve avg yields adn expected earnings
- best handled by co that is over-capitalized and consciously using excess capital to support mismatching
- LT yields can be improved by increasing proportion of assets in stocks/realestate
- need strong capital position to absorb up/downs of mkt
- disadvantage: treatment of cap gains by stock mkts essentially ignored by stock mkts b/c can use to artificially inflate earning in a given year
- if co & stock mkts focused primarily on operating income (excl g/l)
- some volatility acceptable if confined to capital g/l
- Expense Management
- lower expenses generally means higher profits
- quality and friendliness sometimes matter more than price or efficiency
- crucial to understand what matters to customers and dist system
- look @ not only cost, but what it buys you in customer satisfaction of agent loyalty
- some worthless activities can be ingrained into organization adn therefore hard to recognize and eliminate
- Major Expense Reductions
- common techniques
- across-the-board cut - not always a good thing since some areas need to expand, not shrink
- "surgical incissions" - intelligently reduce expenses in areas that most need reductions
- corp raider perspective - look at company from view of corp raider - "slash & burn" areas to shave expenses and boost profits
- ask what a corp raider would do, then do it yourself
- start-up perspective - look @ co from POV of new, start-up co
- Minor Expense Reductions
- analyze jobs throughout co & derive value that each job adds to co
- might also identify structural problems such as too many layers of mgmt & not enough workers
- pursue outsourcing - allows a co to focus on what it does best
- if someone else can do it cheaper, let them
- reengineer processes - involves redesigning or automating processes to improve service or reduce costs
- restructure or reorganize all/part o fthe company so various units wrok together more effectively
- identify ways that company culture can be shifted to improve collaboration, communication, decision making, initiative, creativity, retention of staff, etc
- Allocation of Corp Expenses
- expenses that directly or indirecty relate to a product line s/b allocated accordingly
- expenses not related to anything but total co (corp expenses) should not be allocated
- create a "corp" LOB
- possible def of corp expenses - those that would be eliminated or replaced if company merged into larger organization
- allocating corp exp to LOB may disguise true contibution of each LOB
- Legacy Systems
- outdated, patched-together systems used for u/w, issue, billing, etc
- conversion is hugely difficult, maint is increasingly complex and expensive
- solving this problem has huge savings potential
- possible solution
- modern system for all NB
- bridge over existing as needed
- eventually only the most difficult products left on legacy system
- "incentive" replacement to PO to get policies off books or put forth the effort to get the final policies moved
Capital Management
- overview
- maintaining the proper amounts and types of capital needed to efficiently and safely run the company
- Determining the Proper Amount of Capital
- several perspectives
- insurance regulations
- specify min amt capital req'd to remain solvent and operate independently
- co's strive to maintain capital well in excess of min reg to handle fluctuations
- rating agencies
- rate financial strength/claims paying ability of inc cos
- use req'd capital formulas similar to regulators
- more likely to adjust req'd capital to reflect greater familiarity w/ bus of each co
- company
- internal point of view as to how much is proper
- in line w/ primary competitors
- formulas based on historical events and designed to provide enough capital to survive all but most unusual/extreme events
- Determining the Proper Capital Structure
- debt/equity/reinsurance - options more limited for mutuals
- Corporate Structure
- most common - stand-alone life insurer w/ no parent and no subs
- can issue stock to raise equity capital
- cannot make effective use of deb (ins regs - debt is not capital for solvency purposes, but liability)
- many ins cos have parent holding co - to make effective use of debt
- parent co issues debt and uses proceeds to make captial contribution to ins sub (debt from parent becomes equity to ins co)
- single ins co w/ all ins operations creates some capital efficiencies
- same capital can be used to support mult ins businesses, often w/ complementary risks
- common for large corp to have many holding cos and many ins cos
- add'l holding cos oftern useful for capital and tax reasons
- corp structure partially driven by careful planning and partially by historical events, such as past acq
- Equity
- usually largest component of capital
- owner's capital contributions & retained earnings of co
- capital w/ highest risk, therefore investors demand the highest return on equity capital
- PS & CS do not have to be repaid
- no scheduled maturity date adn no repayment of prin
- normally pay divs
- CS divs must be discontinued before PS divs are cut
- cutting of divs viewed by mkts as sign of poor performance/weakness/distress
- Debt
- mainly used by stock cos
- holding co needed to make debt useful to ins co
- viewed as low-risk capital (for co's w/ good fin ratings)
- often, int paid on debt is tax deductible to the borrower
- since relatively safe, investors settle for much lower rate of return on debt capital
- cost of debt (usually) only slightly higher than yield avail on new investments of similar quality and maturity
- most appropriate for supporting low-risk capital needs
- should structure maturity of various debt offerings to match release of excess reserves adn capital
- s/b structured in conjunction w/ A/L management since debt is another form of liab
- bond debt most commoon
- bank debt - usually S/T @ s/t floating int rate
- if co fails to make int or prin payments on time, faces bankruptcy
- cost of borrowing increases as % of capital in form of debt increases
- rating agencies will lower ratings if it adds too much debt
- investors will criticize if co doesn't make sufficient use of debt to leverage returns
- WACC - weighted avg cost of capital
- = % of capital in equity * desired return on equity + % of capital in debt * after-tax cost of debt
- if co has long range target ratio of debt adn equity, WACC can serve as basis for hurdle rate
- Combinations of Debt and Equity
- aka mezzanine financing
- convertible bonds and surplus notes - types of mazzanine fin used by ins cos
- convertible bond - features of both debt and equity
- similar to regular bond except
- much lower rate of int
- convertible to CS @ price that s/b attractive in a few years
- rating agencies might view as more equity than debt depending on how attractive conversion option is
- surplus notes - function like bonds, except coupon and mat payments
- subject to ongoing approval by ins regulators
- if regulators prevent payment, co is NOT in default and lenders can take no action
- treated as equity for solvency purposes
- rating agencies view as more debt than equity since likely to be repaid
- Reinsurance
- favorable attributes of using reins as capital
- transfer of risk as well as capital
- reduction in need for outside capital
- access to capital as needed, vs prematurely raising idle capital in the form of equity or debt
- Methods of Raising Capital
- Sources of Capital for Mutual Cos
- if formed by original group of PO, these PO would provide capital needed to start co
- if formed by mutualization of stock co, capital remaining after stockholder buyout is starting capital
- once capitalized, no ability to raise add'l equity except retained earnings
- two levers to keep actual capital in line w/ req'd capital
- carefully manage growth so capital needs do not outstrip growth in capital
- manage divs to PO so existing PO provide add'l cap needed to finance new PO
- Sources of Capital for all Cos
- reinsurance (in most jurisdictions)
- amounts and timing of provided captial can be dovetailed to closely match the business needs
- surplus notes (where regs permit)
- sell all or part of one of its businesses to raise capital
- moving a successful business to a sub and selling a piece of it to the public particularly effective way to raise capital
- when a co sells all or part of one of its businesses, may move from too little capital to too much and not know what to do with it
- need to consider where/how to deploy raised capital
- if too much, may be other ways to structure sale
- Sources of Capital for Stock Cos
- in addition to prev choices, fin mkts to raise debt and equity capital
- debt
- easier to raise
- greater a co's fin strength, lower the int rate
- lareg amt of debt usually financed by selling bonds to public
- moderate amts - sometimes sold privately
- s/t adn smaller amounts - usually provided by bank debt
- bank debt - couple days to arrange
- public bonds - a couple months for req'd documentation and approvals
- private - quicker
- equity
- can be problematic
- existing stockholders & new investors have opposite points of view
- existing stockholders - dilutes their ownership
- unless capital rec'd from add'l shares can be immediately deployed to earn same rate as existing capital, offering will be dilutive to EPS
- if permanently dilutive - offering was a stupid idea
- new investors - need to be drawn to offering
- must regard co and/or stock price as attractive
- IPO - takes approx 6 mos
- subsequent offerings - much faster b/c most of req'd info already publicly reported
- Methods of Deploying Excess Capital
- most obvious and most ignored option - distribute to owners
- Distributing Excess Capital to Owners
- special dividend if stock co or increase div rate to pay out over longer period
- buy back shares of stock (if publicly traded)
- tends to raise price of shares since remaining shares own greater portion of co
- more tax-efficient than dividends depending on tax laws
- enhance PO benefits (if Mutual) - increase divs, enhance crediting rates, lower COI
- Deploying Excess Capital into Current Operations
- examine current operations to see where extra capital could do some good while providing adequate return on that capital
- if capital has been main pricing constraint, more capital-intensive be developed or existing products repriced
- expand distribution capabilities
- significant projects to improve productivity or service capabilities
- when raised through debt/equity offering, often more capital than it can immediately use
- makes sense to deploy excess capital through a few large/ST transactions
- Deploying Excess Capital into New Operations
- opportunity to start up new LOB, enter new mkt, build new dist system or pursue acquisition
- must ultimately change or face obsolescence
- Internal Capital Management
- overview
- Company must allocate capital to each business to properly measure performance
- assets backing liab & capital of each business must be allocated
- allows inv income to be calced for each business
- two common methods for allocating capital: historical and req'd capital methods
- Historical Method
- tracks results for a business from inception, accumulating actual cash flows and ignoring capital reqs
- pro:
- tracks inception-to-date contribution of each business
- current results can be viewed in context of historical capital contributions
- con:
- ignores reality by ignoring req'd capital, since buiness must maintain some req'd capital
- understates earnings when accum earnings < req'd capital
- overstates earnings when accum earnings > req'd capital
- ROE grossly misstated (both earnings and equity distorted)
- requires co to keep accurate records of capital contributions to and distributions from each buinsess
- can lead to significant misunderstandings and mistakes
- Req'd Capital Method
- allocates amt of capital req'd to support a business, ignoring past results
- actual earnigs calced consistent w/ dist earnings
- results for young and old business NOT distorted by historical results
- can be allocated by region, etc
- Authors believe req'd capital is THE RIGHT METHOD for measurinng current performance
- however, many co still use historical method
- if no clearly defined std for req'd capital, may be hard to apply
- Value At Risk
- two components of req'd capital (RC)
- portion truly at risk
- portion req'd to satisfy redundant req'd reserves/excess cap req
- value at risk - method of allocating capital that reflects both components
- two-tier approach for each business
- high-risk req'd capital - amt of capital necessary to withstand adverse experience (amt to withstand 99% of 1 yr fluctuations)
- low-risk req'd capital - amt needed to maintain fin ratings or attain desired level of fin strength
- third-tier - not allocated - overall excess (or shortage) of capital
- ideally Tier 1 s/b backed by equity adn Tier 2 by debt
- in reality, debt req'd for Tier 2 would not be acceptable
- if Tier 3 < 0, capital s/b raised
- Using VAR to Allocate Cost of Capital
- calc WACC
- allocate asses backing reserves & Tier 1 req'd capital to LOB
- retain assets backing Tier 2 in unallocated corp segement
- allocate a charge for Tier 2 req'd capital to LOB
- retain assets backing tier 3 in sep unallocated segment
- allocate NO charge since excess corp capital
- ROE = [after-tax LOB income - charge for Tier 2 RC] / Tier 1 RC
- calc charge for Tier2 RC as % of Tier 2 RC
- This percentage is set so co achieves targeted ROE if all LBO achieve target ROE
- company's LOBS will have different proportions of high/low risk capital needs
- measures return on each LOBs high-risk capital while taking into account extra cost of add'l capital
- more common in banking industry, but applicable to ins world as well
- Allocation of Excess or Shortage of Capital
- authors recommend
- if viewed as temporary, allocate to corp segment
- if viewed as perm, calc of req'd calc s/b revised to reflect this
- alternate approach
- allocate all capital in proportion to req'd capital for each LOB
- results can be distorted by reins
- if reins trx designed to help overall company, not just single line, may be appropriate to share costs and benefits across all lines
- Rationing of Capital
- particularly important when shortage of capital
- difficult choices when capital is short
- who should get it?
- some LOB may bet it even w/ inferior returns if of strategic importance
Achieving Financial Goals
- Basic Requirements
- simple story that explains why company will succeed
- told to employees, rating agencies, investors, customers (sometimes)
- explains how co will apply competitive adv to serve mkts that provide opportunities for desirable profits and growth
- embodied in co's vision, mission, strategy
- to achieve goals, many areas need to work together
- products developed
- assets managed
- reins/acq/divestitures coordinated w/ mgmt of risk, earnings, capital
- find right balance between growth, profitability & risk to match availability of capital
- Financial Management Techniques
- simple techinqes/behaviors that can help a co serve owners better
- better to underpromise and overdeliver
- make modestly conservative acctg adn reserving choices -> reduces chance of negative surprises
- increase vigilance when times are good - tend to get overconfident and careless when times are good
- timing is important w/ capital mkts
- raise capital in advance of when you need it...when it is cheap
- have bias toward opportunities w/ more upside than downside potential
- options historically a major source of added earnings & unexpected losses
- strive to include options that benefit co and minimize options that could hurt
- build speed into org
- many opportunities more attractive to those who react first
- Achieving Fin Goals for Mutual Policyowners
- they want fin security adn max value from their pols
- they don't care how fast/slow a co grows, just max value
- when acq costs high and returns low, PPO may be better served by closing down NB & running off inforce and returning all capital to PO
- Demutualization
- since mutuals return much value through PO divs, ROI/ROE often far below that for stock co
- when demutualized, starts as stock co w/ very low ROE
- effective way to unlock mutual PO's value in co w/o dismantling coin process
- most use demutualization and opportunity of IPO to raise add'l capital
- Achieving Stockholder Financial Goals
- want to maximize return through stock price appreciation & stockholder divs
- stock price driven by 2 main factors
- outlook for co and industry
- recent history of co under current management team
- largely a function of P/E ratios (stock price to EPS)
- P/E ratios largely function of expected growth rate for co, tempered by current attractiveness of life ins industry
- ins cos tend to have lower P/E ratios than stock mkt avg
- if privately held, still a fair amt of importance to stockholder divs
- public - not as important. Price appreciation now main focus
- investors focus on stockholder reporting, not regulatory reporting
- co can show negative solvency earnigns and investors will hardly notice
- (rating agencies adn regulators WILL notice)
- fast growing co typically has soaring stockholder earnings and plummeting solvency earnings
- b/c of extreme conservatism in most solv reserves
- slow growing co may experience opposite - solvency > stockholder reserves
- as conservative solvency reserves released on old business
- Embedded Value (EV)
- gaining acceptance in capital mkts as important fin measure
- EV - PV of co's distributable earnings, including any current exess capital
- future NB not included
- EV represents run-off value for co, discounted @ given rate
- why EV may become key driver of Life Ins Stock prices
- used extensively in Europe
- actuarial valuation tool
- used by buyers to substantiate take-over prices
- value of target in 3 pieces: EV, goodwill, multiple fo potential annual cost savings
- allows investors to see how much of a co's current value is represetned by inforce business and how much is based on expected future growth
- good test of recoverability of life ins intangibles (DAC)
- should provide a minimum value for a LIC
- Does have limitations
- time and staff consuming to implement and maintain
- sensitive adn can change significantly w/ assumption change
- difficult to explain to mgmt and outside analysts from one perios to the next
Exercises
Life and Health Marketing (LOMA)
Chapter 5 - PLANNING MARKETING GOALS AND STRATEGIES
Marketing Management - process of planning, organizing, implementing and controlling a company's marketing activities in order to create effective and efficient exchanges
Marketing Management Process
- Planning
- - Set Marketing objectives
- - establish guidelines for implementation and control of mktg activities
- Organizing
- - establish a framework for carrying out mktg plans
- Implementation
- Control
- - analyze results
- - evaluate performance
- - make necessary changes
Types of Planning
- +Corporate Planning
- primarily strategic
- consists of establishing company's overall business plan
- top-down. begins by deining the company's mission - defines scope of org's business activities and business direction
- Establishs Corp objectives - long term results co hopes to achieve
- Outlines Coprorate Strategies - long term methods used to achieve objectives
- must regularly evaluate plans to make sure still appropriate
- +Marketing Planning
- bottom up portion of planning process
Stategic Marketing Planning
- 1-5 years into the future. review and update as necessary. as oftern as every 6 months. focus on long term
- - establishes marketplace objectives
- - defines the target market
- - develops mktplace stategies
- - defines resource needs
Tactical Marketing Planning
- 1-2 years into the future - focus on the day-to-day
- - develops action-oreineted product, price, distribution and promotion tactics
- - describes when activities will take place, how they will be performed and who will perform them
The Planning Process
- 3 primary activities: analyze situation, establish objectives, develop course of action
- Conducting a Situation Analysis
- 3 primary parts: environmental analysis, environmental forcast, internal assessment
- Environmental Analysis - ongoing exam of outside events/relationships that can influence strategic decion making
- Key environmental areas for Financial Services Corp (fig 5-3 p 105)
- - current target markets
- - competition
- - economy
- - society
- - technology
- - regulation
- - labor
- - distributors
- - international conditions
- Environmental Forcast - prediction of major environmental trends that will affect a companies business activities
- several types of forcasts available from businesses, universities, governments and industry associations
- commercial forcasts are a good starting point
- Internal Assessment - exam of co's current activities, strenghts, weekenesses and ability to respond to potential threats & opportunities in environment
- internal factors that have greatest effect on co's mktg planning:
- - mission
- - fin, tech, human resources
- - current distribution systems
- - product lines
- - operational efficiency
- Tools of Analysis
- SWOT Analysis
- Strengths, Weaknesses, Opportunities and Threats
- Mktg Opportunity arises when right combo of circumstances allows co to use its strenghts to take advantage
- Strategic Window - time period where optimum fit between co's distinct capabilities and key requirements of mktg opportunity
- Business Portfolio Analysis
- allows co to evaluate business units according ot their potential contribution to co
- determines units potential for:
- - generating financial resources
- - requiring financial resources
- SBU - strategic business unit
- - operated as a separate profit center
- - own seperate set/share of customers adn competitors
- - own mgmt (generally)
- - owm mktg strategy
- Marketshare/Mkt Growth matrix - Boston Consulting Group
- - Star - high mkt share, high growth mkt - becomes a cash cow when mkt growth slows
- - Cash Cow - high mkt share, low growth mkt
- primary role - provide income to cover corp overhead, pay divs, finance R&D
- - Question Mark (aka Problem Child) - low mkt share, hight growth mkt
- requires more cash than they generate
- - Dog - low mkt share, low growth mkt
- generate enough revenue to cover their own expenses
- unlikely to become stars or cash cows
- many SBUs have the following life cycle
- Question Mark -> Star -> Cash Cow -> Dog -> sold/discontinued
- Market Attractiveness/Business Strength Matrix - GE and McKinsey & Co
- created to address problems w/ mktshare/mkt growth matrix
- 9 matrix cells
- business strength - strong/average/weak (x-axis)
- mkt attractiveness - high/medium/low (y-axis)
- "A" - good investment/growth opportunity
- "B" - average opportunities
- "C" - little growth/investment potential
- mkt attractivness - composite index - uncontrollable env factors
- - market size - market growth rate
- - gov't regulation - mkt stability
- - competitive intensity - tech reqmnts
- business strength - composite index - controllable factors
- - price competitivness - product quality
- - customer loyalty - mktg skills
- - sales growth rate - relative cost advantages
- - tech and fin resources
Establishing Objectives
- objectives s/b
- - clearly stated
- - specific and measurable
- - realistic
- - actionable
- objective shoudl specify (in quantifiable terms) what is to be accomplished and time period to accomplish it
- Corp Objectives - normally 1-5 years
- Marketing Objectives
- primary - describe overall mkt response they hope to achieve in target mkt
- secondary - cover mktg functionnnnnnns needed to carry out plan
Developing Stategies and Tactical/Action Programs
- Corporate Strategies
- - intensive growth strategy - usually requires significant financial resource
- + Market Penetration - increasing sales of current products to current mkts
- + Mkt Development - increasing sales of current products to new mkts
- + Product Development - increasing sales of new/modified products to current mkts
- - diversified growth strategy - venture beyond normal business domains
- + Horizontal Diversification - intro diff products to co's current mkt
- + Concentric Diversification - new mkts, new products similar to current products or current mktg methods
- + Conglomerate Diversification - new mkts, new products that bear no relationship to curernt products
- same product related new product unrelated new product
- new mkt mkt development concentric diversification conglomerate diversification
- same mkt mkt penetration product development horizontal diversification
- - Integrated Growth Strategy - taking over another level of industry or dist channel
- + Forward Integration - control of distribution channel
- + Backward Integration - upstream (manufacturer or supplier)
- + Horizontal - competitor
- Marketing Strategies
- focus w/r to SBU's mkt share
- + Build Strategy - increase mkt share. usually S/T loss (capital outlay) for L/T gain
- most appropriate w/ relatively low mktshare in relatively high growth rate mkts
- Question Marks or "A"s
- + Hold Strategy - maintain mkt share
- Cash Cows or "B"s
- appropriate for high mkt shares in low growth mkts
- + Harvest Strategy - maximize S/T earnings and cash flow
- appropriate for weak growth potential
- weak Cash Cows, Qeustion Marks, Dogs adn "C"s
- + Withdrawal Strategy - selling/discontinuing a SBU
- appropriate for weakest growth and inv potential
- Tactical/Action Programs
- - what activites are to be performed
- - how/when/where they are to be performed
- - who is responsible for performing each activity
- - how much each activity will cost
- - type and magnitude of results expected from each activity
- - main elements of uncertainty involved
- - how results will be monitored and evaluated
- Benchmarking - identify best practices adn outcomes
- - emulate best practices to equal/surpass best outcomes
- avoids reinventing the wheel
- programs must be coordinated and integrated to be successful
- formed for each marketing area and combined to form annual mktg plan
- Setting Budgets
- tell Sr Mgmt how much and when - bottom up
- sometimes top down and funds need to be allocated. Proposed programs scaled up/down as necessary
- budgets provide feasibility info
The Marketing Plan
- written document that specifies marketing goals for a product/product line and describes strategies and implementation and control efforts co intend to use to achieve those goals
- focuses on target markets and elements of marketing mix
- Benefits
- - facilitates communications among all levels of org and among function units
- - allows mgmt to monitor consistency of actions across units
- - focuses EE on right issues
- - keeps poeple focused on overall goals
- - provides basis of performance comparison
- Elements
- - executive summary
- - situation analysis
- - mktg objectives
- - mktg strategies
- - tactical/action programs
- - budgets
- - control mechanisms
Life and Health Marketing (LOMA)
Chapter 6 - ORGANIZING, IMPLEMENTING AND CONTROLLING MARKETING ACTIVITIES
Organizing Marketing Operations
- Essential Mktg Functions
- - Information Management
- - Marketing research
- - product development and pricing
- - sales and distribution
- - advertising, sales promotion and publicity (aka Mktg Communications)
- - customer relations
- - mktg personnel development
- - mktg mgmt and admin
- Four common mktg structures: function/product/geog region/customer type
- Organization by Function
- most common
- different areas of responsibility depending on work performed
- ex. Chief Mktg Officer/Mkt Research Mgr/Sales Mgr/etc
- Advantages
- - simplicity
- - focuses on developemnt of managerial and tech skills
- works best w/ small cos or cos w/ homogenous customers
- Organization by Product
- each SBU responsible for its mktg (most of)
- may be some shared services
- Organization by Geographic Region
- usually mktg manager for each region
- usually some shared services
- Organization by Customer Type
- mktg manager for each division
- ex: households/small business/big business
- Combination Structures
- flexible - meets both co's strategic implementation needs and customer needs
- Matrix Organizational Structure
- project manager directs individuals from different function areas
- two bosses during project
Implementing Marketing Strategies
- Mktg Implementation - process of translating mktg plans and strategies into action
- accomplished through day-to-day tactical and operational activities
Controlling Marketing Activities
- marketing control - process of examing results of mktg plans and company to plan and taking actoin to keep it on track
Performance Evaluation
- performance std - internal vs external std
- - usually incorporated into mktg plan
- management by exception - mgmt only gets involved if performance outside acceptable range
- - saves time and allows attention to be focused on problems/opportunities
- if a problem, read to identify toe cause and take actions to correct
- - change tactical/action programs
- - establish new implementation method
- - new strategies
- - modify how performance data collected/analyzed
- - re-evaluate performance standards
- control tools
- sales analysis vs
- - forcasted sales - prior years sales
- - expenses to generate sales - competitors' sales
- - estimated mkt potential - current industry sales
- measured - # products, 1st yr comm, face ,avg prem, etc
- expense analysis
- natuaral accounts - ledger accounts
- functional accounts - based on purpose
- expense ratios - ex. mktg expenses/$1m face sold
- profitability analysis
- compares sales to expense incurred to generate sales
- use several years data since for line ins, 1st yr expenses > 1st yr revenues
- valuable source of info since combines sales and expense info
- mktg audit
- systematic examination and appraisal of mktg environment, objectives, startegies, tactical/action prgms, organiztional structure and personnel
- key areas of mktg audit (chart p 135)
- mktg environment
- macro environment
- task environment
- mkts adn customers
- other factors in mktg system
- mktg strategy
- business mission and mktg objectives
- mktg strategy
- budgets
- mktg organization
- formal structure
- functional efficiency
- cross-functional efficiency
- mktg systems audit
- mktg info system
- mktg planning system
- mktg control system
- new product developemnt
- mktg productivity audit
- profitability analysis
- cost-effeciveness analysis
- mktg function audit
- products
- price
- distribution
- promotion
- Reporting Sytems
- - provide managers w/ detailed summary info as needed
- - provide accurate adn timely info
- - be flexible to adjust to co's changing info needs
- - be cost effective
- - easily understood by
- + those who evaluate performance
- + those whose performance is being measured
- detail s/b appropriate for level
- lower level needs more detail
- higher level mgmt needs just summary
-
Life and Health Marketing (LOMA)
Chapter 7 - MARKET SEGMENTATION AND TARGET MARKETING
Market Segmentation
- dividing large markets into smaller markets w/ similar product/mktg mix needs
- single variable segmentation - only 1 variable to segment market
- multiVariable segmentation - uses combo of variables
- Requirements for Effective Segmentation
- - customers should have similar product needs/buying habits
- - needs/behaviours s/b distinguishable from other segments
- - potential sales/costs/profits s/b lare enough to be measured and compared to other segments
- - profit potential enough to warrant segment attention
- - customers accessible thorugh currently available means
- - size/composition s/b relatively stable over planning period
- Bases for Segmenting Consumer Markets
- Geographic Segmentation
- country/region/state/county/zip/legal boundaries/rural-suburuban/urban
- Demographic Segmentation
- age/sex.marital.household composition/income/education/occupation/family life cycle/nationality/race/etchic group/social class
- GeoDemographic Segmentation - combo of geographic adn demographic
- economic means/cultural background/perspective/neighborhood
- Psychographic Segmentation
- lifestyle/activities/interests/opinions
- Behavioristic Segmentation
- benefits sought/usage rate/buyer readiness/pref method of purchase/risk tolerance/buyer loyalty
- Demographic - commoonly used in consumer markets
- traditional life ins demographics - hi/middle/low-income households and families/boomers/seniors
- Bases for Segmenting Organizational Markets
- Organizational Mkts - group benefits and continuation of business operations
- therefore two markets, group and business
- Georgraphic Segmentation - simialr to consumar markets
- Demographic Charachteristics
- business activity/type of group-organizatoin/size of group-organization
- SIC - Std Industrial Classification - 1930
- NAICS - N. American Industry Classificatino System - by-product of NAFTA
- small groups <=100 - 80% of contracts, 25% or prem
- medium groups 101-499 - 10% of contracts, 25% of premiums
- large groups 500+ - 10% of contract, 50% of prem
- Behavioristic Segmentation
- similar to consumer markets - usage is a key
Target Marketing
- process to identify, select and focus mktg efforts
- Evaluating Potential Target Markets
- Mkt Size and Growth Potential
- majority fallacy - blind pursuit of largest, most easily identified or most accessible mkt segment
- competition makes big mkts less profitable
- should offer combo size/growth/profitability that best meets co's needs
- Mkt Attractiveness
- depends on level of compettition and buying power of consumers
- Company Goals and Resources
- only puruse targets if it has (can easily get) fin/tech/hr necessary to compete sucessfully
- Target Mktg Strategies
- Undifferentiate Mktg - mass mktg - singel mktg mix for entire mkt
- + cheaper since only one mkt strategy
- - might miss differences w/in segment
- - disadvantage to specialty marketers
- Concentrated Mktg
- for a product - focus all mktg efforts on a single segment of total mkt
- Niche Mktg - form of concentrated mktg w/ narrowly defined mkt
- - all eggs in one basket
- + can be profitable
- Differntiated Mktg
- offer differing product/mktg mixes to appeal to diff segments
- - most expensive
- + better served customers = incr customer satisfaction = incr sales
- Factors to consider when picking mktg strategy
- company resources - if limited, concentrated probably best strategy
- product variability - homogenous products - undifferentiated mktg
- Mkt Variability - if buyers have similar usage/purchase patterns - undifferentiated
- product's life cycle stage - new products - concentrated/undiffernetiated
- Consumer and Organizational Target Markets for Ins Products
- Affluent Consumers
- mass affluent - 100k -$1mil liquid assets - 99.9% of affluent mkt, 54% of total mkt assets
- high-net-worth - $1-25 mil liquid assets - 0.1% of mkt, 31.3% of assets
- ultra-high-net-worth - 0.001%, 15.1% of total mkt assets
- Single-Parent Families - need large amt ins to protect single wage earner
- Non-family Households - low need for life ins, high need for health/retirement products
- Working Women - strong potential for wide range of products
- Employer Groups - ex. negotiate trusteeship/voluntary trade assoc/MEWA
- Small Businesses - rapidly growing segment - approx 99% of businesses are small businesses
- significant market for products that
- - protect against loss due to death/dis of owner
- - preserve value/prevent liquidation due to owner/partner death
- - preserve sharelohlder equity/mgmt control due to majority shareholder death
- - protect against death tax on inherited business
- - enhance credit/fin stability by assuring business continuation
- - source of emergency funds
- - non-qual def comp to attract/retain key employees
- - EE health/life/dis ins and qual ret plans
-
Life and Health Marketing (LOMA)
Chapter 11 - PRODUCT DEVELOPMENT
Product Innovations
- Major Innovations - new prduct that meets needs not addressed before by other products
- Start-up Businesses - new product for a mkt served by a similar product
- New Prroducts for Currently Served mkts - new product for co, but product avail from other cos
- Prodcut Line Extensions - new product forms adn items to existing product line to give customers wider choice
- Product Modifications - characteristic changed ot allow competitive advantage over similar prod
- Style Changes - alter appearances or tangible aspects (ie logo change)
Product Development Process
- 5 basic steps - after first 3 steps (each one) decide continue/abandon/refine
- Product Planning/Business Analysis/Tech Design/Implementation/Monitor & Review
- Product Planning
- Idea generation
- Screening
- two potential screening errors
- - potential of a good idea underestimated and idea rejected
- - poor idea looks deceptively attractive and pursuded, wasting resources
- may use a screening critera checklist to help objectively screen
- - compatible w/ corp goals and strategic inititiatives
- - will prodcut enhance copr image
- - does a need exist in target market
- - can current prodcut be modified to meet this need
- - will product generate new sales or shift sales
- - mkt potential large enough to generate enough business to make product profitable
- - can product be mkted through existing methods
- - support a level of commissions that will motivate slaes force
- - can current systems handle the product
- - will target mkts understand the product
- - would it be more attractive if offerred thorugh a sub
- Concept Testing - measures acceptability w/o actually producing items
- - helps determine how customers would compare product ot existing products
- - what sets of benefits/attributes customers like most
- - which ideas are unacceptable in the mktplace
- - which target mkt to taimfor
- Field Advisory Council - group of agents to test new ideas on for feedback
- Comprehensive Business Analysis
- Mkt Analysis - study of environmental factors that might affect sales
- - potential value of product ot customers
- - nature adn size of target mkt
- - potential value of product to company
- - nature of products competition inthe mkt
- - customer appeal of product
- - appeal of product to distributors
- - products relationship to other products offered by co
- - potential legal/regulatory problems w/ product
- - special tax considerations
- - economic considerations
- - product/company fit
- Product Design Objectives - products basic characteristics/features/benefits/issue lmits/u/w classes/etc
- Feasibility Study - operational & technical viability of producing/offering/admin of product
- Mktg Plan - outlined in C 5
- Prelim Sales & Fin Forcasts
- If analysis indicates good potential, product proposal prepared for mgmt
- Product proposal typically details
- - product objectives - product description
- - mktg strategy - mktg fit
- - fin fit - inv fit
- - systems fit - scope of product implementation
- - legal/regulatory
- Techical Design
- writing contract/actuarial assumptions/rate structure/benefit levels/issue u/w standards
- usually several revisions utnil compromise reached
- prod dev process flow/timeline/budget assembled
- all put together and presented to management
- areas involved
- Mkts/Distributors/IS/Actuarial/Investments/Admin/Acctg/Legal-Compliance
- Implementation
- establishing admin structure adn processes necessary to take product to market
- 3 concurrent activities
- - obtain necessary legal approvals
- - design promo & training materials
- - develop IS systems/procedure to mkt & admin product
- Policy filing - dynamic process b/c state variations
- Design of Promotion and Training Materials - product naem, sales lit
- need to get approval from legal on most materials
- some might need state approvals
- Systems Activities
- IS might need to buy/develop new systems to support product
- usually takes greatest amount of time in process
- Product Introduction
- offering new product for sale and having mktg and product support in place
- Intro sales kit
- - outline of product features and how they work
- - desc adn sample of policy and fin statement insured will get each year
- - table of issue and u/w limits
- - commission scales
- - table of premium rates
- - list of possible mkts
- - sample illustrations
- - saels presentations
- - suggested sales solutions for diff mkt situations
- - samples of local and national advertising to intor product to public
- - sample pre-approach letter adn/or postcards
- - booklet about product for producer
- - brocure about product to give to prospects
- - prospectus (if req'd)
- - sample app
- - details on promo campaign
- - privace disclosures
- - instructions on how to access website for more info
- Training classes
- Incentive prizes/awards
- Sales Monitoring and Review
- review PD cycle to see if time/budget met
- review sales to see if matching forecast - if not, attempt to determin why
- check fin results to see if goals met
- Product Modification
- - s/b systematic as development for new products
- - changes might occurr because of actual sales/profit experience
- Product Withdrawal
- sometimes necessary b/c of legal regs
- sometimes end of lifecycle or unprofitable
- may meet resistance from agents
- good to have an acceptable replacement product
- review portfolio periodically to see if anything should go
Copyright © 2004 Steve Welander.
Permission is granted to copy, distribute and/or modify this document
under the terms of the GNU Free Documentation License, Version 1.2
or any later version published by the Free Software Foundation;
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