Product Portfolio Strategy: How well does your product portfolio align with your business objectives
Grow your company’s revenue and earn reasonable levels of net income – these are pretty straightforward business objectives. Attaining these objectives continues to be more challenging in the insurance industry. Several items are pulling management teams and company resources in various directions; often resulting in a reactionary position as one balances financial, market, operations and compliance objectives. Are the current actions you not only reacting to what is in front of you but also moving you toward your long-term goals?
Consider how your company is dealing with many of the following:
Low investment returns,
Newer regulations (CSO 2017, PBR, cyber security, and ACA to name a few),
Insurtechs and product incubators introducing new products and purchasing models with some success in disrupting certain market segments,
Legacy administration and collateral systems nearing end of life,
Improving customer experience through investments in digitalization and customer self support tools,
Consolidation of IMOs/BGAs reducing your distribution footprint and/or increasing sales compensation, and
Increased attention by regulators and rating agencies on enterprise risk management.
Decisions to update or expand products should not be made without consideration of implications across all internal and external stakeholders. Likewise, often there are significant decisions made for sales, operations, systems, risk management, and financial performance that will have an impact on product performance. Having and managing to strategies for your product portfolio will create thought leadership to improve performance financially and operationally.
To illustrate, this let’s consider a hypothetical insurance company (SP Life) that has for several years derived most of its revenue from the sale of single premium whole life (SPWL) products. Sales continue to grow but profit margins are declining. The profitability of SPWL is very sensitive to the investment yield rates at time of issue. SP Life has not re-priced the SPWL in over 7 years. Comparing to typical time pay life products, SPWL generally has lower net amount at risk at issue, expected net profits by duration front loaded, and negative cash flow in renewal durations.
Moody’s, Moody's Seasoned Aaa Corporate Bond Yield [AAA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/AAA, August 17, 2019.
Corporate bond yields are down significantly in the most recent 7 years, including reaching the lowest level since the 1950s during this past summer. If competitors adjusted premium rates as yields declined during the most recent years, then SP Life sales were enhanced, as rates appeared more competitive in the market. Suppose as the profit margins declined due to declining yields, SP Life managed profits by focusing on expense reductions and limiting investments in automation to improve customer support and engagement.
The de facto strategy became having one of the most affordable products in the market supported by traditional manual processes. It was successful in growing sales, but at lower than desired profits. Suppose SP Life were to adjust the premium rates on the SPWL products to be in line with competitors in order to achieve a desired return on equity closer to what was intended when last priced? Without the robust servicing tools typically offered by the competitors and now with more moderate pricing, SP Life lost its competitive edge without having an alternative competitive value proposition focused on best in class customer experience. Sales will begin to drop off after such a change.
In this simple example there are several potential negative impacts to distribution relationships, cash flow, investments, expense levels, and cost justification of future technology; resulting in more challenges to grow revenue and earn the desired profit levels. Further, rating agencies will probably scrutinize the negative trends, underperformance of product lines and adequacy of the ERM.
Understanding the strengths and weakness of each of your product lines should be discussed as you develop the future direction and objectives. How will results be impacted by meaningful changes in macro factors such as investment yields, mortality and/or morbidity, regulations, taxation and competitive landscape? What are the strategies to maintain your direction given scenarios with various macro assumptions? Would you rather make smaller adjustments to products and pricing to maintain progress toward your long-term objectives or fewer more dramatic changes?
Performing a comprehensive level of thought leadership around your product portfolio will facilitate improved strategic planning and responsive actions leading to an increased ability to achieve your revenue and profit objectives.