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Rapid Product Innovation


By Sanjaya Kumar, Muthu Subramanian and John Streatfeild
This article appears in the SETLabs Briefings Special on ‘Insurance: Powering Modernization‘ (April 2007).
Read the complete issue

Leveraging current investments in product innovation is the key to improve time to market dynamics

The time of stable product portfolios is long gone in the insurance industry. As with other industries, insurance is being forced to respond to every changing demand from distributors and customers. Retooling the internal operations of a company to support these new products is proving to be increasingly difficult, time consuming and costly - but very necessary. The technical capabilities that enabled insurance companies to achieve growth and increased efficiencies are now proving to be major inhibitors in this time of rapid change.

In the "good old days" when companies relied on a single and relatively simple back office system changes were easy to make, test and move to production. Now with multiple and very complex back office systems with their plethora of interfaces and interdependencies, making a change in one system can have multiple and unforeseen consequences across the enterprise - and this is assuming the carriers can determine where to make the change in the first place.

Insurers have always been aware of the importance of new product launches and their effect on their sales and profitability. Carriers refresh their product portfolio by either adding new products or enhancing existing ones to meet market demands. They also discontinue offering non-performing products periodically. It is important to note that in the insurance industry this does not eliminate the need to continue to fully support older contracts. It is this constant cycle of adding new products while continuing to support old ones that has been a major contributor to the complex environment insurers find themselves in, today.

While most experts agree that the demand for new and creative products is only going to intensify, the ability for insurance companies to cost effectively respond is diminishing. It is in this context that one has to explore new and innovative techniques to new product introduction.

BUSINESS DRIVERS FOR PRODUCT INTRODUCTION

Customer Demand: Competition in the insurance marketplace has raised the level of awareness amongst customers. Their expectations now are very specific and the choices before them are plenty. Customer demographics are also changing. The earliest of the 77 million baby boomers turned sixty in 2006 [1]. Insurers need to cater to the diverse demands of the post-retirement life of this economically active group. At the other end of the spectrum, the discerning young generation's needs and expectations are dramatically different. Many economic factors - such as stock market performance, interest rates and inflation etc., contribute to the rapidly changing customer needs.

Pressure from distributors: The demands from distributors - especially the successful ones - are increasing. Distributors needing to differentiate themselves in the marketplace expect insurers to develop and market distributor-specific products. Additionally, distributors are looking to increase their client's wallet share by offering additional products to address perceived gaps in coverage or investment needs.

Pressure from competitors: Insurance companies are being pressured by both insurance and noninsurance financial services competitors. As new product offerings from innovative insurance companies gain traction in the market, other companies feel the pressure to quickly copy. To prevent non-insurance competitors from gaining further market share, insurance companies develop products to take full advantage of their unique tax and protection characteristics. This mounting competitive pressure makes it imperative for insurance companies to keep a close watch on the market and more cost effectively and rapidly implement new insurance products.

Regulations - the moving target: Insurance is a highly regulated industry that must constantly review and adjust its product offering to assure compliance. In addition, changing regulations often represent new opportunities to the aggressive and innovative carriers. Regulations impact every aspect of the product design and development process - from product filings, rate approvals, regulatory reporting, tax treatment, disclosure, etc. In the life insurance industry, many regulatory initiatives - like the American Council of Life Insurers (ACLI) - proposed Optional Federal Charter (OFC), the Interstate Insurance Product Compact, the State Modernization and Regulatory Transparency (SMART) Act etc, are currently underway.

Many of the new proposed regulations strive to simplify the product filing process and reduce delays in obtaining regulatory approval for new products. This could prove highly beneficial to insurers who have multi-state operations. However, once one of these proposed regulations takes the force of law, insurers will be capable of simultaneously introducing products across multiple states. This will only further increase the pressure to expedite the internal product development and introduction process.

WHAT AILS THE PRODUCT DEVELOPMENT PROCESS?

The product development or enhancement process in a typical insurance company requires a high level of collaboration and coordination amongst various stakeholders such as: product designers, programmers, legal, compliance, operations, marketing, training etc. More than 50% of the total product development life cycle is taken up with the implementation phase. The process also necessitates many handoffs between stakeholders.

Legacy systems - Issues and Challenges

Ageing technology and legacy systems have been identified as one major hindrance that insurance companies face in their efforts to quickly introduce new products in the market or modifying existing ones. The heightened pace of mergers and acquisitions has also contributed to the ever increasing number and complexity of back office systems. A Celent study cited inflexible legacy systems as the cause for high maintenance and sluggish product introduction cycles [2].

Product related rules are embedded in complex legacy code and any modifications/ additions to these rules entail considerable time and effort from programmers, analysts and the testing teams. To get products to market quicker in this environment, some companies are encouraged to resort to 'softlaunching' their products by introducing a product in the market after enabling little more than those operations required to record a new policy in the system and to issue first year commissions. This practice may lead to huge project backlogs in addressing post issue servicing and reporting needs, and also make manual 'work arounds' quite cumbersome.

Solving the Time-to-Market issue

Research has revealed that lack of speed to market is not just a technology issue. Any solution to the time to market riddle must adopt a holistic view from a business, technology and process prospective. Improvement in the product introduction process may be brought about in several ways including but not limited to -

  • Enhancing the product introduction process through optimal use of technology and removing inherent bottlenecks
  • Streamlining existing code to make modifications easier and less time consuming
  • Separating product rules from business logic by deploying a centralized product rules engine
  • More fully leveraging opportunities to automate the testing process.
There are three basic principles that need to be addressed in order to improve time to market:

  • Externalization of Product Parameters - Typically, product related rules are scattered across multiple systems which makes identification and modification of rules difficult and time-consuming. For easier management of rules, product-related rules should be defined in a centralized rules engine. This would ensure that processing logic is independent of the product rules, thereby minimizing the analysis, development and testing efforts.
  • A building block approach to product construction - An insurance product can be modeled as a collection of benefit segments each with its own set of features and attributes such as premium, term, coverage limits etc. Using this modular approach to product construction increases the reusability of features.
  • Empowerment of business experts in product creation - In today's environment there is heavy dependence on the IT department to configure new products in legacy systems. It is critically important to empower business users to configure, modify and maintain products.

APPLICATION ARCHITECTURE

Externalizing product related business rules from the legacy code would involve four distinct phases - Prepare, Extract, Externalize and Re-engineer. However, identifying and extracting relevant product rules from hundreds of thousands of lines of legacy code can prove to be a very time-consuming activity if undertaken without any automation aids.

Rule extraction methodology

Many tools exist in the market that can assist in the extraction of business rules. Selecting the appropriate tool is critical to realizing maximum benefit. Proper use of a tool-based approach can result in a 40-50% reduction in efforts over a purely manual approach.

Rules configuration and management
Rules configuration and management
Product rules determine what features are processed within the system. As discussed earlier, one of the common problems faced by the industry is that product related rules are duplicated across multiple systems. Separating these rules from the application logic enhances the reusability of products' features and attributes thereby reducing the time required to construct, test and maintain a product. Once configured in a centralized repository, the rules can be accessed by various operational systems through a common service (Fig. 1).


 

 

 

Product Construction Methodology

Product Construction Methodology
A building block approach to product construction needs to be developed that allows the product actuary to decompose current products into benefit segments that can then be reassembled in new combinations to create new products (Fig. 2). Rules can be attached both at the product and benefit segment level. The ability to copy and modify existing benefit segments to create new benefit segments highlights the reusability aspect of this approach. The new benefit segments created can then be integrated with other existing segments to quickly form new products or variants of existing products.

 


TEST AUTOMATION

The ability to effectively regression test changes is critical to an effective new product launch. Traditional approaches to test automation are technology and platform specific and do not effectively support re-use. They also assume stable, well-documented systems. This approach lacks flexibility when migrating to other tools and platforms. Also, high initial setup and maintenance costs delay realization of ROI.

A contemporary approach to test automation should be built on the key principles of business empowerment, reuse and platform independence. Test cases and scripts should be derived from the business rules repository created and maintained by the business analysts. While the accelerated test automation lifecycle involves both an initial set up as well as ongoing maintenance of the automation framework, many of the activities within the lifecycle can be managed by business users without the interventions of automation experts.

The keyword library, the business rules elements and the business process elements can be reused multiple times within an application or across a portfolio of applications. This inherent reuse enables acceleration.

Lower ROI from traditional approaches of test automation are essentially because of technology lock-in and low reusability, coupled with high initial setup and maintenance costs

PROCESS REDESIGN

In many companies the product introduction process needs improvement. Introducing a cross-functional, milestone-driven product introduction process enabled by tools such as the product configurator, to empower business users to assume a larger role in the creation, modification and maintenance of insurance products is essential. Companies should consider a process that enables product designers to work closely with policy administration systems during the design phase. Using a product configurator, product designers can "test" their design on the system and determine early in the process if system changes are required. Of even greater value would be their ability to fully explore opportunities to design products that meet market needs while eliminating or minimizing the need for system changes.

BENEFITS FROM THE PROPOSED SOLUTION

Enhancing the capability to introduce new products in the market has several core and intangible benefits that make an excellent business case for insurance carriers.


Core Benefits:
  • The proposed solution approach can enable carriers to achieve a substantial reduction in product introduction costs. This reduction provides rapid payback for the initial investment in light of increasing pace of product innovation in the insurance marketplace
  • In addition, this solution approach can ease bottlenecks in the process enabling faster time to market which is one of the key determinants for carrier's competitiveness and overall profitability
Intangible benefits: Enhancing the product introduction capability using the above approach also provides several intangible benefits at the enterprise level.
  • Reduced cost and time to market eases the payback hurdles in investment decisions for new products thereby enabling increased pace of product innovation
  • Reengineering and modernizing legacy systems also provides an excellent business case for achieving a more agile IT landscape in line with architectural best practices
  • These efforts also address technology obsolescence issues from legacy systems thus providing cost avoidance benefits for future upgrade/replatforming efforts.
A paradigm change to a business rules-based approach would enable carriers to enjoy a substantial reduction in product introduction costs, ensuring rapid payback of initial investment

CONCLUSION

Insurance carriers should leverage their ongoing investments in product introduction efforts to develop a strategy for enhancing their overall cost and time-to-market performance. The enterprise capability for product innovation will be a key element in retaining competitive edge and ensuring customer and channel retention in the coming years.

REFERENCES
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