Understanding Where the Profits Come From

December, 2008

Dear Clients and Friends,

Management of the nation’s largest retailers has perfected ways to analyze sales and profitability of their various products and locations.  For example, companies like Walmart and Best Buy understand product popularity and profitability by customer, gender and age demographics, store location, time of day sales are made, product placement, and weather conditions.

Many financial services companies, including life insurers, are justifiably proud of their analytical prowess.  However, many financial services providers have very little idea of what sectors of their business generate profits versus losses, or what catalysts energize sales or strengthen retention.  Unfortunately, the stereotype of life insurers and asset managers as being focused on getting business in the door and then concentrating on the next sales campaign is often true.

For example, how many companies can accurately characterize the actual profitability of their older age life insurance business?  Female business?  Is there a duration “sweet spot” beyond which inforce business becomes substantially more or less profitable?  What is the profitability of business by distribution outlet (banks, RIAs, planners) or even by individual producer?  These may appear to be difficult analyses to perform, but they are well within the capabilities of companies’ modeling tools.

The benefits to creating a culture of segmented profitability analysis are many.  Not only can such work help focus marketing initiatives toward profitable subgroups, but it can help to weed out poorly performing sales groups.  Further, it can form a strong basis for creation of inforce customer retention programs.

As with most ambitious initiatives, financial services companies need to walk before they run.  The most obvious choices for segmented analysis are divisions by producer group, age groups, and contract size.  These can be done using records of existing inforce contracts.  For some firms, a different initial broad division might be more appropriate.

Tim Pfeifer
President