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Not a week goes by that someone does not ask me, "What are the prevailing trends impacting insurance products today?"
Increasingly, Ive been answering in terms of risks that bear upon productstheir marketing as well as their design and implementation.
After all, insurance is not only a risk-bearing business. It is also a , at least where products are concerned. Thats because many varied factors can, and do, affect a products sales success, service, viability and profitability.
Anyone having anything to do with insurance and financial products knows that. Even when the products offer guarantees, there are risks (i.e., how strong is the company issuing the guarantee; how long does the guarantee last; how rich is the guarantee; etc.).
Industry developers and marketers certainly do their utmost to manage product risks they face daily. Witness the stampede a few years back to lower the guaranteed minimum interest rate in fixed annuities.
That initiative involved a lot of regulatory interchange and a long process of pulling, tweaking and re-filing of products. However, the risk management aspect was front and center: The moves were made to protect against the adverse effects of interest rate risk posed by the then-prolonged low interest rate environment. That, in turn, helped ensure continued availability of traditional fixed annuities.
Some people would just as soon deal with financial product risk by avoiding it. Thats not all bad, but its not really practical. Most people just cannot avoid encountering some level of risk during the buying and selling of financial products.
For example, if Susan Consumer wants to buy a universal life insurance policy, she will likely need to assess the interest rate risk implicit in buying such a product. So will her advisor, who also will need to know Ms. Customers risk tolerance. Also, developers need to price their ULs with interest rate risk in mind; marketers need to position the UL in view of that risk, etc.
The name of the game is risk mitigation, or reducing the level of risk all along the product food chain. At the very least, this entails identifying the risks and developing action plans accordingly.
So, what are the product risks that seem most pressing in 2005? Here are several:
Advisory risk. This is the risk that product-related advice may not be suitable and/or that advice recipients may not use advisory services properly.
