Insurance product development: Innovating to win and retain customers

These days everyone is talking about the competition – how to beat them, join them or just stay the course. New ways to get ahead are becoming harder and harder to find, and for an industry that started on such a simple premise – for consumers to pay in advance for protection against harm – insurance today is an amazingly complicated business.

Increasingly, insurers are taking a closer look at new technologies on the market, and asking tough questions about how they can help drive growth and competitive advantage.  What technologies can I use to drive growth while ensuring compliance?  How can trends uncovered using business intelligence help fuel our future success?  And what about improving speed-to-market?

Automating critical parts of the product development and subsequent state filing process can mean the difference between winning or retaining customers and losing the race.  In her recent research note, “Early Signs of Interest for Product Innovation in Insurance,” Kimberly Harris-Ferrante, research vice president for Gartner’s insurance practice, notes there is “an increased awareness in product innovation among property and casualty (P&C) and life insurers. Focus is broadening to building new and creative products to enable differentiation, drive shareholder value, promote the brand, and seize new market opportunities.”

Unfortunately, an increased awareness alone will not cross the hurdles in the way of innovation in insurance product development.  The many hindrances include complicated state regulations, outdated processes and a lack of technologies built specifically to manage product development. These hurdles must be overcome in order for insurance companies to realize the many benefits of rapid product development and speed-to-market.

“Insurance products embody each insurance company’s understanding of the future,” writes Donald Light, senior analyst in the insurance practice at Boston-based research and advisory firm Celent LLC, in his March 2006 report detailing product development best practices. “As an insurance company’s view of possible gains, losses, risks, and opportunities change, its products must change.”

Putting it in perspective
Historically, there was little need for insurers to speed the product development or state filing process. Throughout the 1980s and ‘90s, product development was typically done on an as-needed basis. Most communication was via physical or “snail” mail.  New product specifications were conveyed to potential customers via in-person sales visits. And, the overall pace of business was slower without the 24x7x365 communication style of today.

Product development was a necessary cost of doing business, not a strategic initiative. As opposed to today where differentiation in terms of product features is important, during the latter part of the 20th century a soft market meant rates were more of a market driver than product features, and consumers purchased based almost entirely on price.

Back then, the product development process was anything but automated, consisting largely of meetings around tables, physical drafts of documents and manual changes. It was difficult to get all the appropriate parties together for a complete review of the product before the filing, and, therefore, input from a vital party was sometimes missed, resulting in costly mistakes, re-filing fees and delays in getting important products to market before the competition.

Regulatory challenges
Today, many insurers still struggle with manual, paper-based product development and state filing processes, and often, more time is spent managing compliance with state regulations than actually getting the product out the door. For insurance professionals with an eye on other industries, such as banking and financial services, this can be frustrating.

“The insurance industry is significantly more regulated than the banking sector,” said Edward Woods, an analyst in Celent’s banking practice.  “U.S. banks are required to follow federal and state regulation (rarely in conflict, but nonetheless, different), and to some extent, local interpretation of state regulation.  Like insurers serving institutions, the banking sector also shares concerns with its clients (e.g. Sarbanes-Oxley or ERISA).

“Both banks and insurers could benefit from process improvement for their product lifecycles (in particular through inception and launch),” continued Woods. “Insurers will very likely always be ‘slower’ than banks because of the more challenging products (e.g., adding the actuarial dimension to the product) and a more challenging regulatory environment.”

“The real question is how much they should invest in streamlining their product development processes,” Woods added. “Developing a new product in a day would be too expensive and doesn’t match the business need – but taking a year means missed opportunities.  The key at the front end is determining the right products and developing them for market entry as efficiently as possible. Investments in process improvement and removal of unnecessary bureaucracy make product development both faster and less expensive.”

Dan Trotter, Director of Rate Development and Filings at Bituminous Insurance, shares those sentiments. Based in Rock Island, Illinois, the property/casualty insurer specializes in workers’ compensation, general liability, commercial auto, commercial property and inland marine insurance. The company writes more than $400 million annually in direct premiums. Trotter says that, while all industries today face regulation by some type of governmental agency, such as OSHA or the FDA, few face the same challenges as the insurance industry.

“For example, when a new strip mall or housing development is constructed, all parties involved in the process from the purchasing of the land to its construction and ultimate sales/rental to its final occupants have certain regulatory requirements that affect their actions,” said Trotter. “However, only the insurance company providing coverage for all the varying risks involved for all the parties has their rates governed.  All of the other parties are allowed to charge based upon supply and demand, on reputation and quality of workmanship, on reliability, etc.”

“Numbers like a net profit after taxes of $63.7 billion earned in 2006 are tossed around by certain ‘consumer advocates’ as undisputed proof that the industry is overcharging its customers,” he added.  “Not mentioned is that this net profit was earned on $435.8 billion of premiums. That is a very large pie that this piece of profit is coming from.  And even though this $63.7 billion profit represented an industry record, the industry’s average return on equity still underperformed the average of all Fortune 500 companies.  Last year was only the third time in the last 28 years that insurance companies produced an underwriting income.  With over 3,000 companies domiciled in the United States alone, any company trying to charge an excessive price will not be functioning in its market for very long.”

50 states, 55 rules
In spite of an ongoing push for federal regulation of the insurance industry, each individual state or jurisdiction’s department of insurance (DOI) currently controls companies writing business within their borders. Some argue this is the best system, as it allows for those doing the regulating to be more familiar with local issues and concerns affecting consumers, companies and the industry at large.  Opponents of the state system of insurance regulation argue there is no uniformity in the process and companies doing business in all 50 states have to comply with a total of 55 different sets of laws covering all the jurisdictions within the United States.

Light believes pricing and product features will always be primary drivers for growth and profitability in the insurance industry.

“If and when a national charter becomes available (filing in one state instead of many), and/or principle-based regulation becomes the norm, there will be fewer regulatory hoops to jump through,” said Light. “But regulatory oversight will never disappear for insurance sold to individuals and small businesses.”

So, it’s not all sunshine and roses.  Once a new insurance product is developed internally, insurance companies must pay a filing fee and submit the product – along with all the appropriate rate information, correspondence and forms – to each department of insurance for the jurisdiction where the product will be sold for changes or approval.

“You have 50 different states all with different rules,” said Bituminous’ Trotter. “You have actuarial hurdles, heavily regulated competition, etc.  Insurance companies are dealing with more support issues, more numbers, more data.”

With multiple regulatory concerns, as well as market and consumer demands weighing into the process, product development in the insurance industry is not a quick or easy proposition.  However, even though many insurance companies are struggling through the process with outdated processes and technologies, the fault does not lie entirely with the insurance companies themselves.

The insurance industry is by and large self-governing, with the states aided and supported by the National Association of Insurance Commissioners (NAIC). As stated on its Web site, the NAIC’s mission is to “assist state insurance regulators, individually and collectively, in serving the public interest” in order to achieve “fundamental insurance regulatory goals in a responsive, efficient and cost effective manner.” The NAIC’s members include regulators working together to “protect the public interest, promote competitive markets, facilitate the fair and equitable treatment of insurance consumers, promote the reliability, solvency and financial solidity of insurance institutions, and support and improve state regulation of insurance.”

“I agree with the state system (of regulating insurance) even though a lot of people are pushing for more federal regulation,” continued Trotter. “The Federal Government has a poor track record when it comes to consumer protection. Even though I work in the insurance industry, I am an insurance consumer like everyone else.  Likewise, if an unfavorable change for any party is made at the federal level, everyone across the board is stuck.  At the state level, you can always make changes as to how active you want to be in that particular market. However, the states need to improve uniformity.”

Mary Jo Hudson, Director of the Ohio Department of Insurance, agrees with Trotter’s feelings.

“We’re trying to make sure responsible decisions are being made without getting in the way of companies being competitive,” said Hudson.  “We’re also trying to make it easier for companies to do their filings by working with the NAIC’s SERFF system.  Speed-to-market is a big priority for us.”

Technological improvements
The 1990s was the first time the NAIC realized the state filing system needed an overhaul and began working to streamline the process.  The System for Electronic Rate and Form Filing (SERFF) provides a cost-effective method for handling insurance policy rate and form filings and other communication between regulators and insurance companies.  SERFF enables insurance companies to electronically send rate and form filings, which the states receive, comment on, and subsequently approve or reject. By utilizing SERFF, insurance companies can avoid mailing multiple copies to all the necessary departments of insurance.

Advances, such as SERFF, have helped improve the speed of communications between insurers and regulators. Yet, insurers still face challenges when it comes to initiating product development, defining a product, reviewing the information and preparing state filings. “Insurance is unique in terms of its degree of regulatory oversight of pricing, product features, and sales and services practices,” explained Light. “While many other industries are regulated (securities, real estate, medical providers, etc.), none has this triple whammy.”

Updating processes & technology
Unfortunately, many insurers are stuck with rigid legacy systems not capable of supporting new product development. Rip and replace is an expensive proposition, so new technologies must be integrated to power modern product development demands.  Insurance companies must be able to track a new product through its various stages, ensure appropriate input is received, measure the time-to-market for a new product, and produce management reports to improve accountability.

“There are several kinds of technology that are important: legislation and regulation monitoring services, project management and collaboration solutions, and product design and configuration capabilities, either standalone or embedded in core systems,” said Light.

Utilizing an enterprise-wide solution to automate product development and electronically handle all information related to a state filing provides a competitive advantage. This type of solution eases speed-to-market and compliance woes by providing a centralized repository for all information related to a state filing, including forms, documents and activity history. Workflow-driven processes can virtually eliminate errors and omissions by ensuring that all required parties have reviewed the documents prior to sign-off.

The best solution for the job will include a regulatory knowledge database, containing the latest state regulations and bulletins, which can be updated regularly. Seamless integration with SERFF is another necessary feature, guaranteeing that insurers can submit filings electronically as soon as they are complete.  It gives accountability to filing and compliance professionals, providing status updates, management reports and measurable results.

Any automation effort should attempt to leverage and extend SERFF, giving insurers the ability to automate the entire process from research and preparation to submission of the filing.  Additionally, reporting capabilities are a priority as they enable management to track status, productivity, and time to market.

Steps in a successful product development process
The new millennium and the tragedy of 9/11 brought about hardening of the market and a true paradigm shift in the insurance industry. Suddenly new products were essential to gain or maintain a competitive advantage.  Product development became a business imperative.

Striving for speed-to-market is an admirable goal, but there are definite steps to product development in the insurance industry that must be handled, including:

  • Project initiation
  • Product definition
  • Review
  • Filing
  • Approval

The project initiation phase is typically when a project development team is chosen. Dates and benchmarks for the project are determined, and the project manager assigns tasks for team members to complete, and decides which parties are appropriate to consult for input on a new or revised product.  In an integrated, enterprise-wide environment, project initiation is completed on the desktop, giving the project manager a great deal of flexibility in determining the applicable workflow components and review process for each product.

During product definition, the product development team works to define the product specifications, and solicits input from other business units regarding the type of product and the target market, based on competitive pressures, regulatory changes or revenue demands.  Then drafts of the product are reviewed for preliminary approval. The parties reviewing the drafts usually include all applicable business units, plus staff members who must review the drafts prior to filing.

In an automated review environment, a browser-based interface allows underwriters, actuaries, lawyers, marketers and other insurance professionals to log in, share information, post messages to each other, and track the status of product development projects. Ideally, the collaborative workspace should resemble a Web form, ensuring ease of use for all parties. The point is not to reengineer the process of product development, but to automate it, thus ensuring it is done faster, and done right, every time.

Once internal approval of the product is received from all necessary parties, an insurance company’s compliance department begins to prepare the filing for submission to the appropriate states. Filing preparation includes completing state-required filing forms, including an explanation for each variable or item filed, along with a cover letter and state forms.

Ideally, an automated system should be fully integrated with SERFF, allowing all documents and forms to be submitted electronically with the click of a button. Bituminous Insurance is one company that has implemented new technology to integrate with SERFF and streamline the state filing process.

“It has helped us greatly,” said Trotter. “It has shortened our filing time, and we no longer have to play the mailing game where we mail to the state, the state makes changes and mails it back to us, and so on. We used to have to make multiple copies so that we had enough to keep in house and mail to all the right states.  Now I don’t have to sit at the copier anymore.”

Filing fees can be handled via check or electronic funds transfer (EFT). This accelerates approval, as some states will not look at a filing until they have received payment.

“EFT really saves time,” said Trotter. “When you can automatically wire transfer money, that saves a week’s worth of time on our end.  You’ve taken mail out, copy machine time out… You’ve probably shaved two-three weeks off just filing, and that means you can easily knock a month or two off the process as a whole.”

Once the filing has been submitted, the insurance company’s filing department must negotiate the filings as applicable with each individual department of insurance. When a state approves the filing submission, a filing approval notification is sent out to all departments, agents, and company staff who have been waiting to implement the product, and the process is complete.  An automated system that integrates with SERFF will allow insurers to send and receive notices from state DOIs immediately.

The payoff
There are benefits to a streamlined product development and filings process for insurance companies and customers as well.  For insurance companies, the most significant benefits include increased speed-to-market, reduced costs, improved accountability for compliance through a defined audit trail, and business process improvements that stem from efficiencies created when the product development process is automated.  The benefits for customers include access to the newest products in the marketplace that reflect market and world changes, demographic changes, and consumer needs offered at competitive prices.

Automating the product development and filing process means insurers decrease the time it takes to get new products to market and there is less time spent preparing state filings. Lower operating costs can be realized by reducing the amount spent on paper, printing and storage, and by decreasing the time spent on filings and preparing for market conduct audits.

“Take coverage endorsements, for example,” Trotter said. “Every form typically goes through the same process for review – underwriting, claims, marketing, etc. Now, once language is developed and agreed upon (for a product), I immediately have an electronic copy.  This really makes a difference when you are talking about filing for all 50 states. This way I am attaching it once instead of 50 times.”

Increased revenue opportunities are another benefit of getting products to market faster. Additional benefits include increased product integrity through a wide range of immediate, accurate management reports and status updates and streamlined market conduct audits with access to a centralized repository for state filings and associated documentation.

“The first insurer to market with a new product can gain an important competitive advantage,” said Trotter. “Increased brand awareness, responsiveness and other gains become associated with that company. But you have to be careful that the product you introduce or go to market with is fully developed and meets the state requirements. One misplaced word or comma can cause headaches on the back end or the claims side.”

Electronic filing and storage of necessary documents and data facilitates the compliance process for Bituminous.

“The bottom line is that in terms of typical filing and documentation, we’ve gone from an inch or two of paper to about 15 sheets, and we’re very close to eliminating these,” Trotter continued.  “We have a lot of interested parties, or parties with a stake in the process – states, underwriting, claims, discovery, accounting, actuarial, field personnel, Sarbanes-Oxley, rating systems.  We keep it in once place. We can house it there forever.  It’s all backed up, no more worrying about folder size.”

Conclusion: Innovating product development can fuel speed-to-market
In spite of the challenges, U.S. insurance companies are slowly realizing the benefits of automating product development and the filing process are worth the time and money involved in the change. However, Harris-Ferrante of Gartner notes “without a clear strategy and process discipline, few insurers will truly achieve product innovation.”

By automating product development and the filing process at Bituminous, Trotter indicates, “On a pure count basis, we’ve increased the number of filings we’ve processed by over 40 percent in just the last two years. …Since this information is in an electronic format, it is also much easier to run sorts and/or inquiries against this information than when it was in a cumbersome paper format. Because of the electronic format, another side benefit is that we’ve greatly reduced our physical storage requirements.

“Finally, I would say we’ve improved our communication and sharing of this information internally,” concluded Trotter.  “We’re able to create more meaningful reports and provide access to more people who benefit from it – hopefully leading to better decisions.”

Getting innovative with product development has enabled Bituminous to achieve true speed-to-market.

“Every insurance company does product development,” concludes Light. “And, to a greater or lesser degree, every insurer sees its product development capability as a contributor to its overall competitive strategy.”

Debbie Marquette is the Director of Compliance Solutions at Skywire Software.