PRODUCT DEVELOPMENT CAS Ratemaking Seminar, Tampa March 8, 2002 Kevin E. Kelso Vice President of State Operations Farmers Insurance Group

2 Industries are converging to support people’s activities Credit Banking Investment management Insurance

Larry Keeley -- Doblin Group

10 types of innovation 1. Business model How you get paid 2. Networking How you structure ownership. Finance 3. Core process How you add value to what you offer 4. Enabling process How you support the core processes 5. Product performance How you design your core offering 6. Product system How you enhance your core offering 7. Service How you stay connected with customers after purchase. 8. Channel How you get your offering to market 9. Brand How you communicate the offering 10. Customer experience How you integrate the entire customer relationship Process. OfferingDelivery 4

Computers & peripherals 5 Emerging standards, specialization e.g. PowerPC (IBM, Motorola, Apple), Zero inventory assembly Flexible financing e.g. FreePC, Gateway Your: )ware, Compaq leasing Networked organizations e.g. Dell paperless purchasing, Intra/Extranets Low-cost home PC’s e.g. Windows 95, Intel Celeron Technology-driven multimedia enhancements e.g. Intel 486, Windows 3.0, Adobe Postscript Going direct e.g. Dell, Gateway Country Stores

Innovation landscape: Non-life insurance 6 IT integration allows bundled services - Zurich Technology Risk Services - Cigna solutions and XL Risk solutions IT systems speed service and lower costs - Progressive's immediate response system - CT Mutual One Image paperless electronic forms Alliances open new markets and channels - car insurance through Thailand 7-11 Technology increasing direct channels First wave of consolidation for efficiencies of scale and global scope New channels reinvent the industry and make it more efficient - Direct Line bypasses the agent and sells by telephone

Comparing three sectors... Non-life insurance Diversified financials Securities 7

Larry Keeley -- Doblin Group Observations on Innovation Target the White Space Cross multiple dimensions Innovation can be systematized

Truly new products are rare “What is originality? Undetected plagiarism.” --Dean William R. Inge

Types of Product Development Coverage changes Product combinations Unbundling coverage/service New pricing approach Additional services Entirely new product

Sources of Development Ideas Competitors Distributors Customers Exclusions in current policies Alliance partners Serendipity (aka dumb luck)

Multi-disciplinary process Claims Underwriting Policy Processing Marketing Distribution Systems Billing Accounting Legal Pricing

What is the Actuary’s role? Could be anything, including team leader Minimum: –Consider ALL costs in setting rates –Compare with pricing of similar products within and outside your company –Ensure data will be available to measure performance –Understand the full context of the product

Because... “Pricing done in a vacuum usually sucks.” -- Kevin E. Kelso

Claims Hot Issues Is special expertise needed to handle new kind of claims? –Does company have this expertise? –Should you outsource, specialize internally, or train everyone? Will adjusters have access to coverage information at time of loss?

Distribution Hot Issues Any special licensing requirements? Are distributors already selling similar product? How does yours compare? What about compensation? How/when/who will train distributors on new product?

Most new products fail “I have not failed, I’ve just found 10,000 ways that won’t work.” --Thomas Alva Edison

How to minimize risk/cost? Depends on scope of the change For significant development projects: –Start with PILOT –Develop clear expectations –Measure everything –Evaluate and adjust based on results

Pilot Program Single state (preferably file and use!) Short duration (90 days) Limited distribution Mocked-up system/manual processes

Clear Expectations Number of customer contacts Number of quotes Number of sales Number of claims/utilizations THIS IS THE BIGGEST CHALLENGE!

Measure everything! Develop in advance method for tracking and reporting on all expectations Daily/weekly status reports Distributor feedback Customer feedback

Enough already! “I sometimes marvel at the extraordinary docility with which Americans submit to speeches.” -- Adlai Stevenson