By Naveed Irshad, FCIA and CIA Board Director
Working in in-force management for a life insurance company can be one of the most interesting and insightful jobs in the industry. With the benefit of hindsight, we see how the business performs over the long-term relative to what was anticipated, and get to answer questions like:
- How did pricing assumptions and interdependencies play out over time?
- Were priced-for margins achieved?
- Were the product features and options utilized as expected?
- Were there any unforeseen issues in administering and servicing the policies?
- Can we improve the customer experience?
There are many lessons that can be learned from managing an in-force business, making a seasoned in-force management professional an asset to any organization. A well-run organization will ensure that sharing insights with new business onboarding teams is crucial and will put the formal processes in place to do so.
The 19th century Spanish philosopher George Santayana said “those who cannot remember the past are condemned to repeat it.” A statement which, if I am to assume correctly, was issued with more forewarning than optimism. In fact, I bookmarked a recent tweet from author Nassim Taleb, that echoes a similar sentiment: “I have been in finance for 39 years, long enough to learn that history does not repeat itself in the positive sense, only in the negative one.”1https://twitter.com/nntaleb/status/1480166544273510401
As an in-force management leader, I have learned a long list of lessons over the years that I am apt to share with my peers.
- Misalignment of interest versus customers is a losing game. We have seen this play out in Canada and across the world. In the Canadian market, it was lapse-supported business and products with a large variety of customer optionality where insurance companies came to appreciate what happens when the unanticipated divergence of interest undermines the pricing of a product from a carrier perspective. This is especially important in the digital age where more sophisticated design features are in products being purchased by similarly sophisticated customers. Robust insurance product designs better align interests to the extent possible. Where not possible, showing humility and taking a more cautious approach is important. This lesson applies to the relationship between Reinsurers and direct companies also, as a misalignment of interests can create significant stress at institutional levels.
- Beware of excessive reliance on complex models. Many insurance products are complex and have significant optionality and guarantees with a wide range of potential outcomes. As a result, our tools to evaluate these products have become more sophisticated. But this does not mean that we rely on these tools as a crutch. There are many assumptions that go into a complex model. It is often valuable to take a step back and look at reasonableness and make sure that results or insights coming from models can be qualitatively understood and articulated. Ultimately these models should not be a replacement for simple common sense.
- Market share as a primary KPI is foolish. The esteemed Herb Kelleher, co-founder and former CEO of Southwest Airlines once said “if they mention market share I’d punch them in the nose” and “if we have 4% of a market and we’re profitable, that’s better than having 90% of a market and being unprofitable.”2Remembering Herb Kelleher: How I Built This with Guy Raz: NPR, 26:10 – 26:40 I’ve found that achievement over time of priced-for value is generally negatively correlated to the focus on market share when the business was being written. It’s more important, in my view, to focus on value generated instead. And this is especially more important if you hear terms to describe an existing market such as “irrational pricing” and “ultra-competitive”.
- The best projects start out small, iterate, and evolve. Many experienced practitioners will have been involved in large systems projects such as administration system conversions or other transformative initiatives. I have found that the projects that start top-down as part of a master strategy, tend to fail at higher levels and often leave unforeseen downstream consequences. The best projects, on the other hand, start out as small pilots and then expand, scale-up and branch out with proper feedback loops from stakeholders.
- Spend as much time on servicing existing customers relative to acquiring new customers. Sales and growth in new business are challenging and exciting but it’s equally important to spend time on the in-force block. Ensuring that the in-force is well serviced and managed will mean better persistency, margins consistent with what was priced for, and win-win upsell opportunities that lead to higher value for both the company and the customer. A good gauge of this is whether senior leadership teams are spending as much time discussing in-force and existing customers relative to sales and new business. Is the balance right?
This is just a small sample of my lessons learned. I look at the list often, updating and adjusting as necessary. As you can see, many of these items are strategic in nature and have been well-received by audiences both internally and externally.
I’m sure that many of you have similar lists which include lessons that we can all learn from – make sure you share them. And if you don’t have a list of your own lessons learned, I ask you: why not start one?
This article reflects the opinion of the author and does not represent an official statement of the CIA.