What Does It Take To Be On The Cutting Edge In Life Insurance?

The life insurance industry is no different from any other industry that manufactures products for an end-customer in that it has frequent leading edge innovators, occasional leading edge innovators, quick followers, slow followers, and non-followers.

However, the insurance industry is unique, compared to most other industries, with respect to the speed competitors apply to catch up to an innovative product concept.

Why is this so? It would be an oversimplification to say all cutting-edge manufacturers rely on independent distribution channels (where product uniqueness can attract new distribution outlets–and retrain existing ones–to the innovator). After all, some leading-edge insurers do distribute through captive/proprietary distribution. However, those in the latter group tend to be fewer in number.

So, then, just what are the characteristics of life insurers in the leading-edge group? What makes them tick? Heres my assessment:

They have a healthy risk profile. Such manufacturers are willing to take the risk that a new idea will not succeed, for the potential payoff of a highly energizing product initiative. Nearly all have been forced to bounce back from new product initiatives that have failed. But while no life insurer wants to experience a “New Coke” product launch, the strong ones can (and do) learn from mistakes and move forward.

They have a product “value-added” approach. Many great theoretical product ideas should have stayed in the Home Office because there was no solid value proposition behind the innovation. The strong, creative developers look for designs that solve a real policyholder or sales rep problem, be it enhanced liquidity, retirement income, taxes, commissions, etc. Such insurers do not develop “solutions looking for problems.”

They have administrative and servicing flexibility. The strongest innovators have either well-constructed systems development and service capabilities, or else a “make it happen” mindset among the personnel of those departments. They know that truly innovative ideas will always challenge existing processes, structures, and comfort levels, but they wont let internal roadblocks (related to traditional ways of doing things) derail the potential rewards of the new ideas. They also allocate ample resources to overcome critical path issues.

They are willing to recognize regulatory limits. Innovators are respectful of existing state, federal, and tax regulations, but recognize that regulation nearly always reacts to innovation, and rarely precedes it. Their approach is: An enhancement or feature that offers customer value at a reasonable price with clear disclosure and manageable risks should be permissible, whether explicitly allowed under existing regulations or not. They work in partnership with regulators to enable such products to emerge.

In the past, the life insurance industry has displayed significant innovation. Examples include the debut of universal life, variable products, preferred risk classes, guaranteed death benefits, survivorship products, and so on.

Yet there is plenty to room for more innovation in the future. See the chart for some ideas where significant potential exists.

Product innovation is a way of life in the insurance business. The truly creative carriers are willing to take risk, invest in enabling infrastructure, seek to solve real consumer/distribution needs, and work to overcome regulatory barriers.

Timothy C. Pfeifer, FSA, MAAA, is a principal at Milliman & Robertson, a Chicago actuarial consulting firm. His e-mail is tim.pfeifer@milliman.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, December 10, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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