Managing insurance distribution risk using supply chain

Managing insurance distribution risk using supply chain

Background One of the key challenges in the insurance business is selling new products (that meets customer’s need) and retention of existing customers which if not met properly may result in increasing customer complaints. Such complaints may induce adverse impact on future new business (brand value), loss of reputation and in a very adverse circumstances regulatory penal action. This paper discusses these risks along with the suggestion to address these risks of not meeting customer’s needs by changing the distribution philosophy from current push based supply chain system to pull based supply chain by assembling the generic insurance products at a point of sale. What is the Risk? Let’s ask some fundamental questions about distribution risks in the life insurance industry? Insurance companies face challenges in selling new products and meetings new business targets; also there are challenges in maintaining the customer base (retention) resulting from the fact that customers are not satisfied due to products not meeting their needs. So in short, the risks of insurance companies may be summarised as not meeting their annual business plan target of new business and depletion of customer base at a faster pace than planned due to products not meeting customer’s needs. This can cause serious dent in the balance sheet of the insurance companies. These things also results in the loss of reputation of insurance entire industry. Analysis of Risks Distribution risk as defined above falls under the operational risk category. The operational risk has its definition and method to address risk. Operational risk as defined by the Basel Committee is: “The operational risk is defined as a risk of loss resulting from inadequate or failed internal processes, people, and system or from external events. This definition included legal risk but excluded strategic and reputational risk.” It is important to realise that “cause” is the driver of operational risk and the drivers are “failed internal processes, people, system and external events”. It is the cause that results into “events” which further leads to “consequences” such as financial loss, loss of reputation and adverse impact on customers. So to control the operational risk, causes need to be addressed; next section analyses causes of distribution risk.

A small comment is in the unit linked products, the payment benefits remain the same, however, the death and survival benefits are made based on the market value rather than fix sum at the time of inception. However, there are products in the market where the final benefits are made as greater than fund value or fixed benefits agreed at the time of inception. So the generic product concepts work under both the platform of unit linked and traditional, discussed above.

Pull-based Supply Chain Revisited

To meet the demands of the customers in the life insurance field, it is possible to get the approval of generic products from the regulator with one base term product and several pure endowments of various terms and assemble them at a point of sale based on the needs of the customers. Products are generally sold based on the commission basis given to the distributor and those products are pushed where the commission is higher. The assembly of generic products at a point of sale will also address this problem where commission should be based on delivering one combination of product rather than built-in commission.

If this approach is compared with the “TVS motors with 99 different colours”, there is a similarity, the colouring of the bike at the customer’s choice used to be done at the distributor’s end, and here also the stitching of products is at the distributor’s end at the choice of the customers. Such approach can help in managing some of the issues related to addressing customer’s needs in the insurance business.

Challenges in this Approach

Insurance products are manufactured based on the assumptions made at the time of pricing; some of the assumptions made are beyond the control of insurance companies such as claim experience and interest rate. They are driven by demographic and economic factors. One of the key assumption that goes into the pricing is the expense assumption that is company specific. One of the challenges that may come in pricing the generic products is allocation of unit expense between term and pure endowment, based on the volume as compared to currently done for single products. However, considering the benefits to the customers, the actuarial profession can find ways to address this challenge.


So the distribution risk under the operational risk category where people are the driver can be addressed by changing the manufacturing process from current push based supply chain strategy to pull based supply chain strategy.

About the author:

Sonjai Kumar (CMIRM, FRMAI, PIOR, SIRM, CRICP) is Ambassador in India of Institute of Risk Management, London and Joint Secretary of Risk Management Association of India.

Disclaimer: The views expressed here are of the author.