Insurance Marketing Strategy 1

Unit 1: Insurance Marketing Strategy

Notes
Structure
1.1 Introduction
1.2 Components of Marketing Strategies
1.3 Product/Service Differentiation
1.4 Basic Elements of Insurance Marketing Strategy
1.5 Marketing Environment Audit
1.5.1 Components and Methods of Marketing Audit
1.5.2 Process of Marketing Audit and its Implementation
1.5.3 The Value of Information in Marketing Audit
1.6 Increasing the Willingness to Buy
1.6.1 Demand for Insurance
1.6.2 Supply of Insurance
1.6.3 Adverse Selection in Insurance Markets
1.7 Evidence of Adverse Selection in Insurance Markets
1.8 New Distribution Channels
1.8.1 Recent Developments
1.8.2 Insurance Distribution
1.8.3 Life Individual Market Share by Distribution Channel, 2005-2014
1.8.4 Annuity Distribution
1.8.5 Worksite Marketing
1.8.6 Banks in Insurance
1.8.7 Background
1.8.8 The Insurance Industry
1.9 New Target Markets
1.10 New Product Development Program
1.11 Increasing Human Needs and Insurance Protection
1.11.1 Essentials of Insurance Products
1.11.2 Essentials of Insurance Products Issues
1.11.3 The Financial Planning Process
1.12 Insurance Products versus Other Financial Securities
1.12.1 Types
1.13 Summary
1.14 Check Your Progress
1.15 Questions and Exercises
1.16 Key Terms
1.17 Further Readings

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Objectives
Notes After studying this unit, you should be able to:
 Describe the components of marketing strategies
 Describe the components and methods of marketing audit
 Explain the Increasing the willingness to buy a insurance
 Understand the new distribution channels
 Understand the Increasing human needs and Insurance protection

1.1 Introduction
In today’s economy, the financial services industry is exposed to increasing
performance pressures and competitive forces (Goergen, 2001). Modern media, such
as the internet, have created new challenges for this industry (Fuchs, 2001).New
business concepts, a change in client sophistication (Davis, 2006), and an increasing
number of new competitors entering into the market, such as independent financial
consultants, have changed the business models and the competitive forces that
established financial services organizations are facing today worldwide. A marketing
strategy serves as the foundation of a marketing plan. A marketing plan contains a list
of specific actions required to successfully implement a specific marketing strategy. A
strategy is different than a tactic. While it is possible to write a tactical marketing plan
without a sound, well-considered strategy, it is not recommended. Without a sound
marketing strategy, a marketing plan has no foundation. Marketing strategies serve as
the fundamental underpinning of marketing plans designed to reach marketing
objectives. It is important that these objectives have measurable results. A good
marketing strategy should integrate an organization's marketing goals, policies, and
action sequences (tactics) into a cohesive whole. The objective of a marketing strategy
is to provide a foundation from which a tactical plan is developed. This allows the
organization to carry out its mission effectively and efficiently.
The following techniques are implemented to device the Marketing Strategy for the
product/service:
 Segmentation
 Targeting
 Positioning
Market segmentation is the process in marketing of grouping a market (i.e.
customers) into smaller subgroups. This is not something that is arbitrarily imposed on
society: it is derived from the recognition that the total market is often made up of
submarkets (called 'segments'). These segments are homogeneous within (i.e. people
in the segment are similar to each other in their attitudes about certain variables).
Because of this intra-group similarity, they are likely to respond somewhat similarly to a
given marketing strategy. That is, they are likely to have similar feeling and ideas about
a marketing mix comprised of a given product or service, sold at a given price,
distributed in a certain way, and promoted in a certain way.
 Segmentation: Market segmentation is widely defined as being a complex process
consisting in two main phases:
 Identification of broad, large markets
 Segmentation of these markets in order to select the most appropriate target
markets and develop marketing mixes accordingly.
 Positioning: Simply, positioning is how your target market defines you in relation to
your competitors.
A good position is:
 What makes you unique?
 This is considered a benefit by your target market
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Positioning is important because you are competing with all the noise out there
competing for your potential fans attention. If you can stand out with a unique
benefit, you have a chance at getting their attention. It is important to understand Notes
your product from the customer’s point of view relative to the competition.
 Targeting: Targeting involves divide market into segments and then concentrates
your marketing efforts on one or a few key segments. Target marketing can be the
key to a small business’s success. The beauty of target marketing is that it makes
the promotion, pricing and distribution of your products and/or services easier and
more cost-effective. Target marketing provides a focus to all of your marketing
activities. Marketing Mix: Marketing professionals and specialist use many tactics to
attract and retain their customers. These activities comprise of different concepts,
the most important one being the marketing mix. There are two concepts for
marketing mix: 4P and 7P. It is essential to balance the 4Ps or the 7Ps of the
marketing mix. The concept of 4Ps has been long used for the product industry
while the latter has emerged as a successful proposition for the services industry.
The 7Ps of the marketing mix that are used to frame marketing strategies of
insurance companies can be discussed as:
 Product: It must provide value to a customer but does not have to be tangible
at the same time. Basically, it involves introducing new products or improvising
the existing products. A product means what we produce. If we produce goods,
it means tangible product & when we produce & generate services, it means
intangible service product. A product is both what a seller has to sell & buyer
has to buy. So, insurance companies sell services &services are their products.
Apart from insurance as product, customer not only buys product but also
services in the form of assistance & advice of agent. It is natural that customers
expect reasonable returns for their investments & insurance companies want to
maximize their profitability. Hence while deciding the product mix services or
schemes should be motivational.
 Price: Pricing must be competitive and must entail profit. The pricing strategy
can comprise discounts, offers and the like. The pricing of insurance products
not only affects the sales volume and profitability but also influences the
perceived quality in the minds of the consumers. There are several different
methods for pricing insurance, based on the insurance marketer’s corporate
objectives. They are the survival approach, the sales maximization approach,
and the profit maximization approach. To determine the insurance premium,
marketers consider various factors such as mortality rate, investment earnings,
and expenses, in addition to the individual risk profile based on age, health,
etc., and the time period/ frequency of payment. In insurance business the
pricing decisions are concerned with:
 The premium charged against policies: The interest charged for defaulter
payment of premium & credit facility.
 Commission charged for underwriting & consultancy activities: The pricing
decisions may be high or low keeping in view the level or standard of customers
or the policyholders. Mainly, pricing of insurance is in the form of premium
rates. The three main factors used for determining the premium rates under an
insurance plan are mortality, expense & interest. The pricing of insurance is in
form of premium rates. The three main factors for determining the premium
rates under insurance plan are: Mortality: Average death rates in a particular
area. Expenses: The cost of processing, commission to agents, registration is
all incorporated into the cost of installments & premium sum & forms the
integral part of pricing strategy. Interest: The rate of interest is one of the major
factors which determine people’s willingness to invest in insurance. People
would not be willing to put their funds to invest in insurance business if the
interest rates provided by other financial instruments are higher than the
perceived returns from the insurance premiums. Place - It refers to the place
where the customers can buy the product and how the product reaches out to
that place. This is done through different channels, like Internet, wholesalers

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and retailers. This component of marketing mix is related to two important

facets: (i) Managing the insurance personnel, and (ii) Locating a branch. The
Notes management of insurance personal should be done in such a way that gap
between the services promises-services offered is bridged over. In a majority of
service generating organizations, such a gap is found existent which has been
instrumental in making down the image problem. The insurance personnel if not
managed properly would make all efforts insensitive. They are required to be
given adequate incentives to show their excellence. They should be provided
intensive trainings to focus mainly on behavioral management. Another
important dimension to the place mix is related to the location of insurance
branches. While locating branches, branch manager needs to consider the
number of factors such as smooth accessibility, availability of infrastructural
facilities and management of branch offices and premises. Thus place
management of insurance premises needs a new vision, distinct approach & an
innovative style. The branch managers need professional excellence to make
place decisions productive.
 Promotion: It includes the various ways of communicating to the customers of
what the company has to offer. It is about communicating about the benefits of
using a particular product or service rather than just talking about its features.
The insurance services depend on effective promotional measures, so as to
create impulsive buying. Promotion comprises of advertising & other publicity
tactics. The promotion is a fight not only for market share, but also for mind
share. The insurance services depend on effective promotional measures, so
as to create impulsive buying. Promotion comprises of advertising & other
publicity tactics. Due attention should be given in selecting the promotional
tools. Personnel should be given adequate training for creating impulsive
buying.
 People: People refer to the customers, employees, management and
everybody else involved in it. It is essential for everyone to realize that the
reputation of the brand that you are involved with is in the people's hands.
Understanding the customer better allows designing appropriate products.
Being a service industry which involves a high level of people interaction, it is
very important to use this resource efficiently in order to satisfy customers.
Training, development &strong relationships with intermediaries are the key
areas to be kept under consideration. Process - It refers to the methods and
process of providing a service and is hence essential to have a thorough
knowledge on whether the services are helpful to the customers, if they are
provided in time, if the customers are informed in hand about the services and
many such things. The process should be customer friendly in insurance
industry. The speed & accuracy of payment is of immense importance. The
processing method should be easy to& convenient to the customers.
Installment schemes should be streamlined to cater to the ever growing
demands of the customers. IT & Data warehousing will smoothen the process
flow. IT will help in servicing the large no. of customers efficiently and bring
down overheads. Technology can either complement or supplement the
channels of distribution cost effectively. It also helps to improve customer
service levels & helps to find out profitability & potential of various customers
product segments.
 Physical (evidence): It refers to the experience of using a product or service.
When a service goes out to the customer, it is essential that you help him see
what he is buying or not. For example- brochures, pamphlets etc serve this
purpose. Evidence is a key element of success for all insurance companies.
Physical evidence can be provided to insurance customers in the form of policy
certificate and premium payment receipts. The office building, the ambience,
the service personnel etc. of the insurance company and their logo and brand
name in advertisements also add to the physical evidence. To reach a profitable
mass of customers, then new distribution avenues & alliances will be

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necessary. Initially insurance was looked upon as a complex product with a
high advice & service component. Buyers prefer a face to face interaction &
they place a high premium on brand names & reliability. Notes
 Review of Literature: Sankaran M (1999) studied the measures that would
help domestic players in financial services sector to improve their competitive
efficiency, and thereby to reduce the transaction costs. The study found that the
specific set of sources of sustainable competitive advantage relevant for
Financial Service Industry are: product and process innovations, brand equity,
positive influences of 'Communication Goods', corporate culture, experience
effects, scale effects, and information technology. Trevor Watkins (1989) while
studying the current state of the financial services industry worldwide identified
four major trends: the trend towards financial conglomeration, globalization,
information technology in service marketing; and new approaches to financial
services marketing. These trends, it was concluded, will affect the marketing of
banks and other financial services in the 1990s. Marisa Maio Mackay (2001)
examined whether differences exist between service and product markets,
which warrant different marketing practices by applying ten existing consumer
based measures of brand equity to a financial services market. The results
found that most measures were convergent and correlated highly with market
share in the predicted direction, where market share was used as an indicator
of brand equity. Brand recall and familiarity, however, were found to be the best
estimators of brand equity in the financial services market. P. Kotler rightly
states that a company's marketing strategy depends on many factors, one of
which is its size and position in the market. From this assertion he suggests that
one method of classifying marketing strategies is to place the firm in
accordance with its competitive position; namely as to whether they are market
leaders, challengers, followers. In effect these are behavioral strategies ordered
in relation to the company's market share. Impetus for marketing strategy: India
is a jumbo-sized opportunity for insurance need hardly be labored. Here is a
nation of a billion people, of whom merely 100 million people are insured. And,
significantly, even those who do have insurance are grossly underinsured. The
emerging middle class population, growing affluence and the absence of a
social security system combine to make India one of the world’s most attractive
insurance markets. No matter how you look at it – whether in terms of insurance
premiums as a percentage of GDP or premium per capita – the market is under
penetrated and people are under-insured. In a country where there is high
unemployment and where social security systems are absent, insurance offers
the basic cover against life’s uncertainties. India has traditionally been a
savings-oriented country and insurance plays a critical role in the development
of the Indian economy. The role of insurance in the economy is vital as it able to
mobilize premium payments into long-term investible funds. As such, it is a key
sector for development. Marketing strategies are important and inevitable
phenomenon. Effective selling of insurance policies depends to a large extent
on the marketing strategies selected. As the market for insurance is dynamic
and accompanied by rapid changes in the environment due to advancements in
technology and uncertain economic conditions, coupled with inflation, increased
attention must be given in the future to the selection of marketing strategies

1.2 Components of Marketing Strategies

Pricing, personal selling, advertising, word of mouth selling, and institutional image,
quality control, and marketing orientation, new approaches to strategize the production
of insurance services.
Latest tools and techniques are used by marketers of insurance products to boost
the sales to ensure customer satisfaction and brand building. Some are the approaches
to survive in this scenario are as under: Innovation: Innovation in the delivery system
refers to the internal organizational arrangements that have to be managed to allow
service workers to perform their job properly, and to develop and offer innovative

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services. All the insurance companies have a structured internal organization team with
customer service teams for the delivery of the service. Extensive training is given to the
Notes service contact personnel who are called the financial consultants or Agent advisers.
Service development, service design and delivery are intricately intertwined. All parties
involved in any aspect of the new service must work together at this stage to delineate
the details of the new service. (Valarie A Zeithmal and Mary Jo Bitner, 2003) The need
and importance of the customers involvement in the service innovation process is
considered to be of prime importance by all the insurance companies as the current
market for insurance is customer centric. They also express their opinion that the new
services developed currently are based on customer focus. The degree of involvement
of the customer has gradually increased in the last five years. In the last two years
customers are involved in the new service process as information providers.

1.3 Product/Service Differentiation

In case of product differentiation, new products, customized products, tailored products,
bundled products can be introduced and new target segments can be identified. For
example, life, health and personal accident insurance can be bundled together.
Similarly Home Loan and insurance covering fire and burglary can be put together. The
insurance companies provide only packaged policies whereas new players have been
providing several Riders. Rider in insurance parlance is an option that gives the
policyholder additional coverage without disturbing the fundamental risk coverage. The
service in the field of insurance has improved greatly with the entry of multinationals
and rising competition. The customer should have the option to continue or to switch
over or to come out of the given policy. The service in the field of insurance has
improved greatly with the entry of multinationals and rising competition. The customer
should have the option to continue or to switch over or to come out of the given policy.
Advertising and sales promotion: Advertising and publicizing have a positive effect on
the prospective customers as well as personal selling. Both the direct and indirect
strategies have to be balanced and mixed well to get the desired result. Discounts and
incentives promised along with the policy have to be presented in detail to the
customers. The companies must provide a tangible and rational reason to the
customers to buy a particular policy. Unity and honesty must be maintained by the
company and the frontline executives at any cost to attract the customers in the long
term. Various creative and innovative strategies should be developed to promote
various different insurance policies. Finding an ideal mix of customers with high
disposable income and targeting them with specific policies is another good promotional
strategy. Insurance may be one of the most difficult products to sell, but with an
effective promotional strategy it can be sold easily. Technology: Information Technology
progress is a major driver behind the structural change in the Insurance industry to
enhance risk transfer efficiency. E-business opens up new ways to reduce costs while
lowering market entry barriers and facilitating the break-up of the traditional insurance
value chain. Insurance clients will benefit from greater transparency, lower prices and
improved services – not just in the sales area, but also in claims management. New
information and communication technologies are making it easier for insurers to break
up the value chain and outsource individual functions to specialized providers. In the
long-term basis the information technology units control the potential for new service
delivery since all new products represent a more sophisticated delivery of the service.
Although it is argued that service innovations are often non technological, this is still the
center of much analysis and debate (Kandampully, 2002). Customer relationship
management: Insurance companies experiencing competition from within and abroad.
Making this problem-situation into an opportunity lies always on the prudent
management adopting or adapting tactics and strategies. In line of this, customer
relationship management is a measure of winning competitiveness as it is the
information-driven approach to customer analysis and process automation; and thereon
supplement customer-value proposition. An action on tangible services – prompt and
accurate issue of document, prompt and fair settlement of claim, good listening
mechanism, better problem solving approach, reliable manner of service and meet
requirement of customers on time every time - in lieu of intangible promises would give

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utmost satisfaction to customers, the customer relationship management provides
better service to the insured protecting him against perils or risks and the insurer
enabling to retain the existing customers and bringing in new customers in his ambit of Notes
business Distribution channels: The distribution network is most important in insurance
industry. Insurance is not a high cost industry like telecom sector. Therefore it is
building its market on goodwill and access on distribution network. We cannot deny that
insurance are not bought, it is sold. The market has a great scope to grow. This can be
better done by more innovative channels like a super market, a bank, a post office, an
ATM, departmental store etc. these could be used to increase channels of insurance.
But such growth in channels shall increase with time. Till then agents seem to be the
most important distribution channel in this industry. Agents connect with people and
influence them to buy any insurance policy. For the same such agents charge
commission on the policies they get for the company. There is a fixed percentage of
commission for which these agents work. In the field of distribution channels, many
innovative techniques can be adopted. For example, Bancassurance and selling
through postal network will make a great deal of difference. In Europe 25 percent of
insurance policies are sold through banks. Bancassurance, as a package of financial
services that can fulfill both banking and insurance needs, if implemented correctly can
bring vast benefits to stakeholders such as banks, insurance companies, shareholders
and consumers. Bancassurance will facilitate mass selling of insurance products
through banks. Banks can act as large financial supermarkets. Distribution of insurance
will be smoother through wider number of branches of the banks. Customer database,
personalized service, rural penetration, cross-selling of products (e.g. car loan along
with car insurance), being cheaper than agents are some of the greatest advantages of
Bancassurance.
At present the distribution channels that are available in the market are listed below:
 Direct selling
 Corporate agents
 Group selling
 Brokers and cooperative societies
 Bancassurance
 Mallassurance

Conclusion
Insurance industry requires new strategies in order to survive and survive successfully.
To tap the insurance potential to maximum industry needs to frame such plans and
strategies that will help to capture the market. Companies instead of focusing only on
improving the variety of products needs to focus on targeting new segments and
implement innovative strategies in order to achieve sustained growth and ensure
profitability of business as well as growth of insurance coverage.

1.4 Basic Elements of Insurance Marketing Strategy

The key elements of any successful marketing plan include the concepts of product,
price, place and promotion, also known as the four Ps of marketing. Four Ps functions
of marketing mix help the marketing manager to successfully develop a strategy for
promoting products and services to customers. The definition cited above clearly
indicates the four components of marketing mix. In the case of insurance marketing of
services requires an expanded marketing mix comprising (1) the product, (2) price
(premium), (3) physical distribution / place, (4) promotion, and (5) policy servicing.
These elements should be taken as instruments by the insurance management when
formulating insurance marketing plans.
The marketing mix is a dynamic concept; it keeps on changing with changing
marketing conditions and environmental factors. The following chart depicts the

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insurance marketing mix of a business enterprise. The four ingredients of the marketing
mix are discussed briefly as under:
Notes 1. Product (Scheme): It is the first element, product is the sum total of physical, social
and psychological benefits. Managing the product component involves product
planning and development. The insurance marketers must define their market in
terms of product function. What the customer expects from the product. It may offer
a single product of several products. Insurance as product has also to be designed,
keeping in view these basic requisites, in case of insurance the needs are in the
form of two broad economic contingencies viz., death of the breadwinner and the
subsequent financial insecurity of his dependents, and secondly, longer insurance
is sold as plan of LIC of Nepal developed term assurance and whole life policies
and for the second category various pension plans and annuities. Apart from whole
insurance, endowment insurance and money bank plans, LIC has several products
specially suited for children, exclusively for women, the handicapped, senior
citizens, to cover occurrence of terminal diseases, term assurance and pension
plans. There are also group insurance schemes that can be taken by employer for
their employees. The LIC also administers schemes for people who are below or
just above the poverty line.
2. Price (Premium): The price is another powerful element in the insurance marketing
mix and vitally affects the volume of sales. Price is the valuation placed upon the
product by the offered. In the case of insurance, premium is the price which the
person seeking insurance pays to LIC for purchase in the insurance policy. The
management must take decisions regarding pricing (premium), investment return,
level of premium, node of premium, commission, insured sum, life to be covered,
interest on loan, price strategy, under writing and price related situations. It deals
with price competition.
3. Physical Distribution / Place: Marketing channel policy is another integral part of
the insurance marketing mix. Physical distribution is the delivery of insurance
products at the right time and at the right place. In the case of insurance, it is the
combination of decisions regarding channels of distribution, Agents, Development
Officers, Brokers, Branch Office, Retail financial service distributors, alliances with
banks, tie-ups with non-governmental organization, corporate agencies, Bank
assurance, e-trade, proper infrastructure and training facilities, technical and
material know - how on part of instructor etc. At present the strength of LIC's
distribution channel comprising over 6.10 lakhs active agents and over 19,000
Development officers appears to be phenomenal. This is indeed a great advantage
to cover the vast Nepali population, diverse in nature and spread, for which a strong
marketing network is imperative. The net work duly supported by 2100 servicing
branches.
4. Promotion: The business enterprise should inform the customers about its
products and persuade them to buy. It covers methods of communicating with
consumers through personal selling, advertising, publicity, sales promotion, social
contracts, public relations, exhibition and demonstration used in promotion. For
promoting insurance business sales promotion activities are carried out by the
agent, development officers and branch offices. Calendars, diaries, bags etc are
also given to policy holders as a token of gifts. All these activities increase the
volume of sales by expanding as well as retaining the market share for the
insurance products.
5. Policy Servicing: Customer satisfaction predominate the success of an enterprise.
In the service industry where intangibles are marketed, the importance of customer
satisfaction is all the more significant. Service is said to be the sharpest edge of any
marketing strategy. Sales and services are the two powerful wings of insurance
industry. Prompt and effective service boosts the morale of the sales force to
present a bold form and hold their prospects. Service encompasses the service
rendered to clients before the insurance contract, during the policy term and after
sales (policy becoming a claim).

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1.5 Marketing Environment Audit
A marketing audit is a comprehensive, systematic, independent and periodic evaluation Notes
of a company's marketing assets. It is an effective tool in reviewing the competence of a
marketing strategy, analyzing the objectives, policies and strategies of the company's
marketing department as well as the manner and the means employed in attaining
these goals.
Because of the constantly varying business environment, marketing audit is
frequently required, not only at the beginning of the planning process, but along with the
implementation stage, providing also ground for evaluating possible future courses of
action.
Marketing audit on a regular basis is a strong reference point, reflecting evolution in
external business environment, internal experience and strategy development.
The marketing audit focuses on three key headings:
 The external marketing environment
 The internal marketing environment
 Evaluation on the current marketing plan
External environment consists of economic, political and legal factors and
concentrates on clients and competition.
Marketing audit of the external surroundings analyses the customers, their needs
and how to meet them, their behavior and decisions, perception of products and brands,
segmentation, targeting and positioning on the market. The nature of competition is also
studied, concerning its concentration, profitability, strengths and weaknesses, plans and
strategies. New entrants on the market are also studied as well as the substitute
products, the influence of supplier.
The cultural nature of the external environment consists of education levels and
standards, religion and beliefs, as well as lifestyle and customs. Demography plays a
key role in marketing audit of the consumers, reflecting on growth distribution, age,
evolution of technology and information systems as well as marketing communication
and media. The external economic conditions consist of indicators as unemployment
rates, inflation levels, interest rates, economic growth, taxation and average disposable
income. Political and legal landscaping concern: laws, regulations, minimum levels of
taxes or wages and maximum levels of prices or quotas.
Internal environment focuses on the resources the company has at hand as labor,
finance, equipment, time and other factors of production. It also analyses the marketing
team concerning structure, efficiency, effectiveness, correlation with internal functions
and other organizations. The internal marketing planning process, its accuracy and
actuality, the product portfolio, new products, pricing and distribution are areas the
marketing internal audit is concerned in. It also focuses on market share, sales, profit
margins, costs and effectiveness of marketing mix.
The marketing audit studies also the current marketing plan, focused on objectives,
strategies and the marketing mix used to achieve these goals. It also evaluates
budgeting, staffing, training, developing, experience and learning. The current
marketing plan concerns also the market share, financial targets as profit and margins,
cash flow, debt and other indicators that need to be balanced.
There are several approaches that can be used, for example SWOT analysis for the
internal environment, as well as the external environment. Other examples include
PEST (political-economic-social-technological) and Five Forces Analyses, which focus
solely on the external environment. Using SWOT a company lists its advantages and
disadvantages, strengths and weaknesses compared to its competitors or similar
products providers. It also includes an analysis of the external factors that could help or

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hinder company's chance of success, as well as an evaluation of internal practices and

operations.
Notes
A five force analysis is similar to SWOT, but is used to evaluate an individual
product or business rather than an entire marketing strategy. Using this approach, the
study reviews similar subjects covered in a SWOT analysis, eventually dividing the
results in five groups labeled as following:
 Power of buyer
 Threat of entry
 Competitive rivalry
 Power of suppliers
 Threat of substitutes.
Political-economic-social-technological (PEST) is another audit study also known as
a STEP (change in the order of letters) study. This audit focuses mainly on the factors
influencing the external environment, usually factors out of company's internal control.
This study analyses political climate, economic growth, social environment and
technological evolution in the area where the product will be delivered. Its similarity to
SWOT consists of dividing these results in opportunity and threats.
In conclusion, a marketing audit does not necessarily audit the current activity of the
business, but reviews all the areas that are crucial to the success of the company, both
internal and external and tries to align these. Only considering these results and using
them in planning the next marketing strategy, a business can grow and become
stronger. We audit your marketing processes by starting by looking at the factors that
affect all companies operating in your marketplace, looking at your customers and their
profiles.
The audit will examine the following:
 The macro-environment
 The task environment
 Macro-environmental Audit
It's about where you are, not what you are
The Macro-environmental component examines six main areas, the detail
depending on the involvement of the business and involvement required by the industry.
The audit covers the following broad areas.
 Demographics: What major demographic developments and trends pose
opportunities or threats to the company?
What actions has the company taken in response to these developments and
trends?
 Economic: What major developments in income, prices, savings and credit will
affect the company?
What actions has the company taken in response to these developments and
trends?
 Environmental: What is the outlook for the costs and availability of natural
resources and energy needed by the company?
What concerns have been expressed about the company's role in pollution and
conservation, and what steps has the company taken/planned?
 Technology: What major changes are occurring in product and process
technology?
What is the company's position in these technologies?
What major generic substitutes might replace the company product/s?

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 Political: What changes in laws and regulations might affect marketing strategy
and tactics?
What is happening in the areas of pollution control, equal employment opportunity,
Notes
product safety, advertising, price control, etc, that affects the marketing strategy?
 Cultural: What is the public's attitude towards business and toward the company's
products?
What changes in customer lifestyles and values might affect the company?
The importance of marketing audit the term of marketing audit appeared in literature
in the eighties last century, especially in the works written by Ph. Kotler, M. McDonald
and H. Meffert. One of the definitions says that a marketing audit is: “a comprehensive,
systematic, independent and periodic examination of the environment, objectives,
strategies and activities of the company, which aims to identify problem areas and
opportunities and recommendations for further action to streamline marketing
company.”
According to the previous definition implies that a marketing audit comprises the
steps systematically and covering all marketing activities and areas of business. After
carrying out the analysis, it is important to create recommendations and plans of action
to improve the situation in the field of marketing. This involves examining which is
systematic, independent and periodic, the result represents four basic characteristics of
marketing audit. According to the definition of Ph. Kotler, we can deduce the four basic
characteristics of marketing audit. It includes the following:
 Integrated: It covers all activities of the organization in marketing and not just parts
which are problematic. It may be undertaken in the form of functional audits. This
kind of audit is substantive and can be helpful. However, sources in the detection of
problems and failures in organizations are more effective integrated and completed
marketing audit.
 Systematic: Marketing audit presents an ordered sequence of steps that include
enterprise marketing environment, internal marketing system and marketing
activities. The action plan and recommendations contain with short-term and long-
term proposals to improve the efficiency of marketing in organizations.
 Independent: Marketing audit should be carried out by independent experts called
in particular, marketing auditors who have the necessary knowledge. It is carried
out independently and main objectively. Audit executed by external staff brings
benefits of higher flexibility, objectivity, independence and wider utilizing of
experience.
 Periodic: Audit should be carried out regularly, not just when there are some
problems. Marketing audit serves as prevention and maintain organization in a
favorable position in the market. The audit is associated with the financial side of
the business. It is implemented through a defined set of accounting standards that
are clear, logical and easily available.
The importance of marketing audit is that it is an independent examination of the
marketing performance in particular company whose goals are to identify problem
areas and marketing opportunities and propose measures to improve the situation.
Marketing audit examines the internal situation of the organization. It answers the
question of where the company is currently on the market place. It emphasize on
marketing activities and position of the organizations in the market place. The audit
can be considered as an independent assessment of proposals, solution provider
and routine operation of an information system. The audit has the ability to meet all
safety requirements.

1.5.1 Components and Methods of Marketing Audit

Marketing audit deals with the six main components that determine marketing situation
in the particular organization. These components are explored by six major types of
marketing audit.

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 Audit of Marketing Environment: It deals with factors from external and internal
environment in terms of their past development and expected trends which can
Notes mean either the opportunities or risks for the organization.
 Audit of Marketing Strategy: It checks how the marketing objectives and
strategies of the organization are adapted to the external environment and
corporate resources and options.
 Audit of Marketing Organizations: Determine the ability of the marketing
organization to implement the strategy from formal structure, functional
effectiveness of interactions between different departments in the organization.
 Audit of Marketing Systems: It is focused on the part of operation for the four
main marketing systems in the organization:
 marketing information system,
 marketing planning system’
 marketing control system and
 system for developing new products.
It examines whether an organization achieves the objectives of marketing, whether
these objectives correspond to the opportunities on the market.
 Audit of Marketing Productivity: It brings information about the profitability of
individual aspects of the marketing program. It examines the effectiveness of the
cost.
 Audit of Marketing Functions: In detail evaluate the individual components of the
marketing mix.
 The Methods of Making Audit: In this part of the article we will point out individual
methods of marketing audit.
We can divide into the following:
 Self audit: it implemented by the managers in particular company who through
questionnaire will evaluate the results and methods of the work. In case of own
audit, it is necessary that all the managers adapt the procedures and schemes,
received training and follow up with the strict discipline in carrying out the audit.
 Audit realized by another manager: manager from the department within the
organization evaluate the work of others.
 Utilizing of external experts: in theory but especially in practice it’s recommended
to implement an audit using an external consultant mainly because of its greater
objectivity. External audit is conducted independently, is bound by the relevant
legislation and responsible for confidential data.

1.5.2 Process of Marketing Audit and its Implementation

The implementation of marketing audit can be divided according to the various literature
sources into several stages. The first stage is to create a plan of marketing audit by
auditor. In this audit plan we define the need for implementing various functional audits
and it examines the availability of needed information resources. Auditor, according to
the meeting with the management of the organization agreed to specific audit
procedures. They agreed on the purpose, scope, objectives, information sources, form
of final report and the time period for establishing audit. The second stage is the
implementation. Audit realizes diagnostic steps, using the methods of logical analysis. It
defines the problem and carries out the marketing analysis and behavior of the
organization. According to these implemented analyzes we diagnose the issue. Auditor
analyzes the objective facts that can be derived from past development. For instance,
the analysis of marketing cost. It evaluates subjective elements. It reviews the questions
of employees in the particular section of the organization and compares them with those
of others. The information sources for marketing audit:
 Objective analysis of the marketing activities

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 Subjective opinion of employees about efficiency of marketing systems
 Opinions of business partners and information based on development of economic
environment
Notes
 From external sources.
The third stage is the preparation of the final report by the auditor which should be
submitted to the management of the organization. Auditor expresses their opinion on
the controlled matters. It proposes measures to correct the deficiencies.

1.5.3 The Value of Information in Marketing Audit

The value of information in marketing audit for the existence of any company in the
market the information is important. It also plays an irreplaceable role in the
implementation of the marketing audit. The company can respond with the right
information more effectively to the changes in the internal and external environment, to
adapt and respond effectively. We can define information as a knowledge
communicated or received concerning a particular fact or circumstance. It can lead to
an increase in understanding and decrease in uncertainty. Information is valuable
because it can affect behavior, a decision, or an outcome. For example, if managers are
told their company's net profit decreased in the past month, he/she may use this
information as a reason to cut financial spending for the next month. A piece of
information is considered worthless if, after receiving it, things remain unchanged.
Information can be considered as a valuable asset of the company. Their quality and
value can be found in terms of time, accuracy, confidentiality and form. Managers of
companies are trying to get the right information from official meetings and regular
implementation of the marketing audit. P. Drucker said the following:
“Manager will never be able to get all the information they should have. Most
decisions must be based on incomplete information – either because the information is
not available or their collected information could cost a lot of time and money.”
However, managers need relevant information on the basis which is able to provide
them the right, operational and effective decisions. Employees who are responsible for
marketing audits use the following information which is provided: by studying existing
documentation (reports from previous audits, security policy, and security project), a
physical inspection of the relevant premises (direct – spaces where the new technology
is in place, indirectly – access roads to the facility), and interviews with employees and
with suppliers.
The value of information depends on four criteria such as:
 Form: The value of information increases thereby making form is closer to the
requirements of the person who decides on that basis.
 Time: Higher value has the information that is provided in time. Therefore, the lack
of information can cause negative consequences,
 Availability: Greater value has information that is available and meets the
requirements such as time and availability.
 Character: It can be decided when and to who will be provided. This is also
influenced by the organizational structure and communication channels in the
company.
Experts and professionals predict that, if the information that is available is accurate
it will have a more desired result. However, if this information itself will not help to make
better decision then we can consider it that has no value at all. Any of the information
we could evaluate from the terms of: reliability, importance, level of confidentiality.

1.6 Increasing the Willingness to Buy

Economists view insurance markets as a special case of markets for contingent claims
based on the state-preference approach developed by Arrow (1953) and Debreu

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(1953). A contingent claim is a formal contract between two parties whereby one of the
parties (the insured) purchases a ticket from another party (the insurer), which can be
Notes redeemed for money if certain states of nature occur. The ticket is more commonly
referred to as an insurance policy, its cost is the insurance premium and the states of
nature are the events which are covered by it such as a fire causing damage to one’s
property. Insurance affects individuals prior to specific events occurring because the
insurer must collect premiums. It then pays people in the event of losses suffered from
events covered by the policy. Effective preventive measures on the part of insured
people sometimes lower the premium, if the insurer can observe them at low cost. For
example, if an insured homeowner invests in a mitigation measure that reduces the
potential losses from an earthquake, and if that investment could be observed, then a
competitive insurer that has the freedom to set rates based on risk has a financial
incentive to lower the annual premium for earthquake coverage compared to the
premium charged.
The benefits in the form of lower expected losses have to be sufficiently large that it
is cost-effective for the insurer to incur the transaction costs of varying the premium
based on mitigation behavior. Considerable empirical evidence suggests that many
individuals for whom insurance is a worthwhile purchase do not have coverage. For
example, flood insurance even when heavily subsidized is not purchased by many
homeowners until after they suffer damage from a disaster. Many residents in Louisiana
and Mississippi only discovered that they were not covered for flood damage after
Hurricane Katrina, with some allegedly under the misimpression that they were
protected by their homeowner’s policy.
A standard homeowner’s policy, normally required as a condition for a mortgage,
provides protection against damage from fire, hail, storms, tornadoes and wind damage,
but not from rising water due to floods and hurricanes. Homeowners in flood-prone
areas are eligible to purchase such a policy through the National Flood Insurance
Program (NFIP), a public program administrated by the Federal Emergency
Management Agency (FEMA) that was established in 1968. In the Louisiana parishes
affected by Katrina the percentage of homeowners with flood insurance ranged from
57.7% in St. Bernard’s to 7.3% in Tangipahoa. Only 40% of the residents (owners and
renters) in Orleans parish had flood insurance (Insurance Information Institute, 2005). It
is hard to verify what people believed before the fact since it will often be in their interest
after a disaster to claim that they thought they were covered. Limited data exist on
beliefs about coverage prior to the event.
It is also difficult to know what insurance agents told prospective buyers, above and
beyond specific insurance contract language. In a field survey of homeowners residing
in disaster-prone areas in the United States, Kunreuther et al. (1978) found that 60% of
the uninsured homeowners interviewed had no idea that they could cover their house
against flood or earthquake damage. Some homeowners in Mississippi allege that
insurance agents led them to believe that they had coverage against flooding damage
from hurricanes such as Katrina. Others who appear not to need financial protection
against certain events actually have purchased coverage. For example, many
consumers will buy a warranty on a new piece of electronic equipment or appliance 66
Introduction that pays for only small repair costs and even annual servicing, at a
premium which is extremely high relative to the cost of buying a replacement. For
example, extended protection plans are offered at USD 70 for two years, USD 120 for
three years and USD 300 for five years on a camcorder which sells for as little as USD
180 (Cutler and Zeckhauser, 2004). Some people buy these but, of course, many do
not. Neither of these examples is totally conclusive: some uninsured homeowners may
not be very risk averse and some appliance buyers worried about product failures may
choose warranties even at a high price. But the circumstantial evidence suggests that
“more than a few” people do things that are not expected if they were both rational (in a
sense to be defined more carefully below) and well informed.
One or both conditions for efficient markets may be absent. On the supply side,
certain types of events for which one might expect to see insurance widely marketed

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are viewed today by insurers as uninsurable unless there is public sector involvement.
For example, following the Northridge, CA earthquake in 1994 insurers concluded that
they could not continue to provide coverage to residents in the state. This led to the Notes
formation of the California Earthquake Authority, a state-run program (Roth Jr., 1998).
Novel insurance policies where there is likely to be considerable interest by consumers
have not been marketed by private insurers. For example, Shiller (2003) has proposed
home equity insurance as a way to protect property owners against adverse changes in
the market values of their house. He notes that data exist to construct such a product
that could be attractive to homeowners and profitable to insurers. Other policies that
one might not expect to be successfully marketed do indeed exist on a relatively large
scale.
Health and life insurers often guarantee buyers that they will be allowed to renew
coverage at premiums which are not affected by any adverse changes in their health;
this “guaranteed renewability at class average premiums” in principle provides a
solution to risk segmentation (and perhaps adverse selection, described in Section 5.1)
which many experts think to be insurmountable problems in competitive insurance
markets. Finally, evidence suggests that cost-effective preventive measures are
sometimes rewarded by insurers in ways that could change their clients’ behavior. 67
For example, some insurers offer lower insurance premiums for buying a car with
airbags or automatic seat belts. But insurers do not discount health insurance premiums
for joggers or reduce premiums for windstorm coverage for homeowners who engage in
mitigation.
The above examples reveal that insurance purchasing and marketing activities do
not always produce results that are in the best interest of individuals at risk. This paper
discusses such behavior with the intent of categorizing these anomalies. It represents a
first step in constructing a theory of insurance decision-making to explain behavior that
does not conform to standard economic models of choice and decision-making. In this
sense it differs from the very insightful paper by Cutler and Zeckhauser (2004) that also
discusses selected kinds of anomalies related to insurance but makes no effort to
develop a framework for describing or categorizing a wide range of them. Our approach
to the problem is first to discuss benchmark models of demand for insurance and supply
of coverage in a world where there is perfect information and no transaction costs
between parties.
Buyers of insurance are assumed to maximize a conventional von Neumann–
Morgenstern utility function (1947); choices made in accordance with such a function
are defined as “rational.” We will assume that all people are risk averse, but we place
on a priori limits on risk aversion. This implies that people could pay premiums very
much in excess of their expected claim payments and still be called rational. The
assumption of risk adverse individuals also implies that
1. If the premium is below the actuarially fair value, rational people definitely should
buy insurance. On the other hand,
2. A rational person should not pay a premium greater than the maximum claim that
could be received from the insured event. Insurers are assumed initially to
maximize expected profit. This means that they would not require a premium in
excess of their expected costs in order to be willing to supply insurance. If given the
opportunity they would be eager to collect premiums higher than that amount.
These benchmark models enable us to develop a positive. We are assuming the
expected costs include the marketing and administrative costs associated with a
policy. Introduction theory of demand and supply of insurance that will incorporate
other factors such as information imperfections, biases and simplified choice
models used by individuals, effort and attention costs, and multi-attribute
preferences, insurer market power, and insolvency concerns by firms or capital
suppliers. We then introduce a set of anomalies related to insurance behavior that
shows when and how the assumptions in the benchmark positive models of choice
appear to be violated. We define an anomaly on the demand side where those
individuals at risk should want to buy coverage but do not and where those who do

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purchase coverage should have decided to forego this protection. An anomaly on

the supply side has an analogous interpretation. In some cases insurers should
Notes want to offer coverage but do not and in others they do offer protection but it is
unclear why they are providing a policy.
There is obviously the possibility of the less stark anomaly in which people
purchase insurance but buy either more or less coverage than is rational.
Determining whether behavior is anomalous requires knowing the strength of risk
aversion and the administrative cost of supplying insurance which is often difficult to
measure. The most serious challenge is to develop a positive theory of choice that
can explain these anomalies in a simple way – as opposed to developing an ad hoc
explanation for every strange form of behavior that we observe. This is, to put it
mildly, a daunting task, but one that we begin here. The concluding section of the
paper proposes a set of prescriptive solutions for improving insurance decision-
making by addressing the above anomalies. These solutions may require
government to take on one or more of the following roles: act as a partner with the
private sector; serve as a key party enforcing certain standards and/or require
insurance protection when individuals would not voluntarily purchase coverage.

1.6.1 Demand for Insurance

There is a large literature on the demand for insurance coverage that has been
spawned by the state-preference approach and the theory of contingent claims
developed by Arrow (1953) and Debreu (1953). We will use the elements of their
approach to develop a benchmark model of demand for insurance using problems with
two states of nature (e.g. flood or no flood).

1.6.2 Supply of Insurance

Insurers who supply coverage to those at risk are initially assumed to maximize
expected profits. If instead the insurer is also concerned about the variability of profits,
the ideal case that forms the basis for the benchmark model of choice is where each of
the risks is relatively small and independent of each other. If the insurer has a large
enough number of policies, then the law of large numbers makes it highly unlikely that
the insurer will suffer an extremely large loss relative to the premiums collected.

1.6.3 Adverse Selection in Insurance Markets

Adverse selection is a concept in economics, insurance, and risk management, which
captures the idea of a "rigged" trade. When buyers and sellers have access the
different information (asymmetric information), traders information about the quality of a
product will selectively participate in trades which benefits them the most (at the
expense of the other trader). A textbook example is Akerlof's market for lemons.
The term "adverse selection" was originally used in insurance. It describes a
situation where an individual's demand for insurance is positively correlated with the
individual's risk of loss.
This can be illustrated by the link between smoking status and mortality. Non-
smokers typically live longer than smokers. If an insurance company does not vary
prices according to smoking status, its insurance will be more valuable for smokers than
for non-smokers. Smokers will have greater incentives to buy insurance from that
company and purchase insurance in larger amounts than non-smokers. The average
mortality rate increases, leading to losses for the company.
In response, the company may increase premiums however, higher prices cause
responsible non-smoking customers to cancel their insurance, which can exacerbate
the adverse selection problem and lead a collapse in the insurance market.
To counter the effects of adverse selection, insurers must offer insurance premiums
that are proportional to the customer's risk of accident. The insurer must screen and
distinguish high-risk individuals from low-risk individuals. Medical insurers for instance,

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ask a range of questions and may request medical or other reports on individuals who
apply to buy insurance, so that the premium can be varied accordingly, and any
unreasonably high or unpredictable risks rejected altogether. This risk selection process Notes
is known as underwriting. In many countries, insurance law incorporates an "utmost
good faith", which requires potential customers to answer any underwriting questions
asked by the insurer fully and honestly. Dishonesty may be met with refusals to pay
claims. Buyers sometimes have better information about how much benefit they can
extract from a service in which case the "bad" customers are more likely to apply for the
service. For example, an all-you-can-eat buffet restaurant which sets one price for all
customers risks being adversely selected against by high appetite (and hence least
profitable) customers. Another example is in offering health insurance, the types of
customers most likely to apply are those who are most prone to accidents.
In both cases, the seller suffers from adverse selection should protect himself by
screening customers or by identifying credible signals of quality, see signaling games
and screening games.
An example where the buyer is adversely selected against is in financial markets. A
company is more likely to offer stock when managers privately know that the current
stock price exceeds the fundamental value of the firm. Uninformed investors rationally
demand a premium to participate in the equity offer.

1.7 Evidence of Adverse Selection in Insurance Markets

Empirical evidence of adverse selection is mixed. Several studies investigating
correlations between risk and insurance purchase have failed to show the predicted
positive correlation for insurance, auto insurance, and health insurance. On the other
hand, "positive" test results for adverse selection have been reported in health
insurance, long-term care insurance, and annuity markets. These "positive" results tend
to be based on demonstrating more subtle relationships between risk and purchasing
behavior (such as between mortality and whether the customer chooses a life annuity
which is fixed or inflation-linked), rather than simple correlations of risk and quantity
purchased.
Weak evidence of adverse selection in certain markets suggests that the
underwriting process is effective at screening high-risk individuals. Another possible
reason is the negative correlation between risk aversion (such as the willingness to
purchase insurance) and risk level (estimated beforehand based on hindsight
observation of the occurrence rate for other observed claims) in the population: if risk
aversion is higher among lower risk customers, such that persons less likely to engage
in risk-increasing behavior are more likely to engage in risk-decreasing behavior (to
take affirmative steps to reduce risk), adverse selection can be reduced or even
reversed, leading to "advantageous" selection.
For example, there is evidence that smokers are more willing to do risky jobs than
non-smokers, and this greater willingness to accept risk might reduce insurance
purchase by smokers. From a public policy viewpoint, some adverse selection can also
be advantageous because it may lead to a higher fraction of total losses for the whole
population being covered by insurance than if there were no adverse selection.

1.8 New Distribution Channels

Insurance is generally bought directly through an insurer (through its captive agents, the
web or other direct channels) or through independent agents and commercial brokers
who provide access to the products of several insurers.
Direct writers dominate auto and homeowners insurance sales, accounting for
about 73 and 69 percent, respectively, of net premiums written in 2013, according to
A.M. Best.

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Independent agents and brokers dominate commercial sales, accounting for 67

percent of net premiums written in 2013, according to A.M. Best, which classifies such
Notes writers as “agency writers.”
About 3.1 million auto insurance policies were purchased online in 2012, according
to ComScore.
Many insurance companies use a number of different channels to distribute their
products. In the early days of the U.S. insurance industry, insurers hired agents, often
on a part-time basis, to sign up applicants for insurance. Some agents, known
nowadays as “captive” or “exclusive” agents, represented a single company. Others, the
equivalent of today’s independent agent, worked for a number of companies. At the
same time that the two agency systems were expanding, commercial insurance
brokers, who were often underwriters, began to set up shop in cities. While agents
usually represented insurers, brokers represented clients who were buying insurance.
These three distribution channels (captive agents, independent agents and brokers)
exist in much the same form today. But with the development of information technology,
which provided faster access to company representatives and made the exchange of
information for underwriting purposes much easier, alternative distribution channels
sprang up, including direct sales by telephone, mail and the Internet. In addition,
insurers are using other types of outlets, such as banks, workplaces, associations and
car dealers, to access potential policyholders.

1.8.1 Recent Developments

 Auto Insurance Sales: A 2013 study by com Score estimates that 3.1 million auto
insurance policies were sold online in 2012, about the same as in 2011 but up
about 6 percent from 2010. Sixty-seven percent of shoppers reported getting an
online quote in 2012, according to comScore. The results are based on a data from
a research panel of one million U.S. consumers and a survey of more than 4,000
Internet users.
 Insurance Sales: Eighty-three percent of consumers would use the Internet to
research insurance before purchasing a policy if they had the option, according to
the 2014 Insurance Barometer survey by the Life and Health Insurance Foundation
for Education (LIFE) Foundation and LIMRA. Face-to-face contact with an agent is
the most preferred method for buying insurance, according to the survey. Nearly
one in four said they would prefer to research and purchase online, if given the
option.

P/C Distribution
A.M. Best organizes insurance into two main distribution channels: agency writers and
direct writers. Its “agency writers” category includes insurers that distribute through
independent agencies, brokers, general agents, and managing general agents. Its
“direct writers” category includes insurers that distribute through the Internet,
exclusive/captive agents, direct response, and affinity groups such as members of an
association.
In 2013 direct writers accounted for 51.6 percent of P/C insurance net premiums
written and agency writers accounted for 46.8 percent, according to A.M. Best.*
In the personal lines market, direct writers accounted for 71.4 percent of net
premiums written in 2013 and agency writers accounted for 27.5 percent. Direct writers
accounted for 68.8 percent of the homeowners market and agency writers accounted
for 28.8 percent. Direct writers accounted for 72.5 percent of the personal auto market
and agency writers accounted for 27.0 percent.*
Agency writers accounted for 67.2 percent of commercial P/C net premiums written
and direct writers accounted for 30.7 percent.*

*Unspecified distribution channels accounted for the remainder.

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Traditionally, there has been a distinction between agents and brokers, with agents
(whether captive or independent) representing the insurance company and brokers
representing the client. Recently, the line between agencies and brokers has blurred, Notes
with intermediary firms operating as brokers and agents, depending on their jurisdiction
and the type of risk.

1.8.2 Insurance Distribution

In 2014 independent agents held 50 percent of the new individual insurance sales
market, followed by affiliated (i.e., captive) agents with 40 percent, direct marketers with
5 percent and others accounting for the remaining 5 percent, according to LIMRA, a
insurance trade association.

1.8.3 Life Individual Market Share by Distribution Channel, 2005-2014

Based on first-year collected premiums
1. Includes brokers, stockbrokers and personal producing general agents.
2. Includes career, multiline exclusive and home service agents.
3. No producers are involved. Excludes direct marketing efforts involving agents.
4. Includes financial institutions, worksite and other channels.

Source: LIMRA’s U.S. Individual Insurance Sales Survey and LIMRA estimates.

1.8.4 Annuity Distribution

Insurance agents, including career agents, who sell the products of a single insurance
company, and independent agents, who represent several insurers, account for 37
percent of annuity sales. State and federal regulators require sellers of variable
annuities to register with the Financial Industry Regulatory Authority (FINRA) and the
Securities and Exchange Commission.

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Sales of individual annuities by distribution channels, 2010 and 2014

Notes

Source: U.S. Individual Annuity Yearbook - 2014, LIMRA Secure Retirement Institute.

1.8.5 Worksite Marketing

Worksite marketing is the selling of voluntary (employee-paid) insurance and financial
products at the worksite. The products may be on either an individual or group platform
and are usually paid through periodic payroll deductions. Worksite sales of life and
health insurance totaled $6.89 billion in 2014, up about 3.7 percent from 2013.

Worksite insurance sales by line of business, 2014

Source: Eastbridge Consulting Group, Inc.

1.8.6 Banks in Insurance

Total insurance premiums sold through financial institutions fell by 27 percent from $1.6
billion in 2012 to $1.2 billion in 2013, according to BISRA. Liberty Life of Boston was the
leading underwriter of insurance sold through banks, with $400.9 million in new
premiums in 2013, followed by Great West L & A ($270.4 million), One America ($119.4
million) and the Western & Southern Group ($61.8 million).

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Bank individual insurance sales, 2009-2013

Notes

(1) Based on total new premiums.

Source: Bank Insurance and Securities Research Associates (BISRA).

1.8.7 Background

Early Distribution Channels, Property/Casualty Insurance

Risk sharing is not new. Various kinds of insurance enterprises have existed on and off
for many centuries. The first U.S. insurance plans were organized around membership
in an organization. In 1736 the Friendly Society, operating under a Royal Charter from
England, was formed as a mutual company in South Carolina. It covered the fire losses
of its members, who contributed directly to a fund that paid claims. However, the
Friendly Society’s existence was short-lived. It was dissolved six years later after a fire
in Charleston destroyed hundreds of buildings.
Benjamin Franklin set up the first successful U.S. insurance company whose
policies could be purchased by the public. Established in Philadelphia initially for the
benefit of members of the Union Fire Company, its members voted to open it up to
citizens outside of the organization after it had been in operation for a year or so.
In February 1752 a notice was printed in Franklin’s newspaper asking people who
were interested in subscribing to the terms and conditions of a new mutual fire
insurance company to appear at the Court House in Philadelphia. The first meeting of
the subscribers, which included many prominent citizens of the city, was held in March.
Among other business was a decision to call the company “the Philadelphia
Contribution ship for the Insurance of Houses from Loss by Fire.” The first policy was
issued in June of that year.
Soon, other mutual insurance companies were formed, followed by stock
companies. The Insurance Company of North America (INA), the first U.S. stock
insurance company, was founded in 1792. At first it sold only marine insurance but soon
offered fire insurance as well and was the first company to insure both buildings and
their contents. A few years later, in 1795, the first U.S. insurance agency opened in
Charleston, South Carolina. Known as Davis & Reid, and later as the Vigilant Insurance
Office, it advertised that it offered a choice of “underwriters,” entities that assumed the
risk.
As the population expanded and moved further away from the East Coast, where
most insurers were based, the need for a formal distribution system grew. Companies
created networks of agents, assigning them specific geographic areas, and set up
branch offices managed by general agents, later known as “managing general agents,”

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or MGAs. Agents’ compensation changed from fees for applications to percentage

commissions on premiums collected.
Notes
The Hartford was the first insurer known to have attempted direct marketing.
Founded in 1810, it had an agency network but wanted to expand into areas not
serviced by its agents. In an early advertisement, it announced that people who lived in
areas where the company had no agent might apply through the Post Office directly to
the Secretary of the company. But its efforts were unsuccessful. Apparently people
were not ready to buy this new product through the mail.
As the industrial revolution progressed, the growing complexity of the business
world spurred the growth of the insurance brokerage business. Most of the country’s
major brokerages came into existence in the 19th century, starting with Johnson &
Higgins in New York City in 1845. The firm became part of what is now Marsh Inc. in
1997.
As the 19th century came to a close, the first liability policies were issued: employer
liability was followed by auto liability insurance. The introduction of liability insurance led
to further expansion of the insurance business and to greater specialization among
distributors, with general agents mostly selling liability insurance and independent
agents’ fire insurance.
Today, all agents are licensed by the states in which they do business and sell
whatever coverage’s the companies they work with offer. Independent agents sell more
commercial lines insurance than personal lines (auto and home insurance). The reverse
is true for captive agents. Managing general agents tend to focus on commercial risks
and often have authority from the insurance companies they work for to accept
business on their behalf, subject to certain terms and conditions. Large brokers focus
on commercial lines.
Distribution Channels Evolve: Over the decades, distribution systems have
changed. Some insurance companies that started in business using their own sales
force switched to independent agents because as companies started to write business
in unfamiliar locations, they needed to rely to a greater extent on local people who knew
the area.
The term “captive” or “exclusive” agent has become associated with companies
known today as direct writers. One major difference between captive and independent
agents is that the independent agent rather than the insurer legally owns access to
policy renewals. Captive insurance agents may be employees of the company or
independent contractors.
th
The concept of direct writers developed at the beginning of the 20 century.
Generally, they were mutual companies that sold insurance to farmers and others in
specific agricultural businesses, such as millers, at a time when a quarter of the nation’s
population lived on farms. Because they were familiar with the risks, they were able to
undercut the competition. Many of the direct writers, which are today among the largest
auto and home insurers, began by selling auto insurance directly to farm bureaus in the
1920s. Among the best known are State Farm, Nationwide, American Family and
Farmers. Other companies such as the United States Army Insurance Association, now
USAA sold to the military and yet others sold to state automobile clubs.
Nowadays, the term “direct writer” may apply to any company using captive or
exclusive agents, as well as companies selling directly to consumers through the mail,
Internet or through telephone solicitations, although technically the latter are “direct
marketing” or “direct response” companies. These direct response companies use
salaried employees or company representatives to interact with consumers offsite,
whereas agents generally conduct some business with their policyholders face-to-face
in their office. GEICO, one of the largest auto insurance companies that today markets
directly to consumers, started in 1936 as the Government Employees Insurance
Company, selling to government employees and some military personnel.

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Insurance Marketing Strategy 23
As the number of companies opting to use multiple channels grows, categorizing a
company as a direct writer or agency writer is becoming less helpful. Among the first
direct writers to use independent agents to sell in rural areas, where it may not be Notes
profitable for a direct writer to set up an office, was Allstate, in 1974. A decade later, in
1983, the Hartford began to market its personal lines products directly to what was then
the American Association of Retired Persons, now known solely by the acronym AARP.
Both agents and brokers are known as producers. Traditionally, agents have
represented the insurance company and brokers have represented the client, but the
line between the two is no longer clear-cut. Generally, it is the broker’s responsibility to
seek out appropriate insurance coverage for the client and obtain the best overall price,
terms and conditions, but sometimes brokers have agreements with insurance
companies.
In addition to the agents and brokers who work for or who represent traditional
insurers, there are agents and brokers working for surplus lines companies. The surplus
lines market exists to insure risks that licensed companies decline to insure or will only
insure at a very high price, with many exclusions or with a very high deductible.
Brokers may be retail or wholesale. Wholesalers act as intermediaries between
retail brokers or agents and insurance company underwriters. To work with surplus lines
companies, wholesale brokers must be licensed as surplus lines brokers in the state
where the policyholder or the risk to be insured is located. Wholesale brokers may also
work with other wholesale brokers in the London Market or elsewhere to secure
coverage.
Wholesale brokers may also be managing general agents, who are given authority
by insurers to underwrite and “bind” insurance—provide temporary coverage until an
insurance policy can be issued. Managing general agents, who have a close
relationship with the insurance companies they work with, may also handle claims and
even help in the placement of reinsurance contracts—reinsurance is insurance for
insurance companies. Managing general agents may also arrange so-called “program”
business, which is specialty insurance for homogeneous groups of policyholders, such
as members of a specific industry. These programs, often offered and endorsed by
trade associations, may provide coverage at lower prices.

1.8.8 The Insurance Industry

Beginning in the mid-1870s, the insurance industry developed along the same lines as
the property/casualty side of the business, using captive agents to sell their products.
But unlike agents who sold property/casualty insurance, insurance agents often
collected premiums at the home, on a weekly or monthly basis. This form of distribution
flourished until after World War II, when home service agents were gradually displaced
by a type of independent agent known as the “personal producing general” agent. Over
time, the number of agents closely connected to one life insurer began to decline.
New Distribution Channels: In the early days of insurance, insurance policies
were sold at banks. But the 1916 National Bank Act limited banks’ sale of insurance,
except in small towns. In the 1990s various court decisions allowed banks to get back
into the business of selling insurance, culminating in the 1999 Gramm-Leach-Bliley Act,
which said that banks, insurance companies and securities firms could affiliate and sell
each others' products. Since that time banks have bought hundreds of insurance
agencies and brokerages, and bank sales of all kinds of insurance have grown
significantly.
Life insurers began to market insurance and annuities through banks (mostly fixed
annuities, which are similar to other bank products) and financial planners or advisers in
the 1990s. A large portion of variable annuities, which are based on securities, and a
smaller portion of fixed annuities are now sold by stockbrokers. In three states,
Connecticut, Massachusetts and New York, consumers can purchase small insurance

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policies directly from savings banks, without going through commissioned salespeople.
This practice, which other states refused to follow, began in the early 1900s.
Notes
It is not uncommon for insurance companies to make arrangements with various
entities, in addition to banks, to make their products available; they include workplaces,
associations, car dealers, real estate brokers, pet shops and travel agents, among
others.
Advances in Communications Technology: Starting with the telegraph, and then
the telephone, advances in communications technology have facilitated the
transmission and exchange of information for underwriting and settling claims, enabling
insurance agents and other intermediaries to perform their tasks with greater speed and
reliability.
With the introduction of the Internet in the 1990s, insurers began offering policies
online. As consumers began to be increasingly comfortable purchasing products of all
kinds over the Internet, online aggregators began to appear. Aggregators collect
information on prices, generally for auto insurance and term insurance, which are the
most standardized, so that consumers can compare the cost of coverage from one
company to another. Eventually, many agency companies as well as direct writers
began to offer Internet platforms, making it possible for consumers to purchase an
insurance policy directly online without the aid of an intermediary.
Regulation: The insurance business is regulated by individual states. Insurance
agents and brokers must be licensed to do business in the state in which they conduct
business. To be licensed, producers must comply with the state’s requirements,
including professional educational mandates. Each state also has regulations governing
the termination of agents by insurance companies. Most states base their rules and
regulations on a National Association of Insurance Commissioners model law, but many
have additional requirements.
While there is no national producer licensing system, over the years there have
been efforts to make licensing more uniform and to streamline the approval process. In
1996 the National Association of Insurance Commissioners established the National
Insurance Producer Registry to develop and operate as a national repository for
producer licensing information. In 1999 standardization was given another push with the
passage of the Gramm-Leach-Bliley Act (GLB). GLB would have established a National
Association of Registered Agents and Brokers (NARAB) if a minimum of 29 states had
not passed reciprocity laws for agent licensing by 2002. While 29 states met the
requirement in time, the push for uniformity has continued. In September 2013 the U.S.
House of Representatives approved HR 1155, the National Association of Registered
Agents and Brokers Reform Act of 2013. If enacted, the law, known as NARAB II, would
establish a nonprofit board with the power to grant insurance agents and broker’s
approval to operate on a multiple state basis if they met certain qualifications and were
fully licensed in their home state. The Senate is currently considering similar legislation.

1.9 New Target Markets

A small business's target market is the group of people it targets with advertising. These
people are the consumers who are most likely to use the company's products and
services. Marketers use different variables when determining their target markets,
including demographics, personal interests and the times in which consumers shop.
Target markets can vary by size. But a company's target market generally must be large
enough to earn a profit. A marketing strategy is selecting and describing one or more
target markets that a company's product or service will identify for business
opportunities. A target market is a defined group most likely to buy a company's
products or services. This group usually has similar product needs, such as college
students who usually have an appetite for affordable cars, technology products, dorm
room goods, etc. Once a target market is identified by a company, a target market
strategy needs to be created in order to decide on how to promote, communicate and
reach the group. There are three ways that a firm can identify target markets.

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Insurance Marketing Strategy 25
Identifying Target Markets
The first step is to conduct an MOA (Marketing Opportunity Analysis). This analysis Notes
allows companies to investigate the potential size of the market, profitability potential
and the amount of competition. The next step is to choose the basic target market
strategy. The three strategies for selecting target markets are pursuing entire market
with one marketing mix, concentrating on one segment or pursuing multiple market
segments with multiple marketing mixes.
Examples of different target markets could be men who drink diet soda, parents
with young children or college students who need affordable cars. A company that
concentrates on an entire market with one marketing mix would be producers of milk.
They know that a large market exists for their products. An example of a company that
targets one single target market would be Lady Foot Locker - of course women who are
active would be their target market.
The last target marketing strategy example is for pursuing multiple marketing
segments with multiple marketing mixes. Once a target market (or markets) has been
chosen, then the company must plan on the correct way to reach the consumers with
the best product, service, price, place and promotion.
Target marketing is not a new concept but it still creates a lot of confusion. It’s no
wonder so many advisors, reps, agents, planners, and brokers try to grow their practice
without a target market. It’s like searching for the buried treasure without a treasure
map.

Interest and Passion

Focus on being a resource to an industry or profession where you have a genuine
interest and excitement. Is it the movie industry/Politics/Police officers and
firefighters/Health and fitness? It’s a lot of fun to work with people that do something
you love.
A marketing mix is the perfect selection of product, place, price and promotion
strategies used to have mutually beneficially exchanges with a target market. In the
marketing world, a marketing mix is also referred to as the Four Ps. The Ps being:
product, place, price and promotion. Sometimes a product will fail because just one part
of the marketing mix is incorrect.
A marketing mix must carefully be created to reach the specific target market that a
company is trying to reach.

1.10 New Product Development Program

In Insurance, New Product Development (NPD) is the complete process of bringing a
new product to market. New product development is described in the literature as the
transformation of a market opportunity into a product available for sale and it can be
tangible (that is, something physical you can touch) or intangible (like a service,
experience, or belief). A good understanding of customer needs and wants, the
competitive environment and the nature of the market represent the top required factors
for the success of a new product.
Cost, time and quality are the main variables that drive the customer needs. Aimed
at these three variables, companies develop continuous practices and strategies to
better satisfy the customer requirements and increase their market share by a regular
development of new products.
There are many uncertainties and challenges throughout the process which
companies must face. The use of best practices and the elimination of barriers to
communication are the main concerns for the management of NPD process. While all
insurers are focused on growth, it cannot be growth by any means possible. Growth in
today’s market must be profitable. The lesson from the economic volatility of the last 10
years has been that insurers must be able to build and sustain an underwriting profit, and

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26 Insurance Marketing & Client Management
that investment income can no longer be used as a crutch. Insurers must capitalize on
market opportunities and changes by bringing new products to market faster and adjusting
Notes existing products rapidly and effectively.
The current economic crisis is driving insurers to work harder than ever before to
remain competitive and profitable. According to Gartner Inc., “product development is
becoming a key priority for the global insurance industry. Insurers that invest in new
solutions and change the underlying process to automate and streamline their product-
development processes will find themselves with greater sales volumes and more
satisfied customers because of proper product fit.”
Greater accuracy — characterized by risk dynamics associated with selection —
across underwriting and pricing processes is essential. The consequences for insurers
that neglect product innovation are dire: they will fail to get targeted products out to
producers and customers quickly and efficiently and will lose business, as well as
market share. Ultimately, they may not survive current market conditions.
Technology plays a critical role in meeting these needs by allowing underwriters,
actuaries and marketing staff to electronically collaborate across disbursed locations.
This enables improved product development cycles, which helps increase product
quality, matching to customer needs, and accurate pricing to a narrower segment that’s
harder to identify and supply. The majority of top insurance carriers are cultivating skills
and leveraging partners focused on accelerating product development in order to
compete with industry peers. They also are launching entire new marketing brands as a
means of competition. Small, nimble carriers traditionally are able to respond more
quickly to emerging market segments, getting the early jump on opportunities. Larger
carriers are held back by their inability to centralize information and modify master
product catalogs. They need those abilities to quickly respond to competitive pressures
and implement new marketing strategies and products.
Carriers with stressed balance sheets are causing the industry to experience
unprecedented mergers and acquisitions, bringing about industry consolidation. The
decision of who remains after a merger or acquisition often may be determined by
which department head has the higher-performing team. This uncertainty is keeping
marketing and underwriting executives on their toes. Time to market has become more
than just a competitive advantage; in today’s economy, it’s about corporate survival.
Other market dynamics, such as aging producer organizations, also are causing
industry consolidation. This is producing new, larger Managing General Agencies,
which reduces competition and forces smaller independents out of the market. High-
performance product design and development (PD&D) technology, coupled with
business process automation, can help insurers improve financial ratios and the non-
financial aspects of their businesses, positioning their organizations for future success.
It can help them improve three key areas:
 Increase sales by significantly reducing PD&D cycle time up to 65 percent,
specifically across product research, validation, design, development, maintenance
and deployment
 Increase customer value by dramatically improving product quality perception
 Increase personnel productivity and improve organizational alignment for both
captive and independent producer networks.
An optimized PD&D process must help insurers create niche products quickly
based on even the most narrowly defined market segments. Carriers in North America
and Western Europe quickly are adopting PD&D to identify this niche, underserved
small- and midsize-market segments that are highly profitable. Optimized PD&D also
can improve an organization’s capability to quickly respond to small markets where
many carriers lack control over multi-national or conglomerate product catalogs that
focus on geographic profitability, or provide a heightened awareness of producer
product and channel performance. By creating narrower risk selections, PD&D can
provide improved accuracy in product pricing by increasing the ability to accurately
match risk to price. Another key benefit is an improved ability to generate reports and

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Insurance Marketing Strategy 27
filings, leading to greater regulatory compliance. Insurers have many requirements for
their PD&D solutions as they strive to meet ever-increasing regulatory compliance
obligations, industry pricing pressures and challenging customer recruitment and Notes
retention. Many product configurators only answer part of the requirements. Product
configurators traditionally focus in three areas: product design, product testing, and
product management. While this is a good start for insurers engaged in PD&D
processes, insurers will require much more collaboration and interoperability as they
expand their thinking about product development across the broader community. To
meet their numerous obligations, insurers need to look for new PD&D vendor solutions
that will better integrate people, existing legacy applications and best-of-breed providers
to support these new requirements. Microsoft Corp.’s technologies and services form
key components of the Insurance Value Chain (IVC), a comprehensive approach to
help insurers successfully meet today’s challenges. Solutions from Microsoft’s partner
community ease IT complexity and connect all facets of the insurance process,
including agent and broker services, product development and design, customer
performance and insight, underwriting and claims servicing.
These solutions help insurers become more agile while reducing overall technology
costs. At Microsoft, we believe our low-cost, best-of breed technology platforms have
allowed our global Insurance Value Chain partners to build solutions that can help
insurers reduce product life-cycle management (PLM) cost, and cut average
development time in half — from 180 days to 90 days for the standard cycle, or below
30 days for aggressive carriers. Microsoft’s IVC partner PD&D solutions help insurers
gain more agility in policy administration, underwriting and marketing by enabling them
to extract more functionality from their existing systems. Microsoft and IVC partner
solutions allow insurers to unlock legacy data for new product development endeavors.
Today, very few software solution providers are capable of delivering on promises in
this nascent PD&D landscape that covers a wide range of capabilities specifically
targeting commercial and personal property and casualty (general insurance) carriers.
One asset and partnership that can meet these demands is Accenture’s Insurance
Configuration Components (ICC). ICC is a solution developed by Accenture business
architects in close collaboration with technologists from Microsoft and Avanade (a
company created by Accenture and Microsoft). ICC was released initially on Nov. 21,
2007. The first release was packed with features, such as centralized master product
catalog and component definitions that allow business users to configure product
templates and offerings. ICC now incorporates IVC best-of-breed interoperability with
leading partners such as Blaze Advisor from Fair Isaac Corp. for insurance underwriting
rules and Insbridge for rating. ICC’s product developer workbench allows product
changes to be pre-modeled with these IVC partners and tested for impact on premiums.
Microsoft provides the platform and interoperability software, such as Microsoft .NET
and BizTalk Server, supporting a full service oriented architecture Accenture’s ICC
PD&D solution suite includes a powerful combination of technology tools and non-
technology asset accelerators that provide standardized product catalog blueprint
components, business tasks and workflow frameworks, and process models and flows,
to help insurers fuel intelligent, differentiated and targeted growth.
The Accenture solution can help insurers test pricing scenarios and broader
coverage products before launch to the marketplace. The solution supports targeted
campaigns to customer-specific niche segments by gathering insight around customer
risk exposures and buying behaviors. The ICC solution can enable insurers to build new
products quickly that are tailored to specific industry or customer needs in a way that
allows them to minimize the importance of price and build higher-profit-margin business
capable of surviving market cycles. The solution is intended to help insurers build an
offering that combines products, services and expertise, and help them deliver it to a
dynamic marketplace on a sustainable basis. Accenture’s early-adopter charter client,
Safeco Insurance Co., now a part of Liberty Mutual Group, selected the solution as a
key component in its strategy to modernize its product and policy systems, allowing for
greater product innovation. The goal of the new system was to help centralize and
enhance the delivery of product development capabilities across commercial and

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personal P&C lines of business and geographies. ICC delivers advanced software
application design that offers a full range of product configuration capabilities for
Notes medium-sized and large property and casualty insurers.
The ICC solution is the newest addition to Accenture’s suite of P&C technology
solutions, which also includes claims components, underwriting components and policy
administration software. Accenture helped Safeco, now a part of Liberty Mutual Group,
adapt and implement the Phase I solution. They now are working on Phase II.
Embracing PD&D strategies can lead to differentiation. Insurers that do not improve
their product design and development processes will miss opportunities for profitable
portfolio growth. But even more critical, if they are not able to optimize the PD&D
process by adequately assessing customer needs, creating new products to serve
customers’ needs, and quickly delivering those products to sales channels, they won’t
be able to compete in the various market cycles of what has become a very competitive
marketplace. This white paper delves deeper into the product design and development
challenges insurers currently face and describes forward-thinking strategies that
insurers must identify to address today’s challenges. It explores in more detail the
technologies companies have implemented that have enabled them to become more
agile and technologically integrated, responsive and efficient.
The benefits these companies have seen, and will continue to see, include the
ability to price well, target niche markets, get products out to the market more quickly,
efficiently and cost-effectively, and remain competitive through varying hard and soft
market cycles globally. Business Challenges in Product Design & Development Markets
Across various economies and geographic regions, “hard and soft” insurance market
cycle conditions cause competitive challenges and shifts in strategic business
imperatives for insurers and producers, especially in general insurance lines of
business. Premium pricing strength erodes during soft market conditions, pushing
carriers to seek more profitable niche growth through finer risk segmentation and
tailored product and service offerings.
To respond quickly to these dynamic market conditions, carriers must have the
ability to either price-down in soft markets or price-up during hard cycles at the right risk
levels. Most carriers’ legacy platforms respond to pricing and underwriting change
controls in 90–180 days on average — often missing starting and ending cycle rhythms.
Policy renewals are particularly vulnerable during these cycles. Risk reevaluation and
pricing periods typically are susceptible to competitive predators. Renewal pricing often
is left either to inefficient manual processes as guesswork or to mass re-pricing applied
across the board without insight into risk-ratio tolerances or customer loyalty.
Inability to identify and capitalize on New Product Opportunities with Risk Selection
and Pricing Accuracy Insurance carriers typically move across all or a subset of seven
key business process management steps when responding to market cycle challenges.
The steps, in sequence, are research, design, development, analysis, filing,
maintenance and deployment. Not all product updates require carriers to move through
the entire sequence of steps. For the situations that do use all seven steps, such as
new product portfolio and branding, the bulk of the workload and duration lies within the
“design, develop and analyze” steps, depending on the degree of product complexity for
launch or modification. Whether products have to go through all seven steps or only a
few of the steps, ultimately, carriers want several product development work streams
and launches done simultaneously and issued to production on a specific date. Another
issue brokers deal with is the need for instant risk evaluation, rating, pricing and product
modification to close business quickly. Real-time responsiveness and collaboration with
a broker during these timely negotiation situations are priceless in winning against the
competition.
Rigid, Existing Policy Administration Systems Insurers struggle with the imperative
to grow business with limited resources and budgets. Many insurers are hampered by
inflexible legacy systems that stymie their efforts to grow, through 20- to 30-year-old
technology platforms that hold critical data assets captive. It is not uncommon for an
aged policy administration system to possess old, impossible-to-maintain, hard-coded

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information that holds carriers back. This often is known as the “spaghetti code” of
policy systems. The legacy systems are difficult to maintain, change and teach to new
IT staff. Carriers are looking for ways to use new, best-of-breed technology to make Notes
their systems more agile so they can support improved processes, including shortened
PD&D configuration cycles. Gartner’s Kimberly Harris-Ferrante says, “Some insurers
want to extend the life of their legacy systems and leverage past investments by
modifying policy solutions. Using this approach, established systems are modified to
comply with standards or to support new initiatives.
Policy system modification projects might include using new technologies, such as
Web services and XML, to expose trapped legacy data to other systems and
applications.” Moreover, continues Harris Ferrante, “although custom development has
been preferred in the past, the trend has reversed during the past three to four years.
Instead, insurers today have shifted to purchasing packages or maintaining their
systems.” Difficulty Integrating New Product Development and Configuration
Capabilities on Top of Existing Systems Constantly changing insurance market cycles
have made it essential for carriers to grow new business wisely, while preserving
profitable results. It’s become clear that insurers need to look at their internal operations
and systems for opportunities to integrate best-of-breed IVC components into emerging
supply chain configurations.
This enables carriers to shift resources to new or updated, value added, mission-
critical deliverables that introduce products and services to market faster while hitting
profitable niche targets. Insurance Carrier Strategies for Better Product Design &
Development Servicing Insurers that embrace PD&D strategies can drive successful
business models that lead to a culture of change, rising to meet any product-related
service challenge. The ability to quickly identify and capitalize on new product
development servicing controls can reduce inaccuracy on risk selection and pricing. The
ability to manage several PD&D workload streams at various stages simultaneously
exposes deep insights and business intelligence about your business for those areas
that are running smoothly and those that lack productivity. Organizations seeking PD&D
agility across business, operations and systems will achieve high results consistently by
delivering on difficult assignments that correlate product development, people,
collaboration and regular compliance approvals. As PD&D servicing becomes
normative over time as a naturally integrated set of refined processes, insurers will be
able to develop and maintain consistent delivery through agility, as well as a
streamlined work force. Carriers can consider redeploying critical resources to new
business imperatives that allow for analytics, workflow processes for ongoing
operational efficiency, and/or experimentation with new products and services with
speed and accuracy testing.
Some carriers invite employees to engage in brainstorming for new ideas while
others use cash incentives for ideas that lead to successful product launches. Carriers
possessing these new skills and disciplines will be ready to meet unanticipated
opportunities and threats. Innovators will be able to respond to unexpected shifts in
business strategy, as well as quickly identify product lines to discontinue. While culture,
knowledge and processes are vital elements, Microsoft believes that cost-effective
platforms in combination with IVC technology partners are the most critical aspects to
achieve and sustain consistent high-performance PD&D. Accenture reinforces this
concept with its point of view on the five business imperatives critical for high-
performing insurers: Industrialized rules management: Insurer systems must include
externalized, business configurable rules that separate product configuration from
business process management.
Rules combined with product blueprint components and format accelerators
consistently identify all processes and data utilized in the underwriting and product
development operations that directly govern collaboration processes from a centralized
rules management repository. Data mastery for customer/account, producer, product,
and policy data: PD&D software vendors and systems integrators must possess a firm

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understanding of standardized data model mastery for all transactions across enterprise
service bus messages.
Notes
In addition, data mastery is achieved through standardized XML messaging and
employing ACORD formats and partners that utilize standards. Standardized messages
provide easy analytical and operational business information that leverages common
data dictionaries for improved data integrity and reusability in data capture and rules-
driven processing. Agile product management: A good measure of top-down dedication
to market agility is the level of financial commitment by senior executives to transform
the product development process. It’s important for insurers to have the ability to quickly
develop, test and deploy new products from pre-existing components. It’s also essential
that they standardize efficient processing across business channels and products.
Disciplined and predictive underwriting across market cycles: The quality of an insurer’s
underwriting function can make or break its bottom line. Insurers must be able to finely
segment risk to optimize targeted growth, while ensuring superior selection, pricing and
terms.
PD&D is a complete set of tools for developing, simulating, optimizing and
implementing rule changes faster than the competition, giving insurers the ability to
respond quickly to changes in market dynamics. Straight-through processing: It is
critical to have an integrated approach to data capture, quoting, underwriting, pricing
and issuance that provides variable business processes according to risk complexity
and servicing. PD&D can help carriers go to market quickly with product development
that is faster than conventional methods. Instead of coding rules in programming
languages, new applications are developed using a rules language that closely
approximates how business people think about their business, reducing the opportunity
for errors or misunderstanding. Business users can change rules at any time, without
disrupting operations and without IT assistance.
The Microsoft Vision for Product Design & Development Microsoft’s vision for
insurance product design and development is to help insurers leverage existing
software assets and evaluate new technology innovation platforms. Microsoft
technology can help facilitate the PD&D process in two ways: by helping carriers get
agility out of existing policy administration systems and by enabling insurers to easily
integrate new product development and configuration capabilities on top of existing
systems. Microsoft products and technologies also can help insurers shorten product
configuration cycles. Microsoft can help insurers migrate information from legacy tools
to up-to-date systems or surround existing systems with a common desktop, cohesive
interface and central information repository for greater agility and improved access.
Microsoft technologies and IVC partners can help insurers quickly and easily configure
rules for underwriting, pricing, workflow and assessment dialog questions. With these
technologies, insurers can implement solutions that will allow them to continue to
benefit from their previous technology investments. Microsoft accomplishes this vision
in several ways.
For example:
 By helping IVC partner architecture codification, providing partners with the ability to
test interoperability and compatibility at Microsoft Technology Centers for both
execution and result answer set validation.
 By helping carriers consolidate into a master product production catalog that
provides a single consistent source of product information, which enables product
derivative generation as modifiable product copies.
 By helping standardize on .NET Web services and BizTalk Server Enterprise
Service Bus out of the box, enabling IVC adapters to integrate ICC with Fair Isaac
Blaze Advisor and Insbridge rating engine.
 By implementing solutions that externalize business rules and data that sit on top of
and easily integrate with existing legacy systems, which allows insurers to continue
to benefit from previous technology investments The Microsoft Insurance Value
Chain (IVC) is a comprehensive approach to meeting these challenges

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successfully. Microsoft and its partners develop global and industry standards-
based solutions that ease IT complexity and connect all facets of the insurance
process. These solutions can help insurers become more agile while reducing Notes
overall technology costs. They also can enable a People-Ready Business: one that
builds customer connections and strengthens profitable customer relationships.

1.11 Increasing Human Needs and Insurance Protection

1.11.1 Essentials of Insurance Products
This need not happen, however, since there are insurance contracts that can create a
fund at death to at least partially, and possibly fully, offset the lost income of the
insured. By means of insurance, an individual can ensure that the family will receive the
monetary value of those income-producing qualities that lie within him or her, regardless
of when death occurs. By capitalizing this life value (creating a fund large enough to
generate investment income approximating the salary or wages of the individual), an
income earner can leave the family in the same economic position that they would have
enjoyed had he or she lived. These concepts are the basis of a sales presentation that
was commonly used 30 years ago, and is still valid today, called “live, quit or die”. The
concept was that life and disability insurance can protect the economic values of a
working person, and that in a way one cannot lose by purchasing these insurance
contracts. Only one outcome can ultimately occur in life. A person will:
 Live, and the cash values of the insurance policy will be available as living benefits
 Die, and the death benefits will provide for survivors
 Surrender the policy (quit), and much if not all of the premiums paid can be
recovered
An additional condition was sometimes added—become disabled—to demonstrate
the waiver of premium provision, or the use of a disability policy, that can provide
income in the case of disability.
The Moral Obligation to Provide Protection: Most people assume major
responsibility for the support and maintenance of their dependent children during their
lifetime. In fact, they consider it one of the rewarding experiences of life. In any case,
the law attaches a legal obligation to the support of a spouse and children. Thus if there
is a divorce or a legal separation, the court will normally decree support payments for
dependent children and possibly alimony for the dependent spouse. In some cases
such payments, including alimony, are to continue beyond the provider's death, if the
children are still dependent or if the alimony recipient has not remarried. In such event,
the parent and ex-spouse are required to provide insurance or to set funds aside in
trust. It takes a high order of responsibility for a parent to voluntarily provide for
continuation of income to dependents after his or her own death. It virtually always
involves a reduction in the individual's own standard of living. Yet, few would deny that
any person with a dependent spouse, children, or parents has a moral obligation to
provide them with the protection afforded by insurance, as far as his or her financial
means permit. In his book Insurance, Dr. Solomon Huebner said the following
concerning the obligation to insure: From the family standpoint, insurance is a
necessary business proposition that may be expected of every person with dependents
as a matter of course, just like any other necessary business transaction which ordinary
decency requires him to meet. The care of his family is man's first and most important
business. The family should be established and run on a sound business basis. It
should be protected against needless bankruptcy. The death or disability of the head of
this business should not involve its impairment or dissolution any more than the death
of the head of a bank, railroad, or store. Every corporation and firm represents
capitalized earning capacity and goodwill. Why then, when men and women are about
to organize the business called a family should there not be a capitalization in the form
of an insurance policy of the only real value and goodwill behind that business? Why is
it not fully as reasonable to have an insurance policy accompany a marriage certificate
as it is to have a marine insurance certificate invariably attached to a foreign bill of
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exchange? The voyage in the first instance is, on the average, much longer, subject to
much greater risk, and in case of wreck, the loss is of infinitely greater consequence.
Notes The growth of insurance implies an increasing development of the sense of
responsibility. The idea of providing only for the present must give way to recognition
that a person's responsibility to his family is not limited to the years of survival.
Emphasis should be laid on the "crime of not insuring," and the finger of scorn should
be pointed at any man who, although he has provided well while he was alive, has not
seen fit to discount the uncertain future for the benefit of a dependent household. . . .
Insurance is a sure means of changing uncertainty into certainty and is the opposite of
gambling. He who does not insure gambles with the greatest of all chances and, if he
loses, makes those dearest to him pay the forfeit.
Insurance works as we begin our study of insurance products. The purpose of this
course is to give you a much deeper understanding of insurance products and related
concepts that will help you, as a financial advisor, work with prospects and clients on
ways to protect their families against the risk and financial impact of death. It will
accomplish this by reviewing the basic principles of how insurance works, the different
financial needs that insurance can address, the various types of insurance, ways of
comparing policies, the advantages and disadvantages of insurance illustrations,
insurance policy provisions, the taxation of insurance and some marketing and ethical
concepts applicable to selling insurance. The information in this course is largely to
educate you, not your clients. You will not necessarily discuss much of this material with
clients, since it is largely technical and not relevant to the consumer, but it is important
for you to understand it so you can appreciate the concepts and benefits of insurance,
how they work, and explain them correctly and with confidence to others. The financial
advisor can have a significant role in helping individuals and families establish a firm
foundation of financial security. They should be able to address the fundamental
financial needs and reasons for owning insurance. He or she should be able to help
prospects and clients recognize and accept their financial needs, and encourage them
to act to take care of those needs. People face many financial challenges, and the
ability to plan and save for the future is often put off for the pressures and pleasures of
today. This is clearly seen in recent research published by LIMRA, a research,
consulting and professional development organization that helps insurance and
financial services companies increase their marketing effectiveness. A recent LIMRA
study (Household Trends in Insurance Ownership study, LIMRA, 2010, LL Global, Inc.)
found that only 44 percent of U.S. households have individual insurance, representing a
50-year low in individual insurance ownership. The number of U.S. households with no
insurance whatsoever is growing. Today, 30 percent of households (35 million) have no
insurance coverage, compared to 22 percent of households in 2004. Despite high
unemployment, the study reveals a continuing increase in the proportion of insured
households that have only group insurance. Among households with children under age
18, which arguably have the greatest need for insurance, 11 million have no coverage.
Today 77 percent of husband-wife families with children under 18 have insurance
coverage, compared with 90 percent in 2004. As families have less to fall back on
financially in the economic downturn, more families are living on the edge, without the
safety net that insurance provides. Many Americans say they have not bought more
insurance because they have other financial priorities right now. Among households
with children under 18, four in ten say they would have immediate trouble meeting
everyday living expenses if the primary breadwinner died today. Another three in 10
would have trouble keeping up with expenses after several months. Half of households
feel they need more insurance than they have—the highest level ever. According to
LIMRA’s study, insurance beat out all other sources of financial assets or income that
Americans expect to use to help pay bills and to maintain their lifestyle in the event of
the primary wage-earner’s death. On average, households say they should have
enough insurance to replace their incomes for 6.2 years, but in reality they own enough
to replace the household’s income for only 3.5 years. Almost eight in 10 U.S.
households currently do not have a personal insurance agent or broker to turn to and
most of them say they never did. These facts represent an enormous opportunity as
well as a challenge to the insurance industry and insurance producers.

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The Role of the Financial Advisor: There is much to learn to be a competent
financial advisor. You must master the core skills of your business including marketing,
prospecting, selling, business organization, planning and management, Notes
communications, technical and product knowledge, and financial acumen. To be
effective, you must know how to help people structure their financial goals. To become
a professional and trusted advisor, you must help prospects and clients recognize and
accept their financial needs, and encourage them to act to take care of those needs.
That is rarely an easy job. People expect more from financial advisors today than they
did in the past. There have been serious violations of trust from financial institutions and
those who work for them, and this situation is especially acute today. As an advisor, you
are expected to act professionally and give accurate and valuable advice, based on
your knowledge, skill and experience. Financial advisors assist people who are facing
the challenges of life such as retirement, disability, long-term care needs, or death. We
help people address the problems these life events inevitably create. These are tough.

1.11.2 Essentials of Insurance Products Issues

Research studies point out that people do not like to think about or discuss these topics.
Retirement, death, divorce, having children, paying for college, layoffs and
unemployment, long-term care events, and disability are critical triggers for prospects to
either seek or accept professional financial help. Get in front of this fact with targeted
marketing, and seek prospects and markets where you can address these issues with
prospects. How many people you see will determine how successful you become, not
how much you know. Knowledge supplements a successful practice; it does not create
it. Activity is the key to staying in the business and eventually becoming successful.
Make two appointments everyday for some time in the future. Having two appointments
every day for the foreseeable future is the path to success. Selling is a complex,
psychological use of questions and statements that motivate people to make a decision
and take action. It is neither simplistic nor devious, if done well and professionally.
People fail to act in their best interest and tend to stay put, regardless of their
discomfort, unless motivated by a fear of loss or hope of gain that is greater than the
cost of a solution or doing nothing. No amount of professional knowledge will make a bit
of difference to this critical process unless you have someone to talk with. Expertise is
useless until the prospect is engaged in the process. Most new advisors will need four
or five strategic and repetitive marketing activities to be successful. With time and
experience, these activities may be reduced to one or two core activities discovered
through actual results over time.
Quality comes from experience, and experience comes from repeated activity and
many failures. Insurance Defined Insurance can be defined from many different points
of view. For example, from an economic viewpoint, insurance is a system for reducing
financial risk by transferring that risk from a policy owner to an insurer. The social
aspect of insurance involves the collective bearing of losses through contributions by all
members of a group to pay for losses suffered by some group members. From a
business viewpoint, insurance achieves the sharing of risk by transferring risks from
individuals and businesses to financial institutions specializing in risk. The insurer is not
in fact paying for the loss.
The insurer writes the claim check, but is actually transferring funds from individuals
who as part of a pool, paid premiums that created the fund from which the claims are
paid. Lastly, from a legal standpoint, an insurance contract (policy) transfers a risk (the
possibility of a loss), for a premium (consideration), from one party (the policy owner) to
another party (the insurer). It is a contractual arrangement in which the insurer agrees
to pay a predetermined sum to a beneficiary in the event of the insured’s death. By
virtue of a legally binding contract, the possibility of an unknown large financial loss is
exchanged for a comparatively small certain payment. This contract is not a guarantee
against a loss occurring, but a method of ensuring that payment is made for a loss that
does occur.

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1.11.3 The Financial Planning Process

Notes The financial advisor uses a planning approach to marketing insurance and financial
products.
Financial planning is a process that accomplishes both of the following:
 Determines the client's financial problems and/or financial goals
 Develops a plan to solve the client's problems and/or achieve the client's goals
Although some people may benefit from comprehensive financial planning, the
process of addressing all aspects of one's financial life at one time, most people do not
require this approach, and even if they do, they are unwilling to spend the time and
money it requires. It is difficult to deal with the totality of one's financial problems and
goals all at once. This is also challenging for the financial advisor, who needs
specialized education, experience and training to take on this challenging task. In most
cases, you will be addressing only one or a few of the most important financial needs
for the prospect or client at the initial and subsequent meetings. At the foundational
level of the financial plan, the advisor and client should focus on providing protection
against life’s uncertainties, those events, such as the death of an income producer or
parent that could have a devastating effect on the financial well being of an individual
and his or her dependents. This is the fundamental purpose of insurance. Insurance will
also be involved in the financial planning process as financial objectives such as wealth
accumulation and wealth distribution come into focus.
Insurance was once considered an isolated financial product designed to protect
policy owners from the financial consequences of premature death. Little attempt was
made to integrate insurance planning with the complete array of products sold by all
types of financial institutions. In recent years, it has become increasingly difficult to view
insurance products in isolation from a comprehensive financial planning process. This is
due in part to the growing popularity of the financial planning approach and in part to the
integration of the financial services industry, where a broad range of financial products
are being made available within one financial services organization.
 Risk Management: Life entails risk, which is defined as the possibility of loss.
People generally seek security and avoid uncertainty. The risk of death is
unavoidable, and is especially an economic threat if premature, when an individual
may be exposed to heavy financial responsibilities, yet has not had the time to
accumulate enough savings to offset the financial needs of survivors. Insurance
provides a tool for risk management, a process for dealing with the risk of loss of
life.
Insurance is a substitute of certainty for uncertainty, through the pooling of groups
of people who share the risks to which they are exposed. Uncertain risks of
individuals are combined, making the possible loss more certain, and providing a
financial solution to the problems created by the loss. Small, certain periodic
contributions (premiums) by the individuals in the group provide a fund from which
those who suffer a loss are compensated. The certainty of losing the premium
replaces the uncertainty of a larger loss. Insurance thus manages the uncertainty of
one party through the transfer of a particular risk (death) to another party (the
insurer) which offers a restoration, at least in part, of relatively large economic
losses suffered by the insured individual and his or her dependents.
 Indemnity: The essence of insurance is the principle of indemnity, that the person
who suffers a financial loss is placed in the same financial position after the loss as
before the loss occurred. He neither profits nor is disadvantaged by the loss. In
practice, this is much more difficult to achieve in insurance than in property
insurance. No insurance company would provide insurance in an amount clearly
exceeding the estimated economic value of the covered life. Limiting the amount of
insurance sold to reflect economic value gives recognition to the rule of indemnity.
Additionally, only persons exposed to the potential loss may legitimately own the
insurance covering the insured’s life.

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 Risk Pooling: Risk pooling Insurance is based on a concept called risk pooling, or
a group sharing of losses. People exposed to a risk agree to share losses fairly or
on an equitable basis. They transfer the economic risk of loss to an insurance Notes
company. Insurance companies collect and pool the premiums of thousands of
people, spreading the risk of losses across the entire pool. By carefully calculating
the probability of losses that will be sustained by the members of the pool,
insurance companies can equitably spread the cost of the losses to all the
members. The risk of loss is transferred from one to many and shared by all
insured’s in the pool.

The Building Blocks of Insurance-Mortality, Interest, and Expense

All insurance products are actuarially created by calculating the relationships of
mortality, interest, and expense, and the financial values resulting from each based on
time. The assumptions made concerning these three factors will determine the premium
at which a policy is sold, the structure of the policy, and over time the performance of
the policy and the profitability and solvency of the insurance company. All insurance
policies, regardless of type, are based on these same elements.
Mortality interest expense Mortality rates project the cost of covering death claims
as they occur.
Interest earnings reflect the income the company expects to receive from the
investment of premiums over time that will be added to the reserves, held aside to pay
future claims.
Expenses include the cost of creating, offering, and maintaining the product to pay
all promised benefits.
These factors must also provide profit to the insurer.
Different products apply these factors in different ways. Term insurance has a pay-
as-you-go structure. Premiums increase as mortality increases and the policy does not
build cash value. Interest earnings have a smaller impact on the premium than in
permanent policies and expenses are largely covered by the policy fee. In permanent
whole insurance (WL), the policy owner pays premiums in advance, paying a higher, or
excess, premium that can be “reserved,” so that premiums can remain level throughout
the insured's life. This higher premium level builds cash value the policy owner can
access through loans or cash surrender of the policy. In WL, these factors are
“bundled,” meaning they are not itemized or disclosed separately. On the other hand, in
universal life (UL), the costs are unbundled, meaning the components of mortality,
interest, and expense in the policy are identified and the values and charges for each
are itemized in regular reports to policy owners. Mortality charges are identified as cost
of insurance (COI), which are monthly charges based on the insured’s issue age,
attained age, net amount at risk, gender, and underwriting class. Interest is paid each
month on the cash value at the current crediting rate. Administrative expenses are
charged monthly. All of these elements have a current rate, and are subject to
maximum and minimum guaranteed charges or interest crediting as stated in the policy.
Because of the unbundled nature of policy costs, UL works like an investment account
with term coverage. The mortality charges are similar to those of term, and the interest
rates reflect the current market and adjust to changing market conditions. The policy
owner accepts more of the investment and mortality risk, with a minimum guaranteed
interest crediting rate, and maximum mortality and expense charge guarantees.
Variable universal life (VUL) contains death benefits and cash values that vary with
the performance of the subaccounts selected. The death benefit and cash value are not
guaranteed, and can fluctuate according to market performance. The insurance aspect
of VUL is essentially the same product as UL with the same features and specifications
for the most part. The main difference between UL and VUL is that VUL allows the
policy owner to allocate the premiums and cash value of the policy among a group of
variable subaccounts.

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Actuaries study the incidence of deaths in the recent past, and develop
expectations about how these events will change over time, allowing them to develop
Notes an expectation of the timing and number of such events in the future. A safety margin is
built in that increases the mortality rates above what is expected. In participating
policies, savings created by these conservative assumptions can be returned as
dividends. In nonparticipating policies, the safety margins must be smaller in order for
the premium rates to be competitive.
Essentials of Insurance Products Characteristics: such as smoking status,
occupation, health histories, and others. Larger insurance companies use their own
morality statistics to calculate their pricing of products, based on their own selection and
underwriting practices. Interest Insurers invest the premiums they receive and
accumulate them for future claims and other obligations, such as policy loans and
surrenders. Insurance company portfolios are traditionally long-term and emphasize
safety of principal and predictable rates of return, to accommodate their long-term
obligations. Typically, two-thirds or more of this capital is invested in bonds and
mortgages, which meet the above criteria. A smaller percentage is invested in common
stocks, due to their volatility.
Today, common stocks represent less than 10 percent of the average life insurer’s
general account portfolio. Since recently issued policies have low claims experience as
a whole until years later, there is an adjustment in the calculation of the premium for the
time value of money (compound interest). If the investment results exceed the
guaranteed minimum, policy owners benefit from either participating dividends or
excess interest crediting to the policy’s cash value.
Expense Insurance companies incur acquisition and administrative expenses in the
course of doing business. Acquisition expenses include the costs incurred in obtaining
business and placing it in force, such as advertising and promotion fees; commissions;
underwriting expenses; costs associated with medical exams and attending physicians’
statements, inspection report and credit history fees; home office processing costs; and
an addition to the insurer’s reserve, surplus, and profits. Administrative expenses
include the costs associated with collecting premiums and distributing dividends,
continuing producer compensation, investment expenses, and home office overhead.
Any costs the insurer incurs must be recovered through mortality savings, expense
charges, and (or) reduced interest crediting.

Determining the Premium

YRT (yearly renewable term) is the simplest form of insurance offered by insurance
companies. It provides insurance for a period of one year and allows the policy owner to
renew the policy for successive periods of one year each, paying just the mortality
charges and administrative expenses for one year at a time, and no more. The interest
component is minimal. The mortality charge for YRT insurance is determined by the
death rate for the attained age of the individual involved. Each premium purchases only
one year of insurance protection. Each group of policy owners of a given age is
considered to be a separate class for premium purposes; each group must pay its own
death claims, with the burden shared equally by the members of the group. Because
the death rate increases with age, the premium for yearly renewable term insurance
normally increases each year.

Human Life Value

The economic values of a human life are the basis for the need for insurance, and can
help determine the amount of insurance needed by an individual or a family. A human
life has an economic value only if some person(s) or organization depends upon or
expects to receive some monetary benefit through that life. The following discussion
explains how human life value is determined, and lists and describes the specific needs
for insurance. The methods used to calculate the amount of insurance needed by
individuals and families are discussed later.

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The Concept of Human Life Value
A human life possesses many values, most of them irreplaceable and not easily Notes
measured. These values are founded on religious, moral, and social relationships. From
a religious standpoint, for example, human life is regarded as immortal and endowed
with a value beyond the comprehension of mortal man. In a person's relationship with
other human beings, a set of emotional and sentimental attachments is created that
cannot be measured in monetary terms or supplanted by material things. Such values,
however, are not the foundation of insurance. Although not oblivious to these values—in
fact, the insurance transaction has strong moral and social overtones—insurance is
concerned with the human life value, or the economic value of a human life, which is
derived from its earning capacity and the financial dependence of others on that earning
capacity.
The Economic Value of the Human Life In terms of its physical composition, the
human body has a limited dollar value. In terms of earning capacity, however, it may be
worth millions of dollars. Yet, earning power alone does not create an economic value
that can logically serve as the basis of insurance. A human life has an economic value
only if some other person or organization expects to receive an economic advantage
through its existence. If an individual is without dependents and no other person or
organization depends financially on that person, either now or in the future, then that
life, for all practical purposes, has no monetary value that needs to be insured. Such an
individual is rare.
Most income producers either have dependents or can expect to acquire them in
the normal course of life. Even those income earners with no family dependents often
provide financial support to business or charitable organizations. In either case, a basis
exists for insurance.
Preservation of Family's Economic Security in many cases, an income producer's
family is completely dependent on his or her personal earnings for survival and the
comforts of life. In other words, the "potential" estate, or the earnings and savings that
may be received and accumulated in the future, is far more substantial than the existing
estate—the savings that the family has been able to accumulate. The family's economic
security lies in the earning capacity of each income earner, which is represented by his
or her "character and health, training and experience, personality and power of industry,
judgment and power of initiative, and driving force to put across in tangible form the
economic images of his mind," said Solomon Huebner in 1950.
Over time, this economic potential are gradually converted into income, a portion of
which is devoted to self-maintenance, a portion to support of dependents, and if the
income is large enough, a portion to savings to meet future needs and contingencies. If
the individual lives and stays in good health, the total income potential will eventually be
realized, for the benefit of the family and others who receive benefits from his or her
efforts. If an income earner dies or becomes permanently and totally disabled, the
unrealized portion of his or her total earnings potential will be lost, and in the absence of
other measures, the family will soon find it destitute or reduced to a lower income than it
previously enjoyed.

Insurance Needs
Why have insurance? Ben Baldwin gets to the heart of this question in his book, The
Complete Book of Insurance (Irwin Professional Publishing, 1996). Mr. Baldwin says to
answer this question; a person needs to ask two more questions. The first is, “In the
event of my death, will anyone experience an economic loss?” If the answer is yes, then
the second question is, “Do I care?” If the person does not have anyone who will
experience a financial loss at his or her death, or if he or she does not care that those
people will experience an economic loss, then that person is not a prospect for
insurance. This comment beckons a few axioms from the archives of insurance selling.
The first is that “insurance is sold, it is not bought”. Because so many people find
reasons not to take the initiative to purchase insurance, or in many cases do not

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understand the need for insurance, the insurance advisor takes the initiative to discuss
this important risk management tool. As suggested by Mr. Baldwin’s approach, an old
Notes axiom in the insurance business says that insurance is only sold when somebody loves
somebody.
As the Life and Health Insurance Foundation for Education (LIFE) advises,
“Insurance isn’t for the people who die. It’s for the people who live.” This is a major shift
of perspective for many prospects. (It’s about them, not you.)
The following discussion addresses the needs that may result from the death of a
breadwinner and should be your foundation for educating a prospect regarding the
needs for insurance, human life value approach needs analysis approach.
The human life value approach produces a value for a person’s economic worth at
a given point in their life. This method does not anticipate actual dependent needs that
may arise with the death of a person. An estimate of these needs is obtained through a
needs analysis approach. How much insurance is enough? The needs analysis
approach is a way to determine how much insurance a person should carry by
analyzing the needs his or her family and other dependents would experience if that
individual died. It would be difficult, if not impossible, to prepare a list of all needs that
might possibly arise after the death of an income producer. Family circumstances differ,
and a list of needs that would be appropriate for one family might be quite unsuitable for
another. Even within any particular family, the needs picture changes from time to time.
Insurance is the best way to address the financial impacts of death, regardless of
when or why it occurs. Insurance benefits individuals, families, businesses, and their
communities, because it delivers tax-free money without administrative hassles and
settlement costs. It does so from the inception of coverage until its eventual fulfillment.
The following section outlines the general categories of needs that are likely to be found
in a typical family situation. Funds to Repay Debt Many personal debt agreements have
a clause specifying that the full remaining balance will become due and payable upon
the death of the debtor. This clause may be present whether or not there is any credit
insurance covering the loan agreement. Although lending institutions regularly offer
credit insurance at the time the loan is initially created, such coverage is not mandatory
and is often refused by the borrower. When credit insurance is in force, the remaining
loan balance will be repaid to the lender by the credit insurance company when a death
claim is filed.
However, there is always the possibility that credit insurance benefits will not be
collected if the survivors, executor, or administrator are not aware of the insurance.
Credit insurance information, therefore, should always be noted in files pertaining to the
insured’s debt. Credit insurance is not the only way of repaying debts that become due
and payable at death. All types of insurance policies provide death benefits that are
suitable for repayment of debts. A single large policy can provide enough funds to
liquidate many or all debts. Moreover, the standard types of individual insurance
policies may be lower in costs than credit life policies.
There are some debts that do not become due and payable upon the death of the
borrower. This is more likely to be the case when both husband and wife are liable for
the debt. Adequate amounts of individual insurance will give the survivor the option of
either paying off the debt or continuing to repay it according to schedule. That option is
not available under credit insurance, because benefits automatically cancel the debt
once a claim has been filed and approved for payment. Mortgage Redemption Needs
Homeownership is usually burdened with a mortgage and it is highly probable that a
balance will still be outstanding upon the death of a person with dependent children. In
some cases, of course, the widow(er) may want to sell the house and move into a
smaller one or into an apartment. Assuming the house can be sold for an amount that
exceeds the remaining mortgage balance, it may not be essential to provide funds for
the liquidation of the mortgage.
In many cases, however, it is preferred that the survivors will continue to occupy the
family residence, and funds to pay off the mortgage may be needed. If the family can
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remain in the home, free of a monthly mortgage payment, the family's income need to
be greatly reduced.
Notes
Educational Needs
The income provided for a surviving spouse during the period when the children are
dependent should normally be adequate for secondary school expenses, as well as for
general maintenance. However, if a college education for one or more of the children is
a goal, additional income will be needed. A college or professional education is beyond
the means of many dependent children who lose an income-earning parent. Minor
children need uninterrupted support for their education—from their first day in the
classroom to young adulthood. The funding requirements for educating children vary
widely from one family to another. A public school education that ends at high school
has relatively modest costs compared to the costs of a private school education
including preschool, prep school, private university, and professional school. The
factors influencing parents’ educational goals and decisions for their children involve a
complex mixture of family history, family philosophy toward education, family income,
and the abilities and personality of the child. Planning for an ivy-league education, for
example, will be for naught if the child does not have adequate financial resources to
enable him or her to attend a school of that caliber. For very young children, the
planning horizon for education may exceed 20 years. Adjustments for inflation must be
made for educational costs to be incurred more than a decade into the future. Choosing
the appropriate inflation factor involves estimation, but it is safe to assume that the rate
will be as great or greater than general inflation. Some authorities on the subject
recommend a planning assumption of 7 percent to 8 percent annual inflation in
education costs.
Educational needs of the family are not restricted to the children. A surviving
spouse may need further education to increase future income potential to help support
the family. The spouse may need a refresher course or training to return to a prior
occupation. On the other hand, the spouse’s need may be extensive, such as to
prepare to enter the job market for the first time or to upgrade to a higher-paying career.
One important consideration in providing education or training to the surviving spouse is
whether the survivor will be able to earn any income while pursuing his or her education
or training. Funding spousal education on a full-time basis usually requires prefunding
family support while the spouse is a full-time student and prefunding the educational or
training costs as well. In some cases, the surviving spouse may be able to pursue the
education on a part-time basis while he or she is employed in the workforce. This is an
emotional and challenging avenue for a surviving spouse who is now also a single
parent. Pursuing education on a part-time basis may greatly lengthen the period needed
to complete the educational program. This will delay any significant increases in earned
income for the surviving spouse and family members. If the potential increase in income
because of further education is large enough, it may actually be less costly to prefund a
full-time educational program.

Emergency Needs
From time to time in the life of a family, unforeseen needs for money arise because of
illness, surgery, major dental work, home repairs, or many other reasons. It is
unrealistic for the family income providers to leave only enough income for the family to
subsist if everything goes well and not to plan for unusual expenditures. Therefore, a
liquid fund should be set up from which additional income can be provided if and when it
is needed. Some financial planners suggest that the emergency fund often warrants a
higher priority than income for dependents. The actual setting of priorities is properly the
responsibility of the income earner(s). A 3 to 6 month fund of average spending
amounts is normally suggested, but this will vary by family.

Funding Trusts at Death

Trusts are contractual arrangements for the ownership and management of assets by a
trustee according to the trust agreement. The trustee manages trust assets on behalf of

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and for the benefit of the trust beneficiaries. There are many different motivations for the
establishment of a trust. One is to get professional management from a corporate entity,
Notes such as a trust company or a bank trust department, so that the trustee will not
predecease any of the trust beneficiaries. Tax considerations may also justify the
creation of a trust. Insurance is often an integral part of the trust funding. The trust itself
often owns insurance on the grantor, who names the trust as beneficiary of that
insurance. Trusts can also be beneficiaries of insurance policies not owned by the trust.
Those insurance proceeds provide the funds necessary for the trust to carry out its
objectives. Some trusts are set up specifically for the purpose of funding insurance
premiums and receiving proceeds. If estate tax minimization is the objective of the trust,
the trust is subject to more stringent requirements that can change many times during
the existence of the trust. Trusts have always been an important means of extending
family financial management by the parents beyond their lifetime. In these
arrangements, the trust is often used to distribute funds periodically rather than in a
lump sum. The objective is usually to protect a child from spending funds frivolously. By
spreading out the distribution, the child is unable to get access to and squander the
entire sum immediately after the parents’ death. Final distribution from such trusts is
often based on the beneficiary’s attainment of a specified age and is usually the
parents’ decision as to when the child will be mature enough to handle the funds
responsibly. Trusts can be set up for the benefit of children with mental impairments or
other problems that would prevent them from ever becoming capable of managing their
own finances. The nature of the trust depends very heavily on the type of care being
provided to such children, especially on whether the care is private or public.

Retirement Needs
Retirement is a planning need that the financial advisor must anticipate. This
contingency determines the type of insurance the prospect should purchase. If the
family needs are met with cash value insurance (assuming adequate funds for
premiums), the cash values under this insurance can supplement other retirement
income sources to take care of the postretirement needs of the insured and his or her
spouse.

1.12 Insurance Products versus Other Financial Securities

Insurance-linked securities (ILS) are broadly defined as financial instruments whose
values are driven by insurance loss events. Those instruments that are linked to
property losses due to natural catastrophes represent a unique asset class, the return
from which is uncorrelated with that of the general financial market.
Insurance companies are in the business of assuming risk for individuals and
institutions. They manage those risks by diversifying over a large number of policies,
perils and geographic regions. There are two important ways insurers profit in this
business.
One is by selling portfolios of insurance policies grouped into packages, to
interested investors. The risk from low severity, high probability events can be
diversified by writing a large number of similar policies. This reduces an insurer’s risk
because should a policy default, then the loss is shared between a large numbers of
investors.
The second way insurers profit on policies is by re-insuring them through other
insurers. A reinsurance policy would allow a second insurer to share in the gain and
potential loss of the policy, much like an investor. The secondary insurer would share
invested interest and risk. The reinsurance of policies offers additional risk capital and
high returns for the policy originator, and minimizes their liability, while also providing
high returns for any secondary insurer.

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1.12.1 Types
The most prevalent securitized insurance contracts exchanged in capital markets Notes
include:
 Catastrophe bonds
 Embedded Value Securitization
 Extreme Mortality Securitization
 Life Settlements Securitization
 Longevity Swaps
 Reserve Funding Securitization
To issue an ILS in the security or derivative market, an insurer would first issue an
SPV, or Special purpose vehicle. An SPV has two functions; it provides re-insurance for
insurance companies and issues securities to investors. At first, an SPV deposits funds
collected by investors into a trust. Any interested parties will pay a premium to the SPV.
The money from the premium and investment income will provide the interest payments
owed to investors.
If there is no catastrophic event, or trigger event, before the maturity date of the
contract, investors will receive back their principal investment at maturity on top of the
interest payments they have received.

Other Financial Securities

A security is a tradable financial asset. It is commonly used to mean any form of
financial instrument, but the legal definition of a "security" varies by legal and regulatory
jurisdiction. In some jurisdictions the term specifically excludes financial instruments
other than equities and fixed income instruments. In some jurisdictions it includes some
instruments that are close to equities and fixed income, e.g. equity warrants. In some
countries and/or languages the term "security" is commonly used in day-to-day parlance
to mean any form of financial instrument, even though the underlying legal and
regulatory regime may not have such a broad definition.
In the United Kingdom, the national competent authority for financial markets
regulation is the Financial Conduct Authority: the definition in its Handbook of the term
"security" applies only to equities, debentures, alternative debentures, government and
public securities, warrants, certificates representing certain securities, units, stakeholder
pension schemes, personal pension schemes, rights to or interests in investments, and
anything that may be admitted to the Official List.
In the USA, a security is a tradable financial asset of any kind.
Securities are broadly categorized into:
 Debt securities, (e.g., banknotes, bonds and debentures)
 Equity securities, (e.g., common stocks)
 Derivatives, (e.g., forwards, futures, options and swaps).
The company or other entity issuing the security is called the issuer. A country's
regulatory structure determines what qualifies as a security. For example, private
investment pools may have some features of securities, but they may not be registered
or regulated as such if they meet various restrictions.
Securities may be represented by a certificate or, more typically, "non-certificated",
that is in electronic (dematerialized) or "book entry" only form. Certificates may be
bearer, meaning they entitle the holder to rights under the security merely by holding
the security, or registered, meaning they entitle the holder to rights only if he or she
appears on a security register maintained by the issuer or an intermediary. They include
shares of corporate stock or mutual funds, bonds issued by corporations or

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governmental agencies, stock options or other options, limited partnership units, and
various other formal investment instruments that are negotiable and fungible.
Notes
Classification
Securities may be classified according to many categories or classification systems:
 Currency of denomination
 Ownership rights
 Terms to maturity
 Degree of liquidity
 Income payments
 Tax treatment
 Credit rating
Industrial sector or "industry" ("Sector" often refers to a higher level or broader
category, such as Consumer Discretionary, whereas "industry" often refers to a lower
level classification, such as Consumer Appliances. See Industry for a discussion of
some classification systems.)
Region or country (such as country of incorporation, country of principal
sales/market of its products or services, or country in which the principal securities
exchange where it trades is located)
 Market capitalization
 State (typically for municipal or "tax-free" bonds)
 New capital
Securities are the traditional way that commercial enterprises raise new capital.
These may be an attractive alternative to bank loans depending on their pricing and
market demand for particular characteristics. Another disadvantage of bank loans as a
source of financing is that the bank may seek a measure of protection against default by
the borrower via extensive financial covenants. Through securities, capital is provided
by investors who purchase the securities upon their initial issuance. In a similar way, a
government may issue securities too when it needs to increase government debt

Type of holder
Investors in securities may be retail, i.e. members of the public investing other than by
way of business. The greatest part of investment, in terms of volume, is wholesale, i.e.
by financial institutions acting on their own account, or on behalf of clients. Important
institutional investors include investment banks, insurance companies, pension funds
and other managed funds.

Investment
The traditional economic function of the purchase of securities is investment, with the
view to receiving income and/or achieving capital gain. Debt securities generally offer a
higher rate of interest than bank deposits, and equities may offer the prospect of capital
growth. Equity investment may also offer control of the business of the issuer. Debt
holdings may also offer some measure of control to the investor if the company is a
fledgling start-up or an old giant undergoing 'restructuring'. In these cases, if interest
payments are missed, the creditors may take control of the company and liquidate it to
recover some of their investment.

Collateral
The last decade has seen an enormous growth in the use of securities as collateral.
Purchasing securities with borrowed money secured by other securities or cash itself is
called "buying on margin". Where A is owed a debt or other obligation by B, A may

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require B to deliver property rights in securities to A, either at inception (transfer of title)
or only in default (non-transfer-of-title institutional). For institutional loans, property
rights are not transferred but nevertheless enable A to satisfy its claims in the event that Notes
B fails to make good on its obligations to A or otherwise becomes insolvent. Collateral
arrangements are divided into two broad categories, namely security interests and
outright collateral transfers. Commonly, commercial banks, investment banks,
government agencies and other institutional investors such as mutual funds are
significant collateral takers as well as providers. In addition, private parties may utilize
stocks or other securities as collateral for portfolio loans in securities lending scenarios.
On the consumer level, loans against securities have grown into three distinct
groups over the last decade: 1) Standard Institutional Loans, generally offering low
loan-to-value with very strict call and coverage regimens, akin to standard margin loans;
2) Transfer-of-Title (ToT) Loans, typically provided by private parties where borrower
ownership is completely extinguished save for the rights provided in the loan contract;
and 3) Non-Transfer-of-Title Credit Line facilities where shares are not sold and they
serve as assets in a standard lien-type line of cash credit. Of the three, transfer-of-title
loans have fallen into the very high-risk category as the number of providers has
dwindled as regulators have launched an industry-wide crackdown on transfer-of-title
structures where the private lender may sell or sell short the securities to fund the loan.
See sell short. Institutionally managed consumer securities-based loans, on the other
hand, draw loan funds from the financial resources of the lending institution, not from
the sale of the securities.
A security is a fungible, negotiable instrument representing financial value. We
usually categorize securities into:
 Debt securities
 Equity securities
 Derivative contracts (forwards, futures, options and swaps)
The company or other entity issuing the security is called the issuer. A country's
regulatory structure determines what qualifies as a security.
For example, private investment pools may have some features of securities, but
they may not be registered or regulated as such if they meet various restrictions.
Securities may be represented by a certificate or, more typically, "non-certificated",
that is in electronic or "book entry" only form. Certificates may be:
 Bearer: When they entitle the holder to rights under the security merely by holding
the security
 Registered: When they entitle the holder to rights only if he or she appears on a
security register maintained by the issuer or an intermediary.
 Although we have said that securities have been categorized into debt, equity and
derivative securities, we will study with more emphasis debt and equity. Moreover,
we will pay attention to a hybrid category.
 Debt Securities: Debt securities are any debt instrument that can be bought or sold
between two parties and has basic terms defined. The original buyer of the debt
security lends the issuer money in exchange for the security. The holder of a debt
security is typically entitled to the payment of principal and interest, together with
other contractual rights under the terms of the issue. He also has the right to sell the
security to someone else. In this case this person has the right to receive the
interest and the principal from the issuer. The debt security is also called fixed-
income security.
Debt securities are generally issued for a fixed term and redeemable by the issuer
at the end of that term. Debt securities may be protected by collateral or may be
unsecured, and, if they are unsecured, may be contractually "senior" to other
unsecured debt meaning their holders would have a priority in a bankruptcy of the
issuer. Debt that is not senior is "subordinated".

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Debt securities are defined as debt obligations issued by government,

governmental agencies, and corporations. Government securities are: 1). Treasury
Notes bills; 2). Treasury notes; 3). Treasury bonds; 4). Strips; 5). Municipal bonds. 1).
Treasury bills are issued by United States government. They are the safest security
with maturity of 26 weeks or less which are sold at a discount. 2). Treasury notes,
are 2, 3, 5 and 10 year maturity in which on every sixth month is paid an interest
with a fixed coupon. 3). Treasury bonds are with maturity more than 10-years, the
interest is paid semi-annually with fixed coupon. 4). Strips are created by broker-
dealers. They consist of bonds sold at a discount with no interest payment. 5).
Municipal bonds are issued by state on local governments and governmental
agencies. Generally they are exempt from federal income tax and from state taxes
for purchasers who live in the state of issue. Agency Securities are issued by
government sponsored entities. They provide higher yields than direct government
securities with higher risk. Corporate Bonds are Debt securities issued by
corporations. They have a greater claim on the firm’s assets than equity instruments
and are backed only by the issuing company, with risk quantified by rating
agencies.
Next, we must say that debt securities receive different denomination depending on
certain characteristics, as the maturity. It is necessary to accentuate:
 Corporate bond: It is a bond that a corporation issues to raise money in order to
expand its business. The term is usually applied to longer-term debt instruments,
generally with a maturity date falling at least a year after their issue date.
Money market instruments are short term debt instruments that may have
characteristics of deposit accounts, such as certificates of deposit, and certain org /
wiki / bill of exchange bills of exchange. They are highly liquid and are sometimes
referred to as "near cash".
Euro debt securities are securities issued internationally outside their domestic
market in a denomination different from that of the issuer's domicile. They include
Eurobonds and euro notes:
Eurobonds are characteristically underwritten, and not secured, and interest is paid
gross.
A euro note may take the form of euro-commercial paper (ECP) or euro-certificates
of deposit.
Government bonds are medium or long term debt securities issued by sovereign
governments or their agencies. Typically they carry a lower rate of interest than
corporate bonds, and serve as a source of finance for governments. This kind of bond is
usually used in the open market operations.
Sub-sovereign government bonds represent the debt of state, provincial, territorial,
municipal or other governmental units other than sovereign governments.
Supranational bonds represent the debt of international organizations such as the
World Bank, the International Monetary Fund, regional multilateral development banks
and others.
A security, the document enjoyed personifying the holder the right to property. The
most popular securities include stocks, bonds, treasury bills, savings bonds, bank
notes, checks and bills, and units in investment funds (in Poland and the shares of NFI
program) and lots of lottery tickets.
From the perspective of the type of property rights can be divided into securities
representing ownership (stocks) or debt (other). The nature of income received by the
securities held by the securities can extract yield fixed income (preference shares, zero
coupon bonds or fixed interest rate, bills), and variable-yield securities income (such as
equities, bonds, variable interest rate, the units participation in investment funds).

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Depending on how the transfer of property rights is distinguished:
1. The securities registered - the name (name) the owner is placed on paper and
transfer of ownership may take place by notaries contract, often only with the
Notes
consent of the issuer (also requires recorded in the appropriate register) or by
endorsement.
2. The bearer - transfer of ownership takes place by handing them to another person.
Securities may have a certain period of operation of the financial market, after
which they are subject to mandatory repurchase by the issuer (e.g., bonds, treasury
bills, promissory notes) or remission (e.g., the fate of lottery). They may also have open-
ended nature and not subject to redemption (e.g. shares, units in investment funds,
bank notes).
The securities have a nominal price, written on them and giving rise to property
rights, and the issue price, which should pay for them at the time of purchase on the
primary securities market. The issue price is usually higher than or equal to the nominal
price (it depends on the decisions of the issuer or the result of the subscription price
offers), but sometimes may also be lower (in the case of zero coupon bonds or the sale
of treasury bills tender.)
Securities traded on the secondary market also have a market price, depending on
the current relationship between demand and supply is not. Issuers of securities may be
companies, financial institutions, local government bodies and state, their purchasers
could be all business, but because of the level of the issue price or the market, not
every paper is available for every buyer.
Equity securities: An equity security is a share of equity interest in an entity such
as the capital stock of a company, trust or partnership. The most common form of equity
interest is common stock, although preferred equity is also a form of capital stock. The
holder of equity is a shareholder, owning a share, or fractional part of the issuer. Unlike
debt securities, which typically require regular payments (interest) to the holder, equity
securities are not entitled to any payment. In bankruptcy, they share only in the residual
interest of the issuer after all obligations have been paid out to creditors. However,
equity generally entitles the holder to a pro rata portion of control of the company,
meaning that a holder of a majority of the equity is usually entitled to control the issuer.
Equity also enjoys the right to (accounting) profits and capital gain, whereas holders of
debt securities receive only interest and repayment of principal regardless of how well
the issuer performs financially. Furthermore, debt securities do not have voting rights
outside of bankruptcy.
It is an instrument that signifies an ownership position in a corporation. It also
represents a claim from the shares in the corporation’s assets and profits. Equity
securities usually provide steady income as dividends. They may fluctuate significantly
in their market value depending on the phase of the economic cycle. The partner in the
company who owns equity security has the right to vote on the general meetings of the
shareholders. There are many different types of stocks which can be invested in based
upon the financial position, risk comfort level, and investment goals. A company’s stock
offerings generally fall into one of two categories: common stock or preferred stock.
Common stock represents the basic equity ownership in a corporation.
Stockholders are entitled to vote for directors and other important company matters.
They also participate in the appreciation of share values and in any dividends (declared
from corporate earnings that remain after debt obligations and preferred stock dividends
are met). Common stock has a number of advantages which make it a desirable
investment - it has the potential for delivering very large gains; the potential loss from
stock purchased with cash is limited to the total amount of the initial investment; it offers
limited legal liability. Most stocks are very liquid. In other words, they can be bought and
sold quickly at a fair price.
Preferred stock is a specific type of stock which has very different characteristics
from common stock. Like common stock, proceeds from the sale of preferred stock are

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recorded by the company on its balance sheet as equity. Preferred stock doesn't offer
the same potential for profit as common stock, but it's a more stable investment vehicle
Notes because it guarantees a regular dividend that isn't directly tied to the market like the
price of common stock. This type of stock guarantees dividends, which common stock
does not. The price of preferred stock is tied to interest rate levels, and tends to go
down if interest rates go up and to increase if interest rates fall.

Hybrid
Hybrid securities combine some of the characteristics of both debt and equity securities.
Let´s speak about some of these hybrid securities:
Preference shares form an intermediate class of security between equities and
debt. If the issuer is liquidated, they carry the right to receive interest and/or a return of
capital in priority to ordinary shareholders. However, from a legal perspective, they are
capital stock and therefore may entitle holders to some degree of control depending on
whether they contain voting rights. Capital stock which provides a specific dividend that
is paid before any dividends are paid to common stock holders, and which takes
precedence over common stock in the event of liquidation. Like common stock,
preference shares represent partial ownership in a company, although preferred stock
shareholders do not enjoy any of the voting rights of common stockholders. Also unlike
common stock, preference shares pay a fixed dividend that does not fluctuate, although
the company does not have to pay this dividend if it lacks the financial ability to do so.
The main benefit to owning preference shares are that the investor has a greater claim
on the company's assets than common stockholders. Preferred shareholders always
receive their dividends first and, in the event the company goes bankrupt, preferred
shareholders are paid off before common stockholders. In general, there are four
different types of preferred stock: cumulative preferred, non-cumulative, participating,
and convertible, also called preferred stock.
Convertibles are bonds which can be converted, at the election of the holder of the
convertibles, into the common stock of the issuing company. The convertibility,
however, may be forced if the convertible is a callable bond, and the issuer calls the
bond. Convertibles are part debt and part equity. It is a derivative security whose value
is derived from the value of the debt and equity on which it ultimately depends. The
issuers have several reasons to use convertible financing: by issuing convertibles they
can lower their cost of debt funding compared to straight debt alone. Lower-credit
companies who may not able to access the straight debt market can often still issue
convertible debt. Companies who anticipate equity appreciation can use convertibles to
defer equity financing to a time when growth has been achieved.
Equity warrants are options issued by the company that allow the holder of the
warrant to purchase a specific number of shares at a specified price within a specified
time. They are often issued together with bonds or existing equities, and are,
sometimes, detachable from them and separately tradable. When the holder of the
warrant exercises it, he pays the money directly to the company, and the company
issues new shares to the holder. Warrants are for experienced investors who have an
understanding of risk, and who want to exploit the gearing potential in warrants. This is
one of the more hidden - and thereby inefficient - areas of the market, offering
interesting opportunities to the shrewd investor. Warrants should not be the starting
point for a novice investor, and so, although not required, a good knowledge and
experience of ordinary share markets is desirable. Warrants first appeared in the UK in
the 1970s, but the market took some time to develop. Companies issue warrants
because they are very flexible instruments, and as such can be useful in corporate
finance. From the point of view of the issuer, they are cheap to issue and offer very low
initial servicing costs.

1.13 Summary
Marketing strategy, a marketing plan has no foundation. Marketing strategies serve as
the fundamental underpinning of marketing plans designed to reach marketing
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objectives. It is important that these objectives have measurable results. A good
marketing strategy should integrate an organization's marketing goals, policies, and
action sequences (tactics) into a cohesive whole. Notes
The objective of a marketing strategy is to provide a foundation from which a
tactical plan is developed. Market segmentation is the process in marketing of grouping
a market (i.e. customers) into smaller subgroups. This is not something that is arbitrarily
imposed on society: it is derived from the recognition that the total market is often made
up of submarkets (called 'segments').
These segments are homogeneous within (i.e. people in the segment are similar to
each other in their attitudes about certain variables). Insurance industry requires new
strategies in order to survive and survive successfully. To tap the insurance potential to
maximum industry needs to frame such plans and strategies that will help to capture the
market.
Companies instead of focusing only on improving the variety of products needs to
focus on targeting new segments and implement innovative strategies in order to
achieve sustained growth and ensure profitability of business as well as growth of
insurance coverage.
A marketing audit is a comprehensive, systematic, independent and periodic
evaluation of a company's marketing assets. It is an effective tool in reviewing the
competence of a marketing strategy, analyzing the objectives, policies and strategies of
the company's marketing department as well as the manner and the means employed
in attaining these goals.
The importance of marketing audit the term of marketing audit appeared in literature
in the eighties last century, especially in the works written by Ph. Kotler, M. McDonald
and H. Meffert. One of the definitions says that a marketing audit is: “a comprehensive,
systematic, independent and periodic examination of the environment, objectives,
strategies and activities of the company, which aims to identify problem areas and
opportunities and recommendations for further action to streamline marketing
company.”
Marketing audit deals with the six main components that determine marketing
situation in the particular organization. These components are explored by six major
types of marketing audit.
In Insurance, New Product Development (NPD) is the complete process of bringing
a new product to market. New product development is described in the literature as the
transformation of a market opportunity into a product available for sale Insurance is
based on several basic principles that apply to all types of insurance, and that form the
foundation of the insurance contract.
Insurance-linked securities (ILS) are broadly defined as financial instruments whose
values are driven by insurance loss events. Those instruments that are linked to
property losses due to natural catastrophes represent a unique asset class, the return
from which is uncorrelated with that of the general financial market.

1.14 Check Your Progress

Multiple Choice Questions
1. ---------segmentation is widely defined as being a complex process.
(a) Market
(b) Finance
(c) Agricultural
(d) Stock

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2. -------- defines your target market in relation to your competitors.

(a) Schooling
Notes
(b) Positioning
(c) Banking
(d) Chatting
3. Who must be competitive and must entail profit.
(a) Positioning
(b) Threatening
(c) Forgiving
(d) Pricing
4. The ----------- 'Ps' of marketing is product, place, price and promotion.
(a) Twelve
(b) Four
(c) Seven
(d) Five
5. In which year, Sankaran studied the measures that would help domestic players in
financial services sector to improve their competitive efficiency, and thereby to
reduce the transaction costs.
(a) 1996
(b) 1993
(c) 1997
(d) 1999
6. A ---------- market is a market in which people trade financial securities,
commodities, and other fungible items of value at low transaction costs.
(a) Foreign Exchange
(b) Niche
(c) Financial
(d) Street
7. Both agents and brokers are known as-----------------.
(a) Consumers
(b) Producers
(c) Seller
(d) Engineers
8. How many components marketing audit deals?
(a) Six
(b) Seven
(c) Five
(d) Eight
9. The process of identifying consumer needs and selecting target segments is called
---------------- .
(a) Product management
(b) Marketing management
(c) Office management
(d) Supervision

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10. In-----------, New Product Development (NPD) is the complete process of bringing a
new product to market.
(a) Market
Notes
(b) Customer
(c) Insurance
(d) Producer

1.15 Questions and Exercises

1. Explain the steps in the selling/planning process.
2. What are the basic elements of Insurance mmarketing strategy?
3. Explain the components of marketing strategies.
4. What are the process of marketing audit and its implementation?
5. What is new product development in Insurance? Discuss.
6. What are the new distribution channels?
7. Distinguish between various concepts of marketing.
8. Explain the increasing human needs and insurance protection.

1.16 Key Terms

 Market: A market is regular gathering of people for the purchase and sale of
provisions, livestock, and other goods.
 Insurance: An arrangement by which a company or the state undertakes to provide
a guarantee of compensation for specified loss, damage, illness, or death in return
for payment of a specified premium.
 Marketing: Marketing is an ongoing communications exchange with customers in a
way that educates, informs and builds a relationship over time. With trust, a
community builds organically around products and services and those customers
become as excited about the products.
 Strategy: A plan of action designed to achieve a long-term or overall aim.
 Product: An article or substance that is manufactured or refined for sale.
 Audit: An official inspection of an organization's accounts, typically by an
independent body.
 Auditing: Auditing refers to a systematic and independent examination of books,
accounts, documents and vouchers of an organization to ascertain the financial
statements present a true and fair view of the concern.
 Premium: An amount to be paid for a contract of insurance.
 Principle: A fundamental truth or proposition that serves as the foundation for a
system of belief or behavior or for a chain of reasoning.

Check Your Progress: Answers

1. (a) Market
2. (b) Positioning
3. (d) Pricing
4. (b) Four
5. (d) 1999
6. (c) Financial Market
7. (b) Producers
8. (a) Six

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50 Insurance Marketing & Client Management

9. (b) Marketing management

10. (c) Insurance
Notes
1.17 Further Readings
 Anuroop Tony Singh. (2004). Challenging Opportunity. Asia Insurance Post, 28-29.
 Anil Chandok. (2006). Application of CRM in the Insurance Sector. Insurance
Chronicle, May,17-19
 "Today and History: The History of Equitable Life". 2009-06-26. Retrieved 2009-08-
16.
 "Encarta: Health Insurance". Archived from the original on 2009-11-01.
 E. P. Hennock, The Origin of the Welfare State in England and Germany, 1850–
1914: Social Policies Compared (2007)
 Hermann Beck, Origins of the Authoritarian Welfare State in Prussia, 1815-
1870 (1995)
 Balaji, B (2002), Services Marketing and Management. New Delhi, S. Chand &
Company Ltd.
 Booms, B.H. and Bitner, M.J. (1981), “Marketing Strategies and Organization
Structures for Service Firms”, Marketing of Services. Donnelly J.H and George
W.R. Chicago: American Marketing Association, pp. 47 – 51.

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