What is a product?

One  can say a product is a good, service, or idea consisting of a bundle of tangible and intangible attributes that satisfies consumers and is received in exchange for money or some other unit of value.

The organizations that are production-oriented look at a product basically as a manifestation of resources used to produce it and the organizations that are marketing oriented view a product from the target consumer’s perspective as a bundle of benefits by benefits I mean to say functional as well as emotional benefits.

Accordingly they will have to see how their consumers view their products. Most of the organizations have realized that there is no need to prepare a marketing mix for a product that offers few consumers benefits, because that product will not sell.

One have to consider the product from the target customer’s perspective. In insurance also product must be designed keeping into mind the target market segment.

The target market will  respond positively, if the insurance product appeals their needs. Similarly  the cosmetic companies are combining chemicals to make lipsticks, vitamin manufacturers produce little pills, watch makers produce mechanical devices that keep time. -What are marketers doing they are basically enhancing their products for their target markets-as lipstick has becomes beauty and hope, vitamins become hope for a healthier life and watches become status symbols?

So we can say that a product therefore is a bundle of physical, chemical and / or intangible attributes that have the potential to satisfy present and potential customer wants. In addition to the physical Good itself, other elements include the warranty, installation, after sales service accessories and package.

A customer buying an air-conditioner and a maintenance contract from Carrier Aircon is buying a different product than another who buys the same model without the maintenance agreement. Now lets discuss the levels, that are present in a product

What is a insurance product?

A customer buys insurance to protect against property loss or financial risk. The actual insurance product takes the form of a policy binder which states all the terms and conditions, including an overview of what events would lead to a claim payout.

Insurance products include a wide range of solutions. Common insurance products include home, auto, life, health, dental, mortgage and asset protection. Products can also be customized for various purposes, including to protect professional athletes from lost income due to injury. The costs associated with the purchase of an insurance product are often called premiums or insurance rates. Paid in periodic increments, rates are determined based on a variety of risk factors that affect the likelihood the insurer would have to payout, as well as the coverage amount

Why insurance companies needs new product?

Insurance companies throughout the world are constantly looking for new areas to sell insurance. For instance, many are now insuring specific types of deaths (i.e. cancer-related, Parkinson’s, etc.). Even non-insurance companies practice this behavior.

Cell phones companies offer “cell phone insurance” for customers who worry that their phone may become damaged or lost. Several things must be in place before launching the new insurance, and pricing is among the most important.

A primary objective for a company introducing a new product is to increase their after tax income. To achieve that objective, companies must charge the appropriate price for their product. This is one reason insurance companies employ actuaries, in order to create optimal prices for certain policies and readjust them as certain factors change over time.

The assigned goal of this project was to create a new insurance product and determine how to price the product. Developing rollercoaster insurance, which provided many challenges and obstacles, was chosen.

The product is designed to provide parks with financial security when injuries occur on their rides. In personal injury cases, plaintiffs often ask for incredible settlements which put defendants in a huge financial hole. Few companies can afford a multi-million dollar injury settlement, including amusement parks.

A major accident has bleak short-term consequences for the park:

• Attendance drops because people are overly considered about their safety.
• Profits shrink considerably because of injury settlements and legal fees.
• The ride on which the accident occurred maybe shut down for an extensive amount of time due to repairs and constant inspections, which is costly.
• The media gives the park negative publicity.

The product would ease the financial consequences of an accident, so the amusement park operators can focus on other things (i.e. media relations). However, this protection is not being offered because of decency; it is to make a profit by selling policies as many as possible. Pricing is important as customers very sensitive to costs.

To price accurately, several factors were accounted for. Intuitively, it was assumed that roller coasters are different in some aspects, such as speeds and heights of a roller coaster; hence that was taken into account.

It also became apparent that no single pricing method would make all customers happy, which meant the model had to make sense. A huge factor that was brought to our attention was the difference between insuring an injury and a death. It was estimated that a significant injury (i.e. a broken arm) would result in a normal figure claim, whereas a death claim would be seven figures. The rest of the report will show the specific types of problems encountered and how they were solved. In the end, a price function was created that should seem fair to all parties involved.

Classification of new products

The new products introduced in any sector are classified into two groups:

• New products that arise from technological innovations: These are the products that have new functional value.
• New products that arise from marketing oriented modifications: These are the new versions of the existing products. The products may look new because of some changes in the existing product design, adding a new feature to the existing product, presenting the existing product with a new sales strategy to a new market segment.

Stages in new product development in insurance

Stages of product development differ from one company to another. Generally, product development is carried out at the top-level management. The different stages of product development are:

 

1. Generating Ideas – While developing a new product, the main challenge is to avoid mistakes and reduce risk. Before developing the product, the company should conduct a formal market research. This can help get some ideas on the customer needs and thus, develop the product accordingly. The different sources of information are customers, product development executives, consumer groups, intermediaries, legal pronouncement, employees, journals, magazines, and so on.
2. Screening Ideas – After generating the ideas, screening of those ideas take place. The evaluation committee must screen the product for its objectives, policies, and so on. All the ideas need not be thoroughly followed. While screening the products, it is better to determine the following:

 

 

• Is the new product an improvement over the existing product?
• Is there any need for the new product?
• Is it in the same line of business or different from the business?

 

3.     Concept testing – This is the third stage in the process of development of a new product. In this stage, the product concept is tested. It is a function of customer market research. It tests whether the customers have understood the product idea, whether they have interest in the idea, whether they need the product, and so on. This testing helps the company to make the concept of the new product clear.

4.     Business analysis – This stage of the product development life-cycle helps in designing the product based on the market analysis. It indicates the customer interest in the product, and thus helps in deciding whether to proceed with the project or not. In this stage, the impact of the project on the financial position of the organisation with and without the new product is compared, and calculated. While comparing and evaluating the products, different departments of the organisations have their own responsibilities.

5.     New product development – In this stage, the elements of the products are identified and highlighted. The prototypes of the products are developed in this stage, and after their approval, the actual product is developed. At this stage of product development the organisation is generally committed to the new product.

In the development of the product, the production and marketing departments of the organisation are also actively involved apart from the research and development department.

6.     Commercialisation – In this stage, the organisation releases the product to the market. Insurance companies distribute their products through various channels including banks.

Developing new product is time-consuming; it involves risks, and is expensive. New products have a high attrition rate due to the following reasons:

 

• Many new products do not even reach the market at all, thus wasting considerable amount of money, time and effort.
• Some products that manage to reach the market after many years of development, also fail some time.
• Some products are successful only for a short period of time. They soon lose their initial boom.

 

Therefore, for a product to be successful, it has to have an exclusive and better idea that fulfils the customer requirements and yields benefits. It should have a powerful production expertise and a good marketing strategy.

Product design and development in insurance

Product design and development is the basic responsibility of the management of any company. Insurance policy innovations developed when competitive forces and customer demand encouraged the companies to propose attractive alternatives.

The standardisation of insurance contracts in property and liability leaves a small place for new product development. The other factors that influence the new product development are the changes in regulations and environment. Before introducing any new product, there are some points to be considered, like, nature and size of the market, legal and regulatory problems, predicted responses and competitions, start up cost, promotion and advertising, pricing, underwriting, expected losses, production, distribution, planning etc.

Product development process in insurance

Any business organisation faces problem due to the threats from the environments like political and economical conditions, social, technology and supply conditions, changes in client requirements, and so on. The clients ask for better products and services. They seek more benefits in the products they buy, and more value for money. In addition to this, competition is another threat-causing factor. In order to overcome these threats and fulfill the customer requirements, business organisations have to develop new products. The new products provide new opportunities for the growth and security of the organisation.

The new products are also needed to ensure profits to the company. The products that already exist have some limitations in improving the profit level of the organisation. Therefore, it is very important that the organisation introduce new products to substitute the old, declining and losing products.

Thus, the new products become a part of the growth requirements of the organisation, and yields profits to the organisation. Therefore, new product development is an important part of the product policy of any organisation. For an organisation to grow higher, it has to go beyond the existing product as it cannot obtain its desired growth just by appraising the existing product appropriately.

Pricing strategy for new products in insurance

After the new product is developed, it is essential to price the product before releasing in the market. Therefore, it is important for insurance organisations to have an efficient pricing strategy. Pricing new insurance products is an important phase in product development process.

Pricing a new product of insurance is quite difficult, as there are no previous versions of these products. Thus, there is no data on the possible market reaction for this product and the probable demand rate of the product. So, demand-based pricing is not possible. Competition-based pricing is also not useful while pricing these products, because the customer compares the product only after it is released to the market.

Cost-plus pricing strategy may be difficult, as the research and development cost may have been shared among different products while generating ideas for new products. Therefore, it is difficult to assign the cost for a particular product. Pricing of the new insurance products includes four steps:

 

• Drafting a pricing strategy.
• Actuaries testing.
• Rate setting and testing.
• Managing of pricing outcomes.

 

Product design and development by insurance companies:an area of focus

One main issue in the liberalised scenario of the insurance sector is in the area of developing new products. Constant activity in this area is very important for determining the overall profitability, and growth of any insurance company.

The main reason for the liberalisation of the insurance sector is that it the public sector was not practical in the process of developing products that satisfied the needs of the customer.

Product development process is an important process for an insurance company. Developing insurance products include the following steps:

1.  Customer requirement analysis – In the first step, the customer requirements are analysed. In this phase, the information on the amount to be insured, total income, client biometrics such as age and family size, current purchasing habits, and so on are analysed.

2.  Business analysis – In the business analysis stage of product development, different departments of the insurance company have the following responsibilities.

 

• Marketing department has to perform the market analysis to know the customer needs, and make a forecast for sales.
• Underwriting department has to prepare the manuals.
• Customer service department assesses the procedural requirements of the new products.
• Actuarial department develops the specifications of the product, and the resulting impact on product portfolios.
• Accounting department reports the financial requirements of the new product.
• Information systems department checks whether the insurer has enough operating systems to accommodate the new product or not.
• Investment department along with the actuarial department determines the investment needs for the new product.

 

3.     Prototype development – In this step, a prototype of the product is designed and testing is carried out.

4.     Pricing the product – The pricing of the insurance products plays an important role in the design and development of the product. The price of the product should include the risk premium that the insurance company needs for accepting the policy, and the cost for distributing and administering the product to the client. The policy price that is charged to the client includes the risk premium and the cost of the distributor.

5.     Product release – This stage is called as the ‘technical design stage’. It involves creation of drafts for policy documents, commission structure, underwriting, forms and procedures and issue specifications. Before the product is released to the market the insurance companies have to take care of the following:

 

• Arrangement of training material.
• Designing promotional materials for the products.
• Releasing all the information that is needed to understand the product.
• Administration of the product after release.
• Complete policy filing, the process by which the organisation obtains all the regulatory approvals from all the applicable authorities that are needed to release the product.
• Educating and training the staff and the sales agents on administrative procedures and forms that are needed to sell, administer and service the product.

 

The environment in which the insurer functions inspires its product development. This comprises of the legal framework which the insurance industry has to follow and social and economic factors. Any stage of product development has to be carried out in accordance with the customer’s interest.

Thus, since 1973, the Indian Insurance sector has directed the product development towards meeting this goal. In the last three decades, the General Insurance Company (GIC) together with its four subsidiaries has developed 150 new products, and has met its customer requirements.

To control poverty and provide employment in the rural areas, the insurance sector developed the Integrated Rural Development Program (IRDP).Besides this, the industry developed a solution for the healthcare products like mediclaim and also introduced travel-related products.

Defining the product

While designing the product, we must follow some steps for defining the procedures. These steps are:

 

1. In the first step of the design process the managers plan and identify the research objectives. They also verify the consistency of these objectives in all the national market.
2. In the next step the aspects of the procedural operations to ensure the consistency in the process of data collection is defined.

 

The other points to be considered while defining a product are:

 

• Incorporate study control – All external factors must be thoroughly investigated, so as to minimise their impact on the end results.
• Counting the cost – The market analysis, the actuarial research and the competitive research help in determining the cost of the product.
• Premium rating and product design – To compete in the competitive market, it is essential to know the increased customer demands, improving the product design, bringing in new marketing strategies, releasing the product on time, and so on. Superior premium ratings and the ability in responding quickly to the changing market needs help in meeting this problem.

 

Analysis of the market

This is an important stage while designing a product. It helps in identifying the customer needs and the nature of the market. It includes calculating the present market size, establishing the products and the rating methods that are used in the competition, understanding the market needs and profitability, investigating who decides to buy which product, determining the basic reason for buying the product, advising the effective method for sales and distribution by comparing the advantages of the different distribution methods.

Analysis of data

The actual premium rating is based on the collection of the relevant data in a proper format, and its analysis. The insurance companies can address this issue, by giving an advice on the design database, and the collection of statistical information.

The following steps need to be implemented while analysing the data:

 

• Consider the possible effect on the collection of particular rate changes.
• Analyse the claims that are experienced to know the effect of rating factors on the risk.
• Carry out sensitivity analysis.
• Compare the theoretical results with the existing rating structure and understanding the results.
• Provide financial forecasts on the future results depending on the premium rates that is calculated.

 

The product itself

Insurers are constantly developing new products on the basis of advanced ideas. They have to constantly develop the new products, keeping in mind the new challenges of the society. The insurance products promise the service even in the occurrence of a particular threat operating on a risk.

There are only a few products developed on the basis of new market requirements. Developing a standardised product is cost effective, faster and obtains economies of sale in mass selling. Insurance companies have to develop suitable products, verify price properly and increase profitability.

As it is not possible for a single policy to meet all the insurance objectives, the insurance companies should have a collection of policies that covers all the needs of the customer. With the product life-cycle of the insurance product weakening, either the product lifecycle has to be extended by improving the existing product or a new product has to be developed to fulfill the customer requirements.

Some insurance companies have launched many new insurance products recently. The table 9.1 lists these products and their features.

Intermediaries

In the insurance industry, distribution is an important link of value chain. The insurers are finding it difficult to do away with the distribution even in this technology-based generation. Intermediaries act as the important link between the insurer and the insured.

Insurance intermediaries are the brokers and agents who represent the insurance company. Market is going to come across the appearance of intermediaries in developing business and servicing clients. The intermediaries bring innovative marketing practices in the insurance market.

Product design in emerging  insurance scenario

In India, insurance is not bought, but it is sold. The agents or the insurance intermediaries use different strategies to convince the customers, and sell the products. Therefore, the insurance companies have to bear in mind the need of the customer while developing the product, and also while pricing the product. While developing a product in the initial stages, around 80 percent of the cost is determined.

Thus, if the insurance companies take a wrong decision at this stage, the cost of the product will be too expensive. Involving the research team in the discussion, during all the stages of project development, helps in obtaining maximum advantage in the design process.

Policyholder expectations

Identification of the needs of the customers acts as a stimulant for the improvement of the product. It flows right from the process of analysing the customer needs.

This includes the analysis of the economy, and the main moves in the economy, which affects the business environment either directly or indirectly. The moves or changes in the economy are due to the changes in choice and activities of the customer, changes in the demographic profile, and changes in the environment and expectations.

Identifying the policy holders’ expectations helps in getting idea for initiating the development of new products, helps in converting the knowledge into products, which helps offer value for customers.

Generally, when new products are developed, the old products are subjected to some changes; whereas in insurance, when a new product is developed, it does not change the old product, as the basic needs of the customers cannot be ignored.

There are many examples in the market where the old products continue to serve the target market, and at the same time the new product is developed based on the market requirements.

Role of technology

The introduction of technology in the insurance sector has improved in the development of the industry. Product development can be improved by making use of new technologies together with the environmental factors in order to make the entire product development process a continuous one.

The present day insurance companies have to meet the needs of the customers in a faster way as there is a lot of competition among the insurance companies. Therefore, technology plays an important role in the process of product design and development.

Use of technology as a tool for distribution is presently in the emerging stage, but there is a great possibility that it provides a stage for the development of cost-effective products. In future, we can use the technology for creating new and value for money insurance products. The advantages of using technology can speed up the services and reduce the cost distribution.

Conclusion

Product development process is an important process for an insurance company. Developing insurance products includes many steps. In the first step, the customer requirements have to be analysed. In the next step, a prototype of the product is designed and a testing.

The new products introduced in insurance sector are classified into two groups:

 

• New products that arise from technological innovations, these are the products that have new functional value.
• New products that arise from marketing oriented modifications, these are the new versions of the existing products.

 

The different stages of product development are:

• Generating ideas.
• Screening ideas.
• Concept testing.
• Business analysis.
• New product development.
• Commercialisation.

After the new product is developed, it has to have some rate for it to be released to the market. Therefore, the pricing strategy for new insurance product is an important phase in product development process.

One main issue in the liberalised scenario of the insurance sector is in the area of developing new products. Constant activity in this area is very important for determining the overall profitability and growth of any insurance company. While developing a product in the initial stages around 80 percent of the cost is determined.

References : Various Sources

By: Dr. Ashish Barua, Former Associate Professor & Officiating Director, Indian Institute of Rural Management, Published in “Life Insurance Today” October, 2012