product development methodology

1. product development methodology III. Istanbul Insurance Conference – 25th May 2011 Jürgen Brucker

2. Agenda Introduction of Munich RE Framework for product development methodology General methodology for product development Product development process in the insurance industry Example

3. Executive Summary The Turkish insurance market is and will be experiencing substantial change over the next years. From today's perspective, this change will take place in an evolutionary manner with a multitude of smaller changes rather than few "big bang" events. It should be the aim of any INSURANCE COMPANY not only to participate in this development but aspire to actively shape it in selected and profitable fields by stepping up its innovation efforts. Product development can be a costly and time-consuming task with a high risk of failure. Whilst success is not guaranteed, the risk of failure is reduced considerably if an appropriate and efficient new product development (NPD) process is used. This presentation outlines key product development process issues which will lead to a greater likelihood of success.

4. 25th May 2011 Belgium Added value within the groupDiversified structure – more security Munich Re (Group)* Reinsurance Munich Health Primary insurance Asset management *This listing is incomplete and provides no precise indication of shareholdings.

5. Strategy Best business model for each risk segment Munich Re Group RISK MANAGEMENT Strong integrated risk management with proven track record in financial crisis 1 INVESTMENTS Well-diversified portfolio based on strictly limited risk appetite 2 3 CAPITAL MANAGEMENT Sound capitalisation provides strategic flexibility Munich Re’s business model [Illustrative] Specialtycommercialsolutions Personal specialtysolutions Traditional reinsurance solutions Large individual risks solutions Standard retailsolutions Risk capacity Distribution power Risk know-how Source: Group Development

6. 2. Framework for product development methodology

7. New products in this context means products new to an Ins. company FRAMEWORKGENERAL METHODOLOGY PRODUCT DEVELOPMENT PROCESS EXAMPLE Definition of new products • Products new to the world (e.g. cyber insurance cover) • Products new to the Turkish market (transfer of products from other markets) • Products new to an Ins. Company (already available in Turkish market)

8. The “right” product development methodology strongly depends on five major factors FRAMEWORKGENERAL METHODOLOGY PRODUCT DEVELOPMENT PROCESS EXAMPLE Local Regulations 3 Customer Needs Region and Market 4 2 Type of Industry 1 Company Strategy 5 INFLUENCE Product Development Methodology

9. Product life cycles in the insurance industry follow an atypical pattern FRAMEWORKGENERAL METHODOLOGY PRODUCT DEVELOPMENT PROCESS EXAMPLE Type of Industry 1 Typical life-cycle of a consumer product Typical life-cycle of an insurance product Product AFirst generation Sales volume Sales volume Product BSecond generation Time Time A typical consumer product has a limited life and is replaced by the next product generation. An insurance product has not necessarily a limited life. Modifications of the product usually prolong the product life.

10. The Turkish market has huge potential – effective product development is essential to fulfill future needs FRAMEWORKGENERAL METHODOLOGY PRODUCT DEVELOPMENT PROCESS EXAMPLE Region and Market 2 GERMANY TURKEY Stage of economic development - income level • Fast growing market • GDP per capita: USD 10,0791) • Regional disparities • Mature market, low growth • GDP per capita: USD 41,000 • Reform of health insurance and pension system needed • Reduction of government welfare spending needed • Highly competitive Non-Life market Major economictrends affecting ins. industry • Increase of wealth in western TR • Large infrastructure projects • Change of social security in mid term • Low public awareness of insurance • Historic need to self-insure / family back-up • Low savings ratio • High awareness of insurance products • High uncertainty avoidance Culture • Insurance penetration2): ~ 1% • L+NL Ins. density3): USD 110 • Motor Insurance dominates Non-Life (55%)4) • Growth of Health & Life business Development of the insurance market • Insurance penetration: ~ 7% • L+NL Ins. density: USD 2,900 • Market saturation in Non-Life 1) Data source: IMF(2009); 2)Insurance penetration: percentage of insurance expenses of net income; 3) Insurance density: annually insurance expenses per capita; 2) 3) 4) Data source: 2010 TRSB

11. Liberalization of insurance markets impacts the product development of primary insurers FRAMEWORKGENERAL METHODOLOGY PRODUCT DEVELOPMENT PROCESS EXAMPLE Local Regulations 3 GERMANY TURKEY Products (Contract Wording and Tariffs) need to be approved by the regulator Since 2007 (Revised Insurance Law) Liberalisation of product development (exception: “concerning public interests”, e.g. compulsory insurance, newly-developed life products) Until 1994 Products developed by German Insurance Association (GDV) Approved by the German Insurance Control by releasing the Business Plan (former BAV – now BAFin) Therefore nearly uniform products for all insureds Since 1994 According to the 3rd EU Directive for the Non-Life insurance industry no necessity of approval prior to the release

12. Client needs substantially differ between China and Germany FRAMEWORKGENERAL METHODOLOGY PRODUCT DEVELOPMENT PROCESS EXAMPLE CustomerNeeds 4 GERMANY TURKEY • Property insurance due to increasing accumulation of personal assets (buildings, household etc.) • Insurance protection of infrastructure and power projects to attract investors • Channelling of savings, offer attractive investment returns to customers • Mainly demand for basic mass products • Most Non-Life insurance needs are covered due to relatively high insurance penetration • Growth potential for pension funds, Life insurance products (accumulation of capital, retirement provisions) • Increasing need for old age protection (demographic changes) • Mainly demand for sophisticated products (liability, D&O, etc.)

13. First mover and innovator need strong product development skills FRAMEWORKGENERAL METHODOLOGY PRODUCT DEVELOPMENT PROCESS EXAMPLE CompanyStrategy 5 Follower First Mover Innovator • No attempt to improve / focus on ‘me too’ • Concentrates on price of • offer • Capitalise on perceived high • prices of innovative products • Revenue through high • volume at low margins • Offer of low price alternative • Establish low cost delivery systems • ? • Learn from first movers • Build a better solution • Free ride on customer • awareness • Lower R&D costs • Less new product failures • Easy to improve existing • concepts • Analytical skills • Adapt and improve • Microsoft • Identify new customer needs • Invent new solutions • Invest in new approaches • Market leadership • Early high profits • Set industry standards • Creates entry barriers • Shape consumer preferences • Focus on customer needs • Original research • Probably heavy R&D and launch costs • 3 M Definition Achievement Requirements Best PracticeExamples

14. 3. General methodology for product development

15. In transparent product development processes potentiallylead to sub-optimal outcomes FRAMEWORKGENERAL METHODOLOGY PRODUCT DEVELOPMENT PROCESS EXAMPLE Often-seen new product development issues … • No clear process • Many interest groups try to influence the outcome (political issues), uncoordinated • No clear responsibility for the process • Promising ideas are not developed • Outcome is sub-optimal • Inefficiency in the product development process (time & resources) Source: Wheelwright, S. / Clark, K. (1992): Revolutionizing Product Development.

16. Product development processes in the consumer industry follow stringent rules FRAMEWORKGENERAL METHODOLOGY PRODUCT DEVELOPMENT PROCESS EXAMPLE General new product development process from Cooper Pre-Commercialisation Business Analysis Post- Implementation Review Second Screen Initial Screen Decision on Business Case Post- Development Review Stage 1 Stage 2 Stage 3 Stage 4 Stage 5 Gate 1 Gate 2 Gate 3 Gate 4 Gate 5 Detailed Investigation (Build Business Case) Testing & Validation Full Production & Market Launch Preliminary Investigation Development Idea Generation • Clear process • Clear decision points and responsibilities Source: Cooper (2000): Product Leadership - Stage-Gate™ is a trademark of RG Cooper & Associates Consultants, Inc.

17. Only two out of one hundred ideas are launched FRAMEWORKGENERAL METHODOLOGY PRODUCT DEVELOPMENT PROCESS EXAMPLE New product development funnel Stage 1 Stage 2 Stage 3 Stage 4 Stage 5 Gate 1 Gate 2 Gate 3 Gate 4 Gate 5 Detailed Investigation Testing & Validation Full Production & Market Launch Preliminary Investigation Development Idea Generation

18. Beginning with the development stage, product development costs grow rapidly FRAMEWORKGENERAL METHODOLOGY PRODUCT DEVELOPMENT PROCESS EXAMPLE Typical curve for product development costs Product Development Costs Time Gate 1 Gate 2 Gate 3 Gate 5 Stage 4 Gate 4 Stage 3 Stage 5 Stage 1 Stage 2 Testing & Validation Full Production & Market Launch Detailed Investigation Preliminary Investigation Development Idea Generation

19. 4. Product development process in the insurance industry

20. A typical product development process in the insurance industry can be split into four phases FRAMEWORKGENERAL METHODOLOGY PRODUCT DEVELOPMENT PROCESS EXAMPLE Concept Phase Design Phase Internal Ideas Idea Generation In-depth Investigation Product Development Screening/ Prioritisation External Ideas Launch Phase Monitor Phase Post Implementation Review Final Market Testing Maintenance Commercialisation

21. Most of the initial ideas are sorted out in the concept phase FRAMEWORKGENERAL METHODOLOGY PRODUCT DEVELOPMENT PROCESS EXAMPLE Concept Phase Design Phase Internal Ideas Idea Generation In-depth Investigation Product Development Screening/ Prioritisation External Ideas 100 100% 100 10 10% 30% 70% 3 Launch Phase Monitor Phase Post Implementation Review Final Market Testing Maintenance Commercialisation 70% 2 2 70% >90% 2 X % Carry-on rate Number of ideas X Source: Munich Re, McKinsey

22. Product Development Unit Marketing Business Unit (BU) Sales IT Other Departments (Legal, Tax, Accounting, Claims etc.) The product development department is in charge of managing interdisciplinary teams FRAMEWORKGENERAL METHODOLOGY PRODUCT DEVELOPMENT PROCESS EXAMPLE Concept Phase Design Phase Internal Ideas Idea Generation In-depth Investigation Product Development Screening/ Prioritisation External Ideas Launch Phase Monitor Phase Post Implementation Review Final Market Testing Maintenance Commercialisation

23. 1. Stage: Idea generation FRAMEWORKGENERAL METHODOLOGY PRODUCT DEVELOPMENT PROCESS EXAMPLE Internal Ideas Concept Phase Design Phase Launch Phase Monitor Phase Post Implement. Review Final Market Testing In-Depth Investigation Product Development Idea Generation Screening/ Prioritisation Commercialisation Maintenance External Ideas Description of Process Step: Key Success Factors: • Set incentives for new ideas • Company culture • Make use of external idea market • Accept and allow failures • Set filters for selection/prioritization • Clear company strategy • Internally create awareness for new activities/products within BUs and distribution channels • Analysis of developments changing/threatening the core business • Continuous assembly of promising ideas/products from various sources • Professional administrative handling of opportunity flow. Proactive screening of all incoming ideas • Challenging of ideas together with business units and distribution channels • Outcome: • Long list of ideas (internal and external)

24. 2. Stage: Screening/prioritisation FRAMEWORKGENERAL METHODOLOGY PRODUCT DEVELOPMENT PROCESS EXAMPLE Internal Ideas Concept Phase Design Phase Launch Phase Monitor Phase Post Implement. Review Final Market Testing In-Depth Investigation Product Development Idea Generation Screening/ Prioritisation Commercialisation Maintenance External Ideas Description of Process Step: Key Success Factors: • Screening of business idea/product and involve affected BU for general information and early feedback • First evaluation and assessment of proposal along key criteria, e.g.: - Strategic relevance - Market potential and readiness- Feasibility Outcome: • Short list of most promising ideas with involvement ofBUs and Sales. • Identified sponsor • Identify sponsor • Process owner: Product development department to guarantee an efficient use of resources (minimization of redundancies) • Use strategic goals as filter (i.e. do not follow ideas that do not meet the strategic objectives)

25. 3. Stage: In depth investigation FRAMEWORKGENERAL METHODOLOGY PRODUCT DEVELOPMENT PROCESS EXAMPLE Internal Ideas Concept Phase Design Phase Launch Phase Monitor Phase Post Implement. Review Final Market Testing In-Depth Investigation Product Development Idea Generation Screening/ Prioritisation Commercialisation Maintenance External Ideas Description of Process Step: Key Success Factors: • Detailed concept development and opportunity assessment regarding:- Strategic impact- First testing of product idea- Market analysis (structure/size, competitive landscape, acceptance) - Key factors of success, e.g. Like/Dislike, price acceptability, buying intention, IT-implications- Estimates of sales, costs and profit, incl. - Break-Even-Analysis and Sensitivity Analysis Outcome: • Business Case (incl. opportunity assessment) • Proposal for the Management (Committee) • Top Management commitment and support • Clear end product responsibility • Allocation of relevant project staff for design phase (e.g. Marketing, IT, Accounting, BUs, Sales and Product Development Department) • Allowing views of customers and intermediaries to enter product development at an early stage

26. 4. Stage: Project development FRAMEWORKGENERAL METHODOLOGY PRODUCT DEVELOPMENT PROCESS EXAMPLE Internal Ideas Concept Phase Design Phase Launch Phase Monitor Phase Post Implement. Review Final Market Testing In-Depth Investigation Product Development Idea Generation Screening/ Prioritisation Commercialisation Maintenance External Ideas Description of Process Step: Key Success Factors: • Establish multi-disciplinary team (Product Develop- ment, BUs, Sales, Marketing, IT) • Develop product specification (wording, policy, UW- and claims guidelines, renewal, commission, licensing, statistics and reinsurance) • Check IT-systems and accounting • Define communication strategy (internal communication, product and sales brochures for agents/brokers and clients, advertising, PR) • Develop training (targeted audiences, contents, persons) • Update and/or fine-tune project plan and budget • Finalize marketing plan Outcome: • Fully developed Business Plan incl. marketing plan, financial model, assessment documentation and terms and conditions • Clear process, guidelines and responsibilities (sub-projects) • Central depository • Go / No Go decision (final commitment) by the Board of Management

27. 5./6. Stage: Final market testing / Commercialisation FRAMEWORKGENERAL METHODOLOGY PRODUCT DEVELOPMENT PROCESS EXAMPLE Internal Ideas Concept Phase Design Phase Launch Phase Monitor Phase Post Implement. Review Final Market Testing In-Depth Investigation Product Development Idea Generation Screening/ Prioritisation Commercialisation Maintenance External Ideas Description of Process Step: Key Success Factors: • Final Market Testing: • Test marketing in at least one geographical area • (chosen to be representative of intended market) • Commercialisation: • Product delivery • Training • Communication (internal and external) • Product replacement strategy (in case of product substitution) • Contingency plans for disengagement or expansion • Define time for product review • Outcome: • Launched product • Final critical “Casting” under fair and true conditions • Stick to given timeframe • Inform all relevant parties in case of unforeseen changes (up to Top Management, if necessary)

28. 7./8. Stage: Post implementation review / Maintenance FRAMEWORKGENERAL METHODOLOGY PRODUCT DEVELOPMENT PROCESS EXAMPLE Internal Ideas Concept Phase Design Phase Launch Phase Monitor Phase Post Implement. Review Final Market Testing In-Depth Investigation Product Development Idea Generation Screening/ Prioritisation Commercialisation Maintenance External Ideas Description of Process Step: Key Success Factors: • Post implementation review: • What went wrong and how can we avoid this in the future? • What went well and how can we improve it? • What went really well and is worth repeating in the future? Maintenance: • Compare results with planning figures • Satisfaction research, e.g. UW, claims, agents/brokers, clients • Market research: How do competitors react? • Outcome: • Summary and report about finalized project which • includes performance measurement against project • goals and targets. Take action if necessary • Use standardised questionnaires and establish “Best Practice Manual” • Examine project processes (not product!) to learn for future projects • Maintenance is a revolving process, review at least once a year

29. Conclusion FRAMEWORKGENERAL METHODOLOGY PRODUCT DEVELOPMENT PROCESS EXAMPLE In conclusion Product development in the insurance industry is complex and challenging Need to establish and maintain comprehensive and rigorous processes for Product Development Methodologies are available, but have to be adjusted individually

30. 5. EXAMPLE

31. Recommendation how to fulfill objectives: Project Roadmap FRAMEWORKGENERAL METHODOLOGY PRODUCT DEVELOPMENT PROCESS EXAMPLE PRODEM Analysis of Actual State (Status Quo) Process Develop Implementation Plan Ins. Comp. Decision Joint Insurance company and Munich Re project team (approx. 3~5 staff Ins. Comp. and approx. 3~5 staff Munich Re) Resources Duration approx. 3~5 months • Understand strategy • Understand customer needs • Analyse NPD1) process and organisational set-up • Screen past products • Screen market regulations • Comparison with best practices • Define key criteria for NPD • Define key success factors To Do’s • Presentation to Ins. Comp.’s Board of Management • Adjust implementation plan if necessary Adopted implementationplan Outcome SWOT Analysis Implementation plan for “new” NPD process Current NPD process overview 1) NPD – new product development

32. Recommendation how to fulfill objectives: Project Roadmap FRAMEWORKGENERAL METHODOLOGY PRODUCT DEVELOPMENT PROCESS EXAMPLE PRODEM PRODEM Implementation Process New Product Development Review Ins. Comp. Ins. Comp./Munich Re project team Joint team Resources approx. 2~3 months approx. 3~4 months Duration ~ 1 month • Realise implementation plan • Establish and fine-tune core process • Establish co-operations and • interfaces To Do’s • Identify Ins. Comp.’s innovation focus and currently most promising opportunities • Practice newly implemented process and develop one~two new products • Joint review of NPD process implementation • Report to Ins. company Board of Management Outcome Implemented “new” NPD methodology Finalized “new”NPD methodology New products launched 1 NPD – new product development

33. Proposal for team member profiles FRAMEWORKGENERAL METHODOLOGY PRODUCT DEVELOPMENT PROCESS EXAMPLE PRODEM PRODEM China Life project team members • 1 Project Manager: • Experienced in coordinating international teams • Excellent Turkish company in-house “networker” • Languages: English and Turkish • 2 ~ 4 Experts: • 1~2 Product Developers • 1 Sales expert • 1 Marketing expert • 1 IT expert • All experts should have been involved in recent new product developments and should speak English Team members corresponding to objective; adjusted for additional experts depending on the product scope MRproject team members • Experts: • Experience in evaluating/building new business ideas and developing these into actionable business proposals • Know-how about the Turkish market and customer needs • In-depth property insurance know-how • Specific insurance know-how depending on product scope • Languages: English, Turkish desirable • 1 Project Manager: • Experienced in coordinating international teams • Responsibility for client liaison • Languages: English and Turkish • 2 ~ 4 Consultants: • Experience in conducting fact-based analyses in a business process context • Able to manage a range of complex audits • Languages: English, Turkish desirable

34. Thank you