8I-U - Marketing
Book:Life and Health Marketing (LOMA) - Chapter 3 - REGULATION OF LIFE AND HEALTH INSURANCE MARKETING
Book:Life and Health Marketing (LOMA) - Chapter 5 - PLANNING MARKETING GOALS AND STRATEGIES
Book:Life and Health Marketing (LOMA) - Chapter 6 - ORGANIZING, IMPLEMENTING AND CONTROLLING MARKETING ACTIVITIES
Book:Life and Health Marketing (LOMA) - Chapter 7 - MARKET SEGMENTATION AND TARGET MARKETING
Book:Life and Health Marketing (LOMA) - Chapter 15 - DISTRIBUTION CHANNELS
Book:Marketing for Actuaries (LIMRA) - Chapter I - INTRODUCTION
Book:Marketing for Actuaries (LIMRA) - Chapter II - MARKETING MANAGEMENT OBJECTIVES AND STRATEGIES
Book:Marketing for Actuaries (LIMRA) - Chapter III - MARKET RESEARCH
Book:Marketing for Actuaries (LIMRA) - Chapter IV - TRADITIONAL DISTRIBUTION SYSTEMS
Book:Marketing for Actuaries (LIMRA) - Chapter V - NONTRADITIONAL AND EMERGING DISTRIBUTION SYSTEMS
Book:Marketing for Actuaries (LIMRA) - Chapter VI - MARKETING AND PRICING
Book:Marketing for Actuaries (LIMRA) - Chapter VII - ILLUSTRATION AND DISCLOSURE
Book:Marketing for Actuaries (LIMRA) - Chapter VII - APPENDIX I - MATHEMATICS OF COST COMPARISON APPROACHES
Book:Marketing for Actuaries (LIMRA) - Chapter VII - APPENDIX II - NAIC LIFE INS ILLUSTRATINOS MODEL REGULATION
Book:Study Notes and Published References - Note CIA Education Note - INSURANCE AND ANNUITY ILLUSTRATIONS
Life and Health Marketing (LOMA) - Chapter 3 - REGULATION OF LIFE AND HEALTH INSURANCE MARKETING
Overview
- special position of public trust - financial well-being & business conduct of insurers is of such importance to so many people
- PO can lose $ if insurers don't adhere to standards
- policies are complex documetns not easily understoon
- PO wants to be treated fairly and ethiclly w/ accurate info
US State Regulation
- Background
- McCarran-Ferguson Act (1945) - state regulates insurance
- insurance dept - admin agency w/in each state
- insurance commissioner - head of ins dept
- NAIC - Promostes coinsistency w/in each state's ins dept
- insurance laws in two basic categories
- solvency laws - esnure insurers financially able to meet obligations
- Mkt Conduct Laws - ensure insurers and distributors operate fairly adn ethically
- Regulation of Products
- protect customers by requiring certain provisions or not allowing certain provisions
- require simplified language
- Regulation of pricing
- reasonbale rate - cover's insurers expenses & provides a fair profit
- competition usually keeps rates reasonable
- loss ratios - total claims incurred / total prems rec'd
- adequate rate - high enough to provide insurer w/ enough $ to pay operating expenses and benefits when they come due
- life ins rate adequacy indirecly regulated via min reserve reqs
- equitable rate - prem rate that varies from policy to policy based only on factors affecting the product's costs - not allowed to vary based on race or religion etc
- Regulation of Distribution
- Licensig of Ins Producters - to get license, must prove: are of good character/meet residency req/pass an exam
- license for each state/line they sell
- reciprocity - two states agree that if ok in one state, ok in the other
- Prohibited Sales Practices
- Misrepresentation - false or misleading statements
- Replacement - replacing one contract with another. In itself, not illegal
- Twisting - misrepresent features of a product to induce replacement
- Churning - replacing one policy after another to earn series of 1st year commissions
- Rebating - offer inducement to purchase (not banned in all states)
- Missappropriation - illegal use of PO funds
- Commingling of Funds - combining monies belonging to PO(s) w/ producer's own funds
- Suitability requirement - need reasonable grounds for recommending a specific product as suitable for customer's needs
- Regulation of Promotion
- Advertising and sales Promotion Materials
- Advertisement - any material designed to create public interest in life ins/annuities, insurer, producer OR induce public to purchase, increase, modify, restate, borrow on , surrender, replace, retain a policy
- Insurer ultimately responsible, even if producer creates ad
- Disclosure
- NAIC Disclosure Model Reg
- aid customers in puchasing suitable & reasonably priced ins
- provide accurate adn reliaebl info to ensure competitive mkt
- discourage undesirable mkt behavior
- must give prospect a Buyer's Guide and Policy Summary
- Buyer's Guide
- describes various types of ins and points out +/- of each type
- explains cost comparison indexes
- Policy Summary
- disclosure info on specific policy being considered by prospect
- Market Conduct Examinations
- peridodic exams of insurance co to ensure they comply w/ state laws
- areas of focus in mkt conduct exam
- cert of authority adn licensing of agents/brokers nonf options on life ins pols
- policy form/endorsment approvals sales/advertising materials
- u/w and rating of policies apps rejected/declined
- pols cancelled/not renewed replacements
- claims practices customer complaints
US Federal Regulation
- Antitrust Regulation
- state antitrust regs, but subject to certain provisions of Fed antitrust laws
- Boycott - competing cos agree to refrain from doing business w/ another co
- Coersion and Intimidation - methods of force used by a business to make another business act or refrain from acting in a certain manner
- Price fixing - competing businesses act together to affect the price of a product
- Consumer Protection Regulation - affect mktg of life and health ins
- FTC Act - regulates unfair competition, deceptive business practices adn prohibits false or deceptive advertising that crosses state lines
- Fair Credit Reporting Act (FCRA) - must comply when insurer obtains credit reports for u/w or claims investigation
- GLB Act Privacy Provision - protect non-public personal info from indescriminate dessemination.
- disclosure of practices @ beg of relationship and annually thereafter
- allow opt-out of sharing
- maintain policies to protect security and confidentiality of non-public info
- refrain from sharing acct #s w/ non-afiiliated 3rd parties for mktg purposes
- HIPAA 1996 - privacy protections for group adn health mkt
- Regulation of Variable Ins Products
- subject to regulation by SEC
- 4 fed Laws affect mktg of variable products
- Securities Act of 1933
- Securities Exchange Act of 1934
- Investment Co Act of 1940
- Investment Advisors Act of 1940
- Securities Act of 1933 - Truth in Securities Act
- general fraud provision - prohibits misrep
- registration provision - must provide essential info
- prospectus - most of the info in the registration statement
- any communication (written or oral) that offers security for sale
- Securities Exchange Act of 1934 - gave SEC broad authority to regulate securities
- primary focus - registration of brokers and dealers who sell securities
- securities broker - indiv, corp or other legal entity engaged in business of buying/selling securities for the account of others
- securities dealer - engaged in business of buying/selling securities for own account
- firms that sell must a) register as B-D w/ SEC and b) become member of NASD
- NASD - non-profit self regulating org responsible for making sure everyone follows rules
- SEC registration of B-D - most often an insurer will create and register a subsidiary ot be a registered B-D
- NASD Registration of Respresntatives and Principals
- Registered Rep
- business assoc of NASD member
- engages in securities business on behalf of member
- passed a specified NASD exam
- Principal
- officer/manager or an NASD member
- involved in day-to-day operations of securities business
- qualified as a registered rep
- passed additional exams
- NASD regulatory Oversight Activities
- B-D must supervise reg reps & principals to ensure compliance
- reg reps and principals must serve customers properly and deal fairly w/ public
- reg reps mush have reasonable grounds for believing recommendation is suitable
- NASD approval of ads and sales lit
- Name of B-D
- no promises of results exaggerations or opinions w/ no reasonable basis
- don't imply state or fed endorsement/approval of product
- no rediction/project o finvestmetn results
- SEC "Good" Internal Controls
- strong/capable compliance/legal staff
- create regular exceptino reports and review
- regular communication w/ customer - disclose fees/risks
- periodic reviews of customer holding by branch office
- written procedures fro branch audits w/ written reports as results
- clear compliance guidance to producers
- regular provider trainig - compliance/security laws/self reg rules
- immediate discipline
- review producers to ensure continued licensing/education req
- optical scanning instead of manual paper-based processing
- written procedure to minimize error/delays
- quality control unit to monitor trx processing
- procedures to separate adn secure incoming premium payments
- Investment Company Act of 1940 - regulates conduct of investment cos
- Sep Acct considered an investment company by act
- Investment Advisors Act of 1940 - conduct of investment advisors
- investment advisors - compensated for providing advince to investors about value of securities or advisability of buying/selling securities
- if producer sells VA/VUL and only gets commissions, not req'd to register as investment advisor, jsut reg rep or principal
- Federal Regulation of Bank Insurance
- Licensing and Locatoin
- agency/B-D must be clearly identified adn separate from teller area
- employee must be properly licensed/registered
- must fully and accurately disclose identity of business providing the service
- Prohibited Sales Practices
- Tying Arrangement - conditions the sale of one item on the sale of another
- Advertising adn Dsiclosure Requirements
- Fed Banking laws require additional disclosures
- product is insurance/annuity and not bank-guar product
- amounts payable are premiums and not deposits
- product is not insured by FDIC or other gov't agency or bank
Canadian Legal Environment
- Background
- Dual regulation - both federal and provincial govt regulate
- Federal - OSFI
- Provincial Regulation of Market Conduct
- Insurance Act of each procince regulates conduct and creates Office of Superintendent of Ins
- Canadian Council of Ins Regulators (CCIR) - similar to NAIC
- because of CCIR - fairly uniform regs across provinces
- CLHIA (Canadian Life and Health Ins Association)
- voluntary associate that promotes self-regulation to avoid over-regulation
- CLHIA guidelines
- Products
- CCIR Uniform Life Ins Act & Uniform Acc and Sickness Ins Act - adopted by all provinces by Quebec
- CLHIA Indiv Var ins Contracts (IVIC) Guidelines
- Compliance Report - questions exploring compliance
- Information Folder - collection of 21 items to prove financial soundess of a product
- Policy Form filing required if
- condition to obtaining license to conduct business w/in province
- before mktg an individual variable life contract
- no new filings for trad products after licensed
- Pricing
- indirectly since ins must charge adequate rates to fund sufficient assets
- prohibit unfair discrimination (race/sex/religion/etc)
- can't discriminate between two people who present same risk
- Distribution
- Producer Licensing - no special license to sell variable products but must be accredited by provincial securities commission
- Prohibited Sales Practices - similar to US
- in addition, license revoked if
- violates ins act and/or related regs
- material misrep on license app
- guilty of fraudulent practice
- demonstrates incompetence or untrustworthiness in trx of life ins
- Promotion - prohibits specified ad/sales promotion practices adn mandates cost/benefit disclosures
- Advertising and Sales Promotion - prohibits
- false/misleading ads or statement re: policy features
- conduct that results in unreasonable delay/resistance to fair settlement of claims
- Add'l guidance by CLHIA prohibits
- false/misleading statement/presentations/testimonials
- disparaging statements about other insurers or their products
- statements w/ tech/industry language beyond general public understanding
- guarantees unless conditions/limitations fully explained
- Coupon Advertisements
- must be truthful and not misleading
- must define terms & disclose exceptions/exclusions/limitations
- Cost adn Benfit Disclosure
- CLHIA-developed buyer's guide
- policy summary
- if guarnateed values of reatures mentions, must be display inillustrations
- if non-guar elements displayed, illustration must have at least two summaries
- variable products - must give copy of Info folder onfile w/ office of super
- describes guar/non-guar benefits
- method of determing benefits
- surr/loan/nonf provisions
- charges imposed if surrendered
- Federal Regulation to Maintain Competition
- Ins Co Act - Admin by OSFI - regulates
- fed incorp ins cos
- insurers incorp outside of Canada but do business in Canada
- provincially incorp insurers that choose to register w/ fed gov't
- regulates incorporation, corp governance, solvency
- Competition Act (1986)
- Prohibits
- mergers/monopolies that may operate to detriment of public interest
- price fixing agreements that unduly lessen competition
- other anti-competitive or deceptive mktg or unfair trade practices
- Feds - Privacy
- Provinces - Customer Protection
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 15 - DISTRIBUTION CHANNELS
Overview
- Distribution Channel - network of cos and people that performall mktg activities req'd to deliver products to customers
- 3 types: personal selling/financial institutions/direct response
Personal Selling Distribution Systems
- Agnecy-Building Distribution Systems
- Ordinary agency distirbution system - full or part-time agents to sell/service ins pols
- field force - agents in the system
- career agent - full-time commissioned salesperson w/ agency contract
- agency contract - agreement that defines roles/responsibilities/compensation/power of agency
- power of agency - agents right to act for the insurer
- Career Agents - independent agents, not employees
- exclusive agent - tied/captive - not permitted to sell other insurers products
- agent-broker - broker - places business w/ cos other than primary co
- marketing territory - geographic area insurer distributes products
- field offices - sales offices in marketing territory
- considered a branch office or agency office
- Branch Office System
- Branch manager responsible for increaing sales/recruiting and developing career agents/managing expenses for the co
- Branch manager and office staff are ins co employees
- Agent in branch office under contract to ins co, not branch manager
- General Agency System
- Agency offices established, maintained and funded by general agents
- General Agent - Independent agent under contract to insurer
- primary funtion of GA is to build and manage an agency of career agents focused on distributing products of single insurer w/in defined territory
- GA is agent of insured, not EE
- office staff EE of GA, not insurer
- Comparison of Branch Office adn General Agency Systems
- expensive to build field force from scratch so use GA system
- GA bears some/all of agency startup costs incl office expenses/salaries
- Insurer commission costs ~ sales
- Branch office - high costs @ beginning even though sales low
- Well established insurers prefer branch office
- - greater control & flexibiltiy
- - can transfer personnel between territory
- - can transfer someone w/ experience vs training from scratch
- - rewards good producers w/ better territories
- under GA, need consent of GA to transfer people
- distinction between GA and Branch office getting fuzzier
- Multiple-Line Agency (MLA) Distribution System
- uses career agents to distribute life/health/p/c ins for group of commonly managed or financially related ins cos
- MLAs establish own office w/ little/no help from insurer
- benefits of MLA system
- - efficiency in serving certain markets - one agent for all needs
- - opportunities to cross-sell products
- - persistency - more business and more satisfied = better persistency
- - economies of scale for insurer
- Home Service Distribution system
- exlusive agaents (home service agents/debit agents)
- defined products/defined territory
- autohorized ot collect renewals @ PO's home
- employees of home service co
- req'd to keep certain hours and may be transferred
- MDO policy (monthly debit ordinary) - prems collected monthly at PO's home
- 1k-25k face amts typically
- PNO policy (premium notice ordinary)
- $10k/$15k min face
- prems paid via mail/payroll ded/mbd/eft but may be collected at PO's home
- usually a district office w/ district manager
- districts split into territorys - 1 agent/territory
- Worksite Mktg Distribution System
- individual/grp ins distributed at place of work on voluntary, paryroll deduction basis
- advantages
- - effective way to reach and meet the needs of mill/lower income mkts
- - more cost effective than distribution of indiv plans of ins
- - builds name recognition
- - possible gateway to sell grp benefit products to employer
- - payroll ded less likely to lapse that direct billed for EE who remain w/ company
- disadvantages
- - two sales to make - one to employer, one to EE
- - small face amounts and prems
- - persistency problems in high turnover workplaces
- Location-Selling Distribution System
- consumer initiated sales at kiosk/desk in other store
- may be agency building or direct response dpeending on staffing levels
- pre-need funeral is a specialized type of location-selling
- Salaried Sales Distribution System
- relys on salaried sales reps to sell/service products
- employees of insurer and paid salary
- Group Representative - handle group sales - specially trained for groups
- Call and Contact Centers
- call center - phonebank for support
- contact center - like phone center but email/mail/phone/web chat
- possible source of cross sells
- Non-Agency-Building Distribution Systems
- Pros
- - don't have to train/finance or provde office support
- - less expensive to establish
- - expenses linked directly to sales
- Cons
- - agents not exclusive
- - less control
- Brokerage Distribution System
- uses agent-brokers and licensed brokers
- licensed broker
- - independent life broker
- - licensed to sell but not under an agency contract w/ any insurer
- - responsible for own office space and other expenses
- producer group
- - independent producers organized
- - negotiates compensation/product/service arrangements w/ ins co
- - normally focus on specific segment of mkt
- soliciting brokerage business
- Brokerage Rep
- appointed to solicit brokerage business and appoint brokers on behalf of co
- may be full-time salaried employee or soliciting agents
- Brokerage General Agency
- agency operated by Brokerage General Agent (BGA)
- BGA - independent agent under contract w/ numerous insurers
- BGAs have minimum production reqmts
- primary function - encourage agents/brokers to sell products of cos BGA represents
- Wholesaler - broker rep that solicits business for an insu co primarily from broker-dealers adn banks
- Personal-Producing General Agency (PPGA) System
- PPGA - commissioned salesperson, not housed in insurer's field office, engaged primarily in personal production
- most co's that licensse PPGAs have min prod reqs
- soliciting PPGA business
- Regional Officer - independt contractor or EE who recruits and manages PPGAs for only one insurer
- Managing General Agent (MGA) - indepentd contractor typically recruits and manages PPGAs for # diff cos
- primary advantange of PPGA system - tendency to hold down costs
- Professional Advisors Distribution System
- Financial planners/CPAs/Attorney distributing life ins
- sometimes fee based, sometime commissioned
- laws and ethics codes are strict for these folks - lots of extra disclosures
Financial Institutions Distribution Systems
- Broker-Dealer (B-D) Distribution System
- variable products can only be distributed through B-D
- if insurer want to distribute variable products
- register ins co as B-D
- establish sub that registers as a B-D
- mkt prducts through affiliate that is a registerd B-D
- Bank Insurance
- distribution of ins to bank customers through bank-affiliated insurer or ins agency
- authorized by Gramm-Leach-Bliley Act (GLB Act)
- Insurance Companies
- nonproprietary products - products manufactured by another insurer
- common products - DI/Indiv Health/small group health
- done to keep agents/customers happy
- home-office-to-home-office arrangement
- HO distributes specific product lines mfg by another insurer
- career agents allowed to broker on their own for products not carried
- in-house brokerage agency - solicits dist agreements w/ other cos for prodcuts not offered
- keeps exclusive agents from dealing with other cos
Direct Response Distribution Systems
- overview
- normally noface-to-face contact occurs - sometimes phone sales reps or agents
- Direct Response Mkts - using one or more media to elicit an immediate and measurable response from a customer
- Two types of direct response materials
- Invitation to inquire - communications designed to generate interest in product/service and provide prospects w/ means to request and receive add'l info
- Invitation to Contract - communicaton desited to solicit and close a sale
- fullfillment kit - package of materials designed to address customer's request
- Products Distributed Through Direct Response Marketing
- generally simple to apply and pay for, u/w, administer
- typically non-med or guar iss basis
- non-med basis - sold w/o exam by doc/paramed - may have health questions on app
- guar-iss basis - no indiv u/w takes place - if an eligible member of group, apply and meets specified contitions, automatically issued a policy
- Media used in Direct Response Marketing
- Direct Mail - generally print form via mail service - contains mail kit
- mail kit
- intro letter response device (application/form)
- brochures business reply envelope
- Telemarketing - use telephone to produce sale
- Outbound Telemarketing - co calls you
- Inbound Telemarketing - cust call your - usually as a response for other ads
- Internet
- Aggregator - site where users can comparison shop many co's for rates
- Type of Mailing Lists
- House List - compiled from people who have shown interst in co or been referred by current customers - most productive list
- Response List - people who have brough from another co through direct response - their house list - second most productive list
- Compiled List - derived from direcories/newspapers/tradeshow registrations/ etc
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Marketing for Actuaries (LIMRA) - Chapter I - INTRODUCTION
Overview
- Actuary responsible for product designs and pricing is as much a part of mktg as those more directly involved
- product design adn pricing should not be done in actuarial vacuum, but integral part of total mkt strategy
- must be familiar w/ mkt segment targeted & dist-system used in order to properly price products
Marketing for Actuaries (LIMRA) - Chapter II - MARKETING MANAGEMENT OBJECTIVES AND STRATEGIES
Overview
- Critical Ins Co functions
- establishing mkt objectives
- determing how to grow in mktplace
- implementing strategies to implent these goals
- mktg objectives s/b designed to maintain existing business and generate NB w/in existing mkts adn from existing dist channels
- growth objectives s/b designed to generate NB from new mkts, new products and new dist channels
- mkt adn growth objectives s/b based on
- historical results - where co has been, is today, and why
- strengths - s/b viewed as opportunities and capitalized as either competitive edge or way to enhance profitability
- weaknesses - eliminated or minimized as much as possible
- external environment - assesment includes
- competition
- consumer needs/desires
- demographics
- economic conditions
- int rates
- inflation
- reg climate
- consumer attitudes
- gov't intentions (regarding public/private fin security issues)
- internal assumptions
- assume sufficient CF & reserves to support sales goals and forays into new mkts, products, dist channels
- strategic assumptions about how it will utilize capital and other resources
- mktg strategies
- specific interrelated & complementary activities a co will perform to achieve its goals
- markets, product, distribution
Markets
- specific mkts co wants to operate in
- must be indentified and defined as precisely as possible
- definition includes
- demographic characteristics
- geographic location
- lifestyles
- motivation
- needs
- product use
- social mobility
- each mkt mustbe measurable (size and purchasing power)
- must be large enough to be profitable and reachable by distribution
- once mkts identified, can plan how to best penetrate these mkts
- req'd resources, who will implement, time frame
Products
- products offered must be suitable to targeted mkts and dist systems
- must be designed to support mktg adn pricing objectives
- objectives for quality, services and growth s/b met w/in budget adn w/in expense loadign for each product line
Distribution
- Cos must tailor each dist system to mkt it will serve and products it will sell
- pay attention to what is needed to enhance capability of field & HO to deal w/ new products and to penetrate targeted mkts
- pay attention to how internal programs might impact dist system
Role fo the Actuary
- offer assistance to mktg officer in formulation of mktg mgmt objectives and strategies
- gauge potential effects of mgmt decisions
- project expectd results
- take active role in design of product and compensation
- measure progress toward attainment fo mktg objectives
- advise on impact of strategies on fin rating
- advise on appropriateness of sales illustration
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Marketing for Actuaries (LIMRA) - Chapter III - MARKET RESEARCH
Overview
- conducting surveys to analyse
- sales and persistency trends
- census demographics and econ stats to sales data to id mkt-potential
- developing conservation programs
- studying profiles of buyers and products purchases
- examining trends in buying and paying behavior
- exploring motivations invovled in various purchases
- conducted both at company and industry level
- study both internal ins environment and external environment
- external environ - demographic,economic, regulatory, cultural, technical trends that may affect ins mkts
- sources: fed govt agencies, private industry, trade orgs, professional assoc & vendors
- conducted at industry leve by various ins fin services trade orgs and prof ins orgs
- helps senior management in
- setting company objectives
- monitoring goals established by such objectives
Market Surveys
- montior sales activites and their persistency
- tracked by several measures including product lines and dist systems
- results are used
- strategic planning process
- establish mkt share goals adn monitor such goals
- as performance criteria
- competitive intelligence process
- diagnose strengths adn weknesses
- mkt segmentation purposes
- motivational purposes
- measure of the mktg effectiveness of the ins industry
- problem identification
Sales Surveys (LIMRA primarily)
- Individual Life
- qtrly and ytd indiv life sales performance trends by dist channel
- annualized new premium, face amt, # pols, avg size pol, prems/pol, prem/$1m
- allows cos to compare results w/ others
- WL/Term/UL/VUL
- Individual Annuities
- qtrly sales trends by product type
- deposits for variabel adn fixes annuites, qual/nonqual, single prem/periodic prem
- Individual Health
- DI - qtrly indiv DI sales by annlzd prem and # pols
- LTC - new issues and trends in inforce
- Indiv Health - annlzd prem & pols - medicare supplement, acc, hospitalization, major med, comprehensive
- Buyer Study
- Indiv life sales observed for trends in variety of product and buyer characteristics
- provides overall picture of industry
- hleps w/ design of new products
Other Market Data
- helpful to have info on competition w/ mkt share
- analyse using primary (internal company) data along w/ secondary data
- used to estimate expected growth rates
- sources fo seconday data:
- US Census Bureau - population and household counts, estimates and projections by area
- Bureau of Economic Analysis - aggregate personal and per capita income for areas & income proj
- Bureau of labor Stats - unemployment stats adn workforce size
- Nat'l Assoc Realtors - housing starts and sales and home values
- Persistency Studies
- periodic studies for indiv def ann, indiv life, indiv DI
- Consumer adn Field Force Surveys
- mostly mktg info from
- analysis of internal operating stats
- policyholder records
- trade assoc figures compiled across groups of cos
- more and more info from own records
- move from policy records to client records (householding)
- focus groups can help w/ consumer info
- industry studies needed for avg ins holding and similar data
- Public in General
- ACLI surveys American Public
- Sub-Population of the General Public
- survey of widows/people who recently bought through a bank/etc
- survey ow policyowners
- cross section or subgroup such as recently serviced or recently terminated
- Field Force
- evaluating compensation systems, portfolio, policyowner service, field-HO communication, quality of agent training
- wants & needs of public - at least agents perception
- field survey vs field advisory council
- field survey represents all agents, not just most vocal/top producers
- field morale improved if ask all
- Caveats
- surveys can mislead - using info for purpose other than intended
- surveys are an "art" and trick to get set up adn utilized properly
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Marketing for Actuaries (LIMRA) - Chapter IV - TRADITIONAL DISTRIBUTION SYSTEMS
Overview
- two distinct dist systems in US: Agency and Direct Response
Agency-Building Systems
- Career Agents - co recruits, finances, trains & sometimes houses agents to represent them
- field offices - general agencies (headed by GA) and/or branch offices (agency manager)
- GAs appointed by HO and considered independent contractors
- usually receive expense allowance to cover office-type expenses
- responsible for fin mgmt of agency
- Branch Office - agency mgr gets assignment from HO and directly supervised by HO in fin mgmt of agency
- difference between GA and agency manager has blurred
- Multiple Line (MLEA) and Home Service Agents
- usually exclusive relationship w/ HO
- MLEA also sell P/C products
- MLEA has much higher agent retentino rate than career agents
- Home service Agents - generally work in a debit (defined geog area)
- works in lower-middle income mkts
- all business is assigned to a servicing agent (eliminates "orphan" problem)
- commissions generally NOT vested to writing agent
Independent or Non-Agency Building Systems
- Brokerage
- mktg attempt to maintain relationships w/ producers whose primary affiliations are directed elsewhere
- usually do not finance, train, or house agents who represent them
- broker-insurer relationship - independent contractor
- many variations on brokerage - specialized products, substd business, etc
- brokerage supervisor - HO employee who contracts w/ brokers
- PPGA
- contracted similar to how brokers are
- co-employed regional directors (RD), MGAs (Managing General Agents) & direct contact via press
- RDs and MGAs authorized to appoint PPGAs
- PPGAs supply own office facilities
- receive tech assistance in form of computers and adv sales support
- usually have contracts w/ several cos
- cu usually has min prod req to continue to receive tech support
- Marketing Organization - co contracts w/ independent org to mkt its products
- Wholesaling - co produces basic product and producer adds fees or commissions
- Producer Groups - groups of high-producing agents agree to place min amts of business w/ a co in return for a share of profits
- usually through reins or stock options
Elements of Agent Compensation
- Overview
- major components: FY/RY comm, asset-based comm, bonuses, exp allowances, security benefits
- First Year Commissions
- expressed as combination of %FY prem, amt/polcy, amt/$1m, %CV
- usually just % FY prem
- often annualized & fully vested w/ chargebacks for early lapse
- Renewal Commissions
- rate of compensation (usually % of prem), pattern of comp, conditions fro payment can be fully, partially, or non-vested
- reasons for disparate nature of renewal comm scales
- competitive concerns
- regulatory constraints (ex. NY Section 4228G)
- desire to improve persistency
- direct agent's efforts in manner conducive to co philosophy
- conditions for payment of renewal comm
- renewal comm can be viewed as
- deferred 1st year comp
- reward for loyalty to co
- payment (reward) for persistent business
- payment for service to PO
- start toward a retirement plan
- Asset-Based Commissions
- aka trails
- % of acct value/cash value
- concept from stock/mutual fund world
- more common on annuities
- when on life, usually on UL/VUL products
- not a significant source of income for newer agents
- Bonuses and other Compensation
- bonuses focus agents attention on product profitability
- various bonus measures
- FY prem or commissions
- net FY comm
- total prems or comm
- persistency (s/t and l/t)
- # new clients or policies sold
- combination
- Expense Allowances
- usually a % of some mesure of slaes
- sometimes based on renewals/persistency
- used (in some cases) when agents pay some/all costs of office adn business expenses
- Security Benefits
- a necessary and important part of overall compensation for career agents
- includes live ins, health ins, dis, ret benefits, profti sharing, thrift or savings adn 401(k)
- sometiems includes deferred comp options
- covered under federal and state laws - OASDI, unemployment, workers comp
- benefits ~ 16% of agent earnings
- ERISA - probably biggest impacy adn most important - 1974
- other acts include:
- age discrimination - 1978
- TEFRA 1982
- DEFRA 1984
- REA 1984
- COBRA 1985
- TRA 1986
- OBRA 1987
- FAS106 - 1990 req'd co's to carry retiree benefit costs as liab on fin statements
- Salary Compensation
- usually restricted to new agents
- Differences Between Brokerage Contracts and Career Contracts
- career agent usually considered a stat employee adn receives a W-2
- broker compensation on 1099
- brokerage contracts - normally no provision for fringe benefits
- brokers commission schedules generally fully vested and pay rates generally below typical career agent
- Compensation for Internal Replacements
- common methods for determing first year comm on internal replacemnt
- % of full 1t yr comm where % increases based on dur of old pol, usually 100% after 10 yrs
- full comm on increased prem, reduced comm on rest
- difference between full FY and nwe and old
- full FY if new prem > 2x old prem, otherwise %
- full FY regardless
Levelized Commissions
- high front-end commission structures palce persistency risk w/ cos
- level com shifts much of that risk to agents
- aligning agents' interestes w/ co may be what is needed ot arrest churning of business
- problem w/ transistions to level comm structures
- increase in new agent fin cost since much lower early year comm
- transitioning existing agents from high FY to levelized
- Possible solutions:
- option to commute later year renewals to earlier years
- adding add'l comp to existing business during transition
- Two major challenges
- what will it cost to make this conversion
- will change produce overall favorable results to co
Estimating the cost of Agent Compenstation
- PC(n) - % of companies FY prem producted by agents in nth year of service
- O(n,t) - prob FY prem written by agents in nth YOS is from agents who will leave before policy enters year t
- O(t) - prob FY prem from agents who leave before business enters year t
- P(t) = prob prem fro year t will be paid
- P(t)O(t) - prob that in policy year t, prem paid and agent no longer w/ co
- r(t) - nonvested renewal comm as % of prem
- cost of nonvested newnew comm = sum(r(t)*v^(t-1)*P(t)*[1-O(t)]
- To calc O([n],t)
- l(n) = # agents entering nth yos
- w(n) = # agents w/d from service in yer n
- wq(n) = w(n)/l(n) = prob agent entering nth yos will w/d that year
- PRD(n,s) = FY prem produced by one agent during their nth yos who will leave in their n+s-1th yos
- O(n,1) = 0
- O(n,t) = sum(PRD(n,s)*w(n+s-1)) / sum(PRD(n,s)*w(n+s-1)) where first term is summed from s=1 to t-1 and second term is from s=1 to infinity
Financing the New Agent
- Overview
- fundamental purpose of financing - make up difference between income needed (on a fair and resonable basis) and income initially earned under co's std basis of compensation
- Degree of Financing
- depends on individual curcumstances
- Aptitude
- Preliminary Training adn Supervision
- Company and Agency
- Type of Commission Scale
- Annualization of Commissions
- Personal Circumstances
- Types of Financing Plans
- Advances - loans made against future comm earnings
- security against advances
- comm on all business produced during financing period only
- comm on all business, past and future, produced by agent
- all fo agent's assets, incl commission earnings
- rarely used
- Subsidy - aka Training Allowance Plan (TAP)
- payments, on a formula basis, in addition to comm
- Salary
- payments made in lieu of part (or all) of earned comm
- Validation Requirements
- Validation Schedule - contains production requirements necessary to continue agent financing adn/or avoid contract termination
- 3 basic factors to a validation schedule
- expected growth rate in agent production
- avg comm scale expected for financed agents
- avg persistency and modal mix of business sold by financed agents (usually on premium basis)
- need to know what to include/exclude from validation req
- intercompany mktg agreements
- subsidiaries
- non-insurance products
- efforts to reflect indiv performances
- salary plan that pay comm on sales > validation reqs
- shift from salary to subsidy plans
- subsidy plans that pay variable TAP based on performance instead of initial salary level
- some co's set up drawing accts to smooth out income fluctuations
- Variable TAP
- Advantages
- production driven
- agent experiences effect of production on income
- less costly
- Disadvantages
- income can fluctuate more than for experienced agents
- Fixed TAP
- Advantages
- income stable as production increases
- strong incentive to produce b/c comm paid
- Disadvantages
- high producers not rewarded proportionately
- production does not have to be smooth
- income can fall below income needs
- Line-of-Credit Plans
- Advantages
- income stable as long as acct cr/dr constant
- large fluctuations in prod may still yield relatively stable income
- fairly flexible by incorp adv from other types of plans
- Disadvantages
- agent could have decr in income after fin period b/c comm withheld
- production doesn't have to be smooth
- more costly due to development and admin
- Salary Plan
- Advantages
- Level income regardless of production
- additional payments if production > certain limits
- attractive to prospective agents
- easier for mgmt to recruit
- Disadvantages
- high producers not always rewarded proportionately - may cause retention problems
- costly if agents do not produce @ expected levels but continue on plan
- income may change considerably when agent goes from salary to comm
- requires close supervision adn strict adherence to validation scheds
- Estimating Financing Cost
- avg financing level
- validation schedule
- agent retention rates
- first year prems - estimates should include FY prems by agents who terminate w/in fin period
- persistency rates and modal dist (freq of prem payments)
- comm payments and subsidy payments
- "unvested" recoveries - agents who terminate normally forfeit normally vested commissions on business written during fin period
- "recoveries" normally subtracted from subsidy payments to determine fin costs
- example p.IV-22
- Field Management Cost-Sharing
- provisions for sharing cost and risk of fin new agent usually in GA's contract and now branch managers as well
- Basic approaches
- field mgmts share of the cost is highest in early part of fin period
- discourages hast recruitment and careless selection
- may carry marginal/failing agents until managers share becomes lower
- field mgmt's share increases during financing period
- mgr will continually evaluate prospects for sucess
- field mgmt assums full cost responsibility from point when agent's production falls below some minimum validation level instead of requiring termination
- Home Office Supervision
- agencies usually req'd to submitprogress reports on financed agents
- Evaluation of Financing Plans
- criteria for evaluating effectiveness of plan
- cost - ultimate excess of total payments over total comm
- investment - amt outstanding at any time
- simplicity of operation
- understandability
- degree of control
- correlatoin between benefits and agents performance
- dist of cost between co and GA or branch manager
- likelihood of co's new agents meeting validation schedule
- relationship of validation schedules to co's training porgrams
- financing plan is ont substitute for training, supervision and sales assistance
Elements of Field Mgmt Compensation
- GO or agency manager - vital position in co's mktg org
- many responsibilities incl
- recruiting/selection of agents
- agent training/development
- sales assistance and support
- 2nd line mgmt development
- business mgmt
- agency planning and admin
- agency mgmt pay partly income for doing job and partly reward for taking risk
- five major categories of risk
- development risk - associate w/ weighting various sources of business and productivity of source
- persistency riks - assoc w/ payment/nonpayment of renewal prems and conservation of assets
- expense risk - running the agency w/in certain standard for "controllable" expenses
- product mix risk - multiple products w/ smaller exp loading and profit margins
- time risk - delay between "virtuous activities" adn "result" that system rewards
- may also be stabilization factors adn deferrals which futher separate reward from behavior
- General Ageny vs Agency Manager Systems
- Theoretical Differences
- GA is indep dist adn therfore assumes greater business risk in return fro greater l/t reward
- 3 distinct types of GA contracts
- general agency contract calls for specific overrideg comm to the GA and provides separately for the soliciting agent's comm
- company pays comm to GA and PG pays to comm to agents - seldom used today in agency-building situations
- PPGA contract primarily a producer contract
- Personal Production
- regualar comm on personally produced business often not a substantial element of agency head's income
- agency managers historically viewed as sales managers w/ principal responsibility to increase sales of co's products
- expected to recruit/select/develop career agents whose perforamcne will help co achieve corp growth adn profit objectives
- Compensation Overview
- Salary - exclusive to managerial systems since inconsisten w/ indep dist philosophy of GA approach
- First-Year Overrides - motivate new sales
- most sytems place significant rewards on this component
- Renewal Overrides - usually paid in a GA system, less freq in a managerial system
- provides CF stability to a GA and incentive for persistent business
- Vesting - usually subject to vesting provisions that give GAs ownership of future override streams if they leave co
- originally intended to continue the return of invested capital after GA returned
- Service Fees - common in GA systems
- orig established to cover prem collection and certain service functions
- usually not vested
- Bonuses - do not usually vest
- aka leverage elements
- ex agency productivity, new agent organization, agency persistency, growth
- Expense Allowance/Business Management Factor
- GA pays all expenses (in theory)
- managerial approach - co provides agency office and support
- GA expenses generally lower since he makes decisions based on actual CF
- Sharing of new Agent Financing Cost
- loss-sharing assures better supervision and encourages more economical use of co resources
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Marketing for Actuaries (LIMRA) - Chapter V - NONTRADITIONAL AND EMERGING DISTRIBUTION SYSTEMS
Overview
- "nontraditional" for life ins is mainstream in France adn Spain
- high cost of fact-to-face selling by trad ins agents forced most co's to upscale mkt
- middle mkt co's either abandoned mkt or chosen diff dist channel
- nontrad dist channels by mkt
- Middle Mkt
- worksite
- banks
- direct mktg
- internet mktg
- Upscale Mkt
- fin planners
- mutual fund salespeople
- stockbrokers
- accountants (CPAs)
Nontraditional Dist Channels in the Upscale Markets
- many reps used to be full-time agents in traditional system
- Financial Planners
- negative perception of life ins agent - many got ChFC or CFA and advertise as fin planners/advisors/consultants
- objective: to become trusted advisor providing full range of fin advice
- growing number compensated on fee basis (vs commission)
- fees: unpront to develop a written plan or asset-based
- some states allow both fees & comm, some states say either/or
- few ins cos make fee-based fin planning a primary strategy
- potential liabilities, admin costs, potential conflict between independent advice and sale of proprietary products
- Stockbrokers adn Mutual Fund Salespeople
- VAs a natural extension b/c of tax advantages vs stocks/bonds/mutual funds/etc
- stockbrokers most significant source of VA sales
- not as sucesful selling life ins
- grid-based compensation systems - consistent w/ evolving needs of distributors & producers
- grid approach - gross dealer concession - gross dist margin
- Accountants (CPAs)
- enjoy high degree of respect and integrity in eyes of ins buying public
- clients good opportunities for 2nd-to-die life, annuities, and mutual funds
- traditionally good source of referrals
- if not selling themselves, expecting agents to split comm w/ them
- very influential in fin affairs of high net worth clients
Nontraditional Dist Channels in the Middle Mkt
- Worksite Marketing
- aka voluntary benfits
- mktg personal ins products to EE at their place of work
- products endorsed by employer that EE decides whether to purchase
- ER cooperation needed to initiate sales process and implemet payroll ded plan for EE prem payment
- insurers view as way to reach underserved potential clients in a cost-effective manner
- agents view as either primary or secondary mktg focus. For both
- provides daytime selling opportunities
- large prospecting list
- fresh "door opener" conversations w/ decision makers
- EE view
- discounted rates
- convenient, non-intrusive slaes process
- policy portability
- usually low min prems and guar iss/simplified u/w
- 3 ways to present and enroll
- agent (or salaried enroller) meets w/ EE 1-on-1 at work
- group settings
- payroll stuffers/direct mail
- account admin is most critical factor to determining effectivness and success of program
- depends on ability of payroll deduction
- systems must be able to accomodate w/o add'l ER expense
- pricing requires special knowledge and u/w assumptions that allow for attractive profit margins
- requires close monitoring of actual experience
- Banks
- increasingly important for annuities
- 3 main strategies for bank annuities
- licensed platform staff - specially trained bank employees
- in-branch (bank) agents - usually work for Bank's ins agency subsidiary
- third-party agents
- some mkt annuities through b/d or securities units
- some use direct mktg methods
- life ins sales not as sucessful as annuities < 1% total life sales
- reason for poor life sales
- regulatory constraints (eased by passage of GLB)
- u/w process an annoyance banks not used to dealing with (collecting blood, etc)
- planning for a negative life event vs savings for home or college
- banks used to transaction sales adn life ins not a transaction sale
- Compensation
- most bank producers paid base salary w/ some form of incentive
- banks hesitant to have sales force paid solely on incentive basis b/c of fear of agressive sales tactics
- since prospecting not an issue, don't need to compensate for that
- banks usually compensated by LIC via commission
- other methods
- expense reimb & allowance
- override
- lease paymenets for use of bank office space
- incentive for non-licensed bank personnel for lead generation
- Bancassurance in Europe
- very succesful in Spain (50%) and France (60%)
- Direct Mktg (aka Direct Response)
- uses one or more media to elicit an immediate and measurable response
- records, tracks and analyses that action
- stores info about action in database for future retrieval and use
- methods
- direct mail - tech allows to be highly targeted adn personalized
- print media
- broadcast media - select shows/times to hit target mkts
- telemktg - outbound and inbound (primarily to support other direct response media by processing responses)
- fax mktg
- retail centers and kiosks
- internet dist methods - own site or aggregators
- traditionally used for consumers not served by personal selling dist systems
- need only limited or supplemental ins
- live in geog remote areas
- need products not widely avail from most co's, agents, brokers
- need products whose comm potential is too small in relation to an agent's personal selling efforts
- Tarket mkts also includes indiv who can be easily reached b/c belong to special into or consumer groups
- company's own customers
- consumers who have prev inquired about a co's products
- consumers who have prev inq about another co's direct mktg offer
- members/vets of armed forces
- hold dept store or bank credit cards
- Credit Card holders and SR Citizens frequently targeted
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Marketing for Actuaries (LIMRA) - Chapter VI - MARKETING AND PRICING
Life Insurance
- Persistency
- Short-term Persistency
- generally measured using lapse rates based on face/# pols/prem
- # pols = # decisions to lapse
- prem - better measure on fin impact
- most common def of s/t lapse - policy that fails to pay 1st prem of 2nd policy yr (aka 13th mo) for reasons ofther than lapse/conversion
- early lapse rate stressed b/c
- fin impact on eraly terminations greater than later terminations
- early lapse primary indication of if business being sold efficiently
- early lapses most susceptilbe to chagne by direct co effort
- Long-term Persistency
- loss of older business significantly affects profits, div scales and current pricing
- Establishing Persistency Objectives
- consider effect of req'd effort on dist channels and on co fin results
- agents must allot their time between pursuing NB adn servicing old business
- keeping in mind potential monetary payback
- if measures to imporve persistency reduce expenses, but production inhibited to point where cost/unit actually increases, no fin gain has resulted
- Factors Affecting Persistency
- Income and mode of prem payment are major factors related to persistency
- MDB close to same as annual b/c of automatic nature
- buyer-related: higher than average persistency among
- older
- professional adn executives
- already own ins w/ same co
- insuring lives of juveniles/students
- initiating sale themselves
- Product Related: higher than average persistency
- perm vs term
- higher prem and/or acct value (cv plans)
- w/o policy loans
- u/w on med basis
- sold w/ insurability option
- larger PRD policies
- business vs personal policy
- issued as applied for
- sold w/ wvr in home service mkt
- Producer Related
- persistency incr as agent's YOS incr
- new agent terminators sell business w/ poor persistency
- positively related to agent's product knowledge
- persistency obnuses have intended effect
- orphans - good business lost b/c lack of contact
- poor agents selling poor business
- Sales Process Related - higher lapses when
- partial or no cash w/ app
- needs selling not employed
- agent stresses savings and thrift
- policies not deliverd personally to insured
- post-sale service not employed
- Related to Outside Environment
- persistency poorer during high unemployment and high int rates
- persistency improves when personal savings adn eff buying incomes high
- growing competition from competitive inv media incr replacements
- better persistency in mid-Atlantic and Norther part of US
- Replacements
- reasons why PO may consider replacing existing coverage
- reduced prems
- volume discount
- flexibility
- interest rates
- insurer's financial health
- factors to consider when determining if replacement in PO best interest
- FY acq expenses
- Increased prems
- Values in existing pols
- suicide adn contestable provisoins
- new-money plans vs Trad plans
- tax consequences
Annuities
- most same info as life
- Persistency
- measured using surrender rates based on contracts or CV
- SC relatively effective @ preventing surrender activity when in effect
- surr rates increase when charges expire (aka shock lapses) & tend to remain higher
- dist channel has major impact on annuity persistency
- SPDA shock lapse rates lowest->highest career agents/banks/ind agents/stock brokers
- Replacements
- reasons to replace annuity contract
- change of investment risk tolerance
- cost
- product perforamnce
- product features
Managing Persistency
- loyalty perspective - whole copmany perspective
- potential for quantum leap gains in persistency
- tweaking - relatively small improvements can have large financial gains
- financial incentives - sales reps and/or customer a persistency bonus
- compensation for persistency - reducing FY and increase RY comm
- continuous educatoin - educate PO about purchased products
- reduces risk of "escalator effect" - switch products to participate in recent performance of stocks/bonds w/o consideration to their risk tolerance or LT goals
Managing Replacements
- strategies to combat replacements
- aggresive pro-active measures by formal conservation unit
- computerized detection system to indentify internal replacements
- inform sales reps when policy about to lapse
- guidelines to sales reps to id potential replacement situations
- educational materials and sample letters for sales reps to use
- provide service to former sales reps who service policies
- compensate sales reps for high retention thru persistency bonuses, incentives, recognition programs
- do nothing - may be OK for some blocks, but may send wrong signal to field
- increase face for existing policy. costs s/b offset by improved profits
- decrease premium for existing policies. costs s/b offset by improved profits
- set up loan repayment program or exchange program for special cases
- keep product protfolio attractive and flexible
- selling good product reduces chance of replacement
- provide quality customer service
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Marketing for Actuaries (LIMRA) - Chapter VII - ILLUSTRATION AND DISCLOSURE
Competition
- consumer level - competing against otehr cos w/ similar products
- distribution level - compete for agents or other sales sources
- inter-industry competition - consumer savings and retirement dollars
- mainly focused on price comptetition adn disclosure regs
- price comparison - measures relative attractiveness of pols avail from diff cos
- policy benefit disclosure - informing prospects of structure of policy offered
- prems, CVs divs, options and supp benfits
- life ins is usually "sold" instead of "bought" - different from most consumer products
Cost Index for Price Comparison
- old std basis - net cost = sum prems for 20 years - 20 yr CV - illustrated divs
- 70s - suggesting int adj cost index
- slow acceptance b/c
- controversy over choice of new cost comparison system
- apprehension that emphasizing comparative costs might hampter selling and discourage prospects from buying
- failure to sufficiently recognize risks of buying needed coverage
- failure to sufficiently recognize the risks of delay
- feds started looking @ alternate indexes and spurred cos to react
- ind adj finally adopted by NAIC in 76
- myth: cost alone is basic comparison factor among ins products - int adj method perpetuates this
- doesn't help buyers assess appropriateness of product to their needs
- consumerists often forget that one of the benfeits for buyer is education and services of a professional agent
- efforts to improve quality and availability of comparative info ineffectove for several reasons
- failure by industry leaders (and actuaries) to recognize delay may lead to widespread buyer rejection of ins
- problems in comparing dissimilar policies - policy types adn company philosophies (new money vs portfolio)
- agent's ability to vary illustrations - esp int racditing rates
- actuaries who confuse illustrations w/ projections and reject any form of comparative analysis
- regulators and regulations that have not kept pace w/ products
Illustrations as Method of Comparison
- historically used to show effects of dividends
- b/c of external copetition, began using illustrations to show inner workings as comparison to external products
- tech alloed agents to produce illustrations on the fly
- if done on a consistent basis, illustrations provide valid comparison
- abuse of illustrations have caused may problems
Illustration Model Reg and ASOP 24
- NAIC working group indentified # of computer illustration problems
- inappropriate use of illustrations to estimate future performance and compare policies
- lack of accountability of any of the parties to the sale
- lack of standardized format fo rlife ins illustrations
- lask of std and consistent definitions, lang, assumptions adn methodology
- inadequate description of the policy
- consumers not notified of changes in current assumptions
- insufficient penalty provisions exist for disclosure violations
- current regulatory approaches out-of-date considering desings of poliices being sold today
- NAIC Life Ins Illustration Model Reg - app 1995
- provided for protection of consumers
- fostered consumer education by making illustrations understanbable
- provided illustration formats
- prescribed standards
- req'd disclosure in connection w/ illustrations
- created illustration actuary
- Illustration Actuary - certifies illustratoin based on ASB standards
- ASOP 24 provides guidance
- "Illustrated Scale" must be supportable (disciplined current scale)
- to appease regulators concerns over "bait and switch" scales (non-guar elements)
SelfSupport Test
- policy form should not be supported by another policy form or another source
- accumulated value of policy CF using disciplined current scale and underlying assumptions s/b >= illustrated PO valued for 15th anniv and every illustrated point beyond
Lapse-Supported Test
- req prohibits illustration of non-guar elements in poliicies deemed lapse supported
- req degined lapse-support test - used disciplined scale assumptions except years 6+ assume 100% persistency
- intended to insure that any persistency bonuses included in test
Illustration Assumptions
- disciplined current scale assumptions s/b based on actual experience to extent experience is current, determinable, and credible
- otherwise use actual exp/trens of similar blocks from
- same co
- other co
- other sources
- in above order
- major experience factors
- interest mortality taxes
- direct sales costs all other expenses persistency
- aggregation reinsurance changes in methodology
- model req defines min expenses w/ 3 option approaches
- approach must be used for all policy forms during certification year
- Fully Allocated Unit expenses
- Marginally Accocated Unit Expenses
- similar to fully but excluded corp overhead adn general adv
- GRET
- marginal only to used if > GRET
- GRET can only be used if > marginal (in aggregate)
- can always use fully allocated as minimum
- cannot project favorable trends into future
- Illustration Actuary needs to certify scale
- scale has not changed since last certification and experience doesn't warrant changes OR
- scale has changed since issue only to extent chagnes are reasonably consistent w/ changes in exp assumptions underlying current disciplined scale OR
- currently payable scale has been made less favorable to PO since last certification and change is more than current experience would necessitate
- Illustration Actuary should certify annually
- and for newly introduced forms before new policy form is illustrated
- certification should contain
- for business issued in last 5 years, if currently payable scale as been reduced since last cert for reasons unrelated to exp changes
- statement as to whether inconsistency between illustrated non-guar elements for new policies adn similar inforce policies
- statemetn whether illustrated non-guar elements for new and inforce pols consistent w/ non-guar element amts actually credited or charged to smae or similar forms
- statement as to choice of expense assumptions
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Marketing for Actuaries (LIMRA) - Chapter VII - APPENDIX I - MATHEMATICS OF COST COMPARISON APPROACHES
Int-Adj Cost Index
- 1/s(n|)*[sum([t]P(x)*(1+i)^(n-t+1)) - sum([t]D(x)(1+i)^(n-t)) - [n]CV(x)]
- P - prem, D - Div
- originally 4% in US, 5% in Canada, now 5% in both
- if i=0, Net Cost Index is result
- NAIC model REg Int Adj Payment index - same formula in book, but use 0 for yield
Actuaries Index (Canada)
Linton Yield Approach
- solves for a level effective int rate or yield
- compares a level prem policy to a term adn invest such that investement @ solved for rate = nth yer cash value
Internal Rate of Return
- commonly used w/ "leveraged" COLI policies
- only appropriate for sophisticated buyers
Basic Differences Among Cost-Comparison Methods
- Actuaries' Index is a "group-average" type adn other methods are "event-specific"
- "group average" - average cost to a group of PO
- main objection to "group avg" - employs probabilitys that represetn avg and therefore not applicable to many of the buyers who rely on the result
- main objection to "event specific" - likelihood of chosen event occurring is rather small
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Marketing for Actuaries (LIMRA) - Chapter VII - APPENDIX II - NAIC LIFE INS ILLUSTRATINOS MODEL REGULATION
Overview
- N/a to
- variable life
- ind and gruop annuities
- credit life
- life policies w/ no illustrated DB > 10k
- disciplined current scale - reasonably based on actuarl recent hist exp
- does not allow projected improvements
- does not allow assumed expenses < minimums
- illustrated scale - lesser of
- disciplined current scale
- currently payable scale
- lapse-supported illustration - disciplined current scale ecxept 100% persistency years 6+
- min assumed expenses
- fully allocated expenses
- marginal expenses (only OK if > GRET)
- GRET
- if no approved GRET, must use fully allocated
- self supporting illustration - accum CF >= PO value (CV adn other available amts) for 15th policy yer & all illustrated points beyond
Policies to Be Illustrated
- can't use an illustration prior to 1st anniv if policy form marketed w/o illustration
- if mktd w/ illustration, illustration must follow reg
- quotations for non-term group life: show sample age values <> illustration for purposes of reg
- but illustrated values must be consistent w/ illustrated scale
- basic illustration must be available to any non-term gruop life enrollee who requests it
- General Rules and Prohibitions
- labeled "Life Ins Illustration" adn contain basic info
- name of insurer name adn address of sales rep
- name/age/gender of prospect u/w/rating class illustrations base upon
- generic & company prodict name and form #
- initial DB dividend option election or application or non-guar elements
- shall NOT
- represent pol as anything other than life ins pol
- use or describe non-guar elements in a misleadaing manner
- state or imply that non-guar elements are guar
- use a non-compliant illustration
- use an illustration more favorable than reality
- provide an incomplete illustration
- represent that prem payments not req'd to maintain illustrated DB unless that is true
- use "vanish"
- use "lapse-supported" illustratino, unless prodcut has no non-f benefits
- use a non-self-supporting illustration
- int rate can't be greater than disciplined scale rate
Standards for Basic Illustration
- Format
- boat load of caveats adn supplemental explanations for anything not guaranteed
- have date prepared and page # of ##
- Narrative Summary
- brief descriptoin of policy
- breif desc of prem outlay
- brief desc of policy features/riders/options
- identification adn brief def of column headings and key terms
- not-guaranteed caveat
- Numeric Summary
- Pol years 5,10,20,AA70
- Policy guarantees
- insurer's illustrated scale
- "mid-point" scale
- divs @ 50%
- credited rates @ avg guar & illustrated
- non-guar charges @ avg guar & illustrated
- Statements
- one signed by applicant/PO
- one signed by sales rep
- Tabular Detail
- basic illustrations
- every year 1-10 adn 5th year thereafter
- any year premium outlay changes
- prem outlay and mode of payment
- guar db
- guar csv
- non-guar elements may be shown if described in contract
- must show at same durations
- must show 0 in guar column
Standards for Supplemental Illustrations
- must be associated w/ basic illustration
- can't show values more favorable than basic illustration
- non-guar caveat
- must include notice to look @ basic illustration
Delivery of Illustration and Record Retention
- copy if signed illustration attached to app
- revised illustration need to be signed if policy issued other than applied for
- agent must sign if no illustration used and illustration provided w/ policy
- signed illustration must be kept in file for 3 years after policy no longer in force
Annual Report; Notice to PO
- Illustrated policies must provide annual status reports
- UL
- beg adn end odate of report period
- pol value @ end of last and current period
- total amts credited/debited - by type
- current Db
- CSV
- loan balance
- lapse notice - if applicable
- Other Pols
- current DB
- ann prem
- current CSV
- current DIV
- applicatoin of current div
- outstanding loan
- if pol has no nonf values, only need to supply annual report when change made to non-guar elements
Annual Certifications
- Illustration Actuary - appointed by board of directors
- Ill Act will certify that illustrations in compliance
- Illustratio Actuary is
- MAAA
- familiar w/ illustration ASOP
- not been bad - from an illustration actuary perpsective
- disclose material changes in scales/assumptions
- disclose expense assumptoin
- certify policy forms annually adn before first use
- another responsible officer certified
- illustrations in use are ones Ill Act certified
- co gave agents info about expenses
- company will promptly inform when and why illustration actuary changes
Study Notes and Published References - Note CIA Education Note - INSURANCE AND ANNUITY ILLUSTRATIONS
Considerations
- professional responsibility of member to public - don't mislead
- familiarity w/ users and uses of sales illustrations - who are users and what is purpose
- determination of range of primary scenarios - ensure ranges are reasonable
- based on policies, practices adn expereince adn economic environment
- demonstrate reasonable sensitivity - pick an alternate scenario to demostrate sensitivity of policy to changes in experience
- documentation
Guidance
- historical results s/b adjusted for current factors
- ex Investment Income Tax, current tax law, current expense levels adn margins for profitability, compensation, etc
- historical results s/b adjsuted for unique/one-side factor
- impact of declining canadian $ on international inv yields
- temporary dividend enhancements
- co's intended management of product
- caveat that primary scenario is NOT prediction of results
- scenarios shoudl encompass all exp factory which might materially impact results
- caveat that alternate scenario is NOT worst case scenario
- info on variability of results
- also consider
- policy provisions
- company practice
- potential impact of illustration on PRE
- ease of implementation of new scenarios
- whether product is lapse-supported
- consistency between assumptions used in scenario
- consider product special features
- for par dividend scales, consider
- trends in inv returns
- compositoin of portfolio of assets
- investment adn div policies of co
- recent co experience on factors impacting div scale
- for UL consider
- guar credited rates
- LT avg of inv returns by major inv options
- availability and use of hedging fo rindex-linked inv options
- guar mort andtoehr charges
- int credited copared to cgross inv returns
- recent co experience which might impact spread
- for toher products
- recent adn anticipated experience in factors affecting results
Sources of Info
- co's valn report
- co's long range plan
- economic forcasts
- spot yield curves
- CIA economic statistics
- historical results as reported by organiztions such as S&P, Morgan Stanley, etc
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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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A copy of the license is included in the section entitled
'GNU Free Documentation License'.