There may be nothing new under the sun, but in the world of new products for the personal lines, carriers are certainly making it appear differently. The research and advisory firm Strategy Meets Action has released a report: Product Development: Insurer Plans and Priorities and the author, SMA partner Karen Furtado, discovered the problems that are plaguing carriers in this area and what they plan to do about it in the next three years.

The competitive challenges in the personal lines market—particularly personal auto—have created an upsurge in new products to the point where it seems like there is a new policy for each customer, according to Furtado.

“Look at something like vanishing deductibles,” she says. “That is part of a whole new wave of products. The sophistication behind the differentiation of the competition in personal lines is fierce. The variables are multi-dimensional in rating and personal lines are almost to the point of one-to-one rating.”

The competitive challenges mean that personal lines insurers have been forced to push the innovative and creative boundaries, according to Furtado. Unfortunately, the challenges are beyond what many insurance carriers can handle.

“There is a level of sophistication needed not just to develop [products] but to support them as well,” says Furtado. “I break down the product development lifecycle into product creation—the new innovative ideas—and product configuration—all the implementation work. We are trying to get a pulse on what lever is taking the most time and we found it was configuration.”

Insurers have spent a lot of time implementing changes within their core systems, explains Furtado, but legacy systems were not designed with the way the personal auto market has advanced with products such as vanishing deductibles.

“How do we understand the requirements and get it into a flexible system,” she asks. “External rating systems help, but more and more we see both policy administration and rating systems coming together and offering product configuration capabilities so the rate can be configured without the paradigm construct of previous policies. Today the questions are: Do you want a deductible? How do you want it to work? Before, the question would be: How do you want the deductible to work?”

It is not just the mainframe policy and rating systems that are struggling to keep pace, Furtado believes the client/server technology of the late 1990s is inefficient in this regard as well.

“Many of the client/server systems were built with modern technology, but there were older paradigms around what a product is,” says Furtado. “When you look at the technology side, you are starting to see some policy administration systems starting to address the verbiage. We have product development or product configuration engines. New entrants in the market have product configuration beyond the rating engine. Insurers are pushing technology to go to places they haven't been before.”

Insurers always want to increase their speed to market with new policies and the report shows there is reason for concern. The report lists the average implementation time for new products as 7.7 months with only 28 percent of new products implemented within 120 days.

“What is taking insurers so long to implement?” she asks. “If they are going to spend an average of 7.7 months to implement a new product and in this hypercompetitive environment, that is a long period of time.”

So, who has it easier in the ability to get a new product to market? Surprisingly, Furtado believes it might be easier for smaller tier insurers.

“What we found from our data is that those insurers that are at $1 billion to $5 billion (in direct written premium) have specialty lines books of business, so they have a lot of products,” she says. “They are well behind. They are taking 11.2 months to implement a new product.”

Furtado points out that it is difficult for a carrier to gain much traction from a new product if it takes more than half a year to reach the point where agents can actually sell policies.

“It takes from six months to over a year for over 80 percent of their new products,” she says. “They are the most challenged, typically because of the product mixes and the grouping of insurers that tend to be super-regional to small national carriers.”

The survey showed that Tier 4 insurers—with less than $50 million in written premium—are able to be more aggressive in introducing new products.

“They are the only insurers that can do something in less than 30 days,” says Furtado. “They are in fewer states and are not dealing with the complexity that larger insurers face. They are spread thin as far as what they offer, but they are getting there. They have to. A long timeframe to implementation would be a death march for them if they want to compete. Having good implementation times is critical if they are to be responsive and customer focused.”

New product development has been one of the sleeper areas in insurance IT budgets, points out Furtado. The report showed that 29 percent of insurance IT budgets is spent on new product implementation and the maintenance of existing products and the number will be going up significantly.

Fifty-four percent of insurers will increase project spending for product changes in 2013 and 70 percent will increase spending in the period of 2014-2016. Twenty percent expect to increase spending significantly (more than 20 percent) in that period.

“To go from such a flat [spending] number to almost 70 percent increase in investing in the future for product development and configuration is a huge jump,” she says. “We feel we were at a tipping point and the survey information certainly echoes that. There is a shift when we talk about what those systems will look like in the future and the requirements.”

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P&C Insurers Plan Major Spending Increase for New Product Development

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