Product Bundling In Financial Services - A Perspective
Srinivasan Varadharajan
Bundling of products is a universal marketing strategy
ranging from physical commodities to intangible
products like insurance. Internet Explorer with Windows
OS by Microsoft; basket bundling of apparel at lower
prices by retailers, buffet offered by hotels, low cost
credit or health insurance by credit card companies and
multiple benefits under a single policy by insurance
providers are some examples..
purchase of multiple products at the same time reduces
the costs incurred by insurer and by bundling the
products the benefit is passed on to the consumer.
Insurers generally offer a basket of rider benefits, which
a prospect can choose from depending on requirements,
which offers cost advantage. Bundling also aids selling
using the already existing intent by offering the riders
and benefits.
Price Bundling and Product Bundling are prominent
among different sales strategies. Price Bundling offers
multiple related products at a price less than the
combined price offering price advantage to the
consumer, e.g., price reductions for multiple purchases
such as 'Buy 2 get 1 free' offers. Product Bundling offers
increased value to the base component, examples being
car models with base and luxury versions; extended
service or free regular check ups. Inseparable and
dependent supplementary benefits such as accelerated
death benefit or premium waiver represent Product
Bundling, whereas additional Riders like accidental
death benefit and critical illness are that of Price
Bundling.
Effects of bundling on risk evaluation
Bundling of products alter the likelihood of pay out and
the associated risk. Diagram 1, depicts the impact of
bundling from the perspective of various stakeholders in
an insurance contract.
Bundling of Insurance Products:
Bundling of products is advantageous to both the
What Bundling means to diffrent stakeholders
Actuaries
- Enhanced risk owing to similar bundling - Disablity and Mortality
- Complementary bundling offers natural hedge - Term and Annuity
- Lower expenses and competitive pricing
- Multiple effects of risk owing to building of riders
- Moral hazard
Distributor
Provider/Seller
- More attractive and
- Satisfy Multiple need
easier to sell than individual
in single offering
products
- Attractive and innovative
- More commission
products
with lesser effort
- Basket bundles offer
speed to market
Consumer
- Single policy satisfies multiple needs
- Reduced fixed costs and hence cost advantage
- Hassle free - One application
- Additional products with no additional requirements
- Bundled product purchase over a period of time
Diagram 1
consumer as well as the insurer. Price variation based on
consumer's condition is unique to Insurance. Another
unique factor is that the requirements based on
condition will be valid for a long enough period. Hence,
Some Best of the breed Life Insurance Bundles:
As Product Bundling has been inherent feature of
insurance products for a long time, there is many a
product bundle available in the market. To cite some
examples:
—
New York Life's “Custom Whole Life Insurance”: A
whole life product with choice of paid-up date.
“Dividend Option Term” rider, a combination of
Decreasing Term Rider and Paid up Addition
Dividend Option, provides more insurance
coverage at lower cost. It provides a level death
benefit with reduced cost of Term Insurance as
Paid up Additions increase. It also has an option to
convert to other Whole Life products within the
first 10 policy years.
—
“ProtectorPlus” of Sun Life Financial a Universal
Life Product, with Long Term Care (LTC) rider. The
rider provides acceleration of the policy's death
benefit and other benefits. It also comes with a
unique feature called Assist America, which
reimburses insured for emergency medical care
expenses incurred while traveling more than 100
miles from home anywhere in the world. Also
bundled are -- choice of care providers, language
interpreter services and evacuation and
transportation to home.
—
Jeevan Tarang from Life Insurance Corporation of
India: A with-profits whole of life plan which
provides for annual survival benefit at a rate of
5½% of the Sum Assured after the chosen
Accumulation Period. The Sum Assured, along
with Loyalty Additions, if any, is payable on
survival to age 100 years or on earlier death.
Product bundling vis-à-vis Product mix
Product bundling is where the bundled products are sold
at a price less than that of the sum of individual prices.
Product mix is where products meeting a particular need
are supplied together but the fact they are sold together
doesn't necessarily reduce the price. Best example for
this is deposits, insurance, loans and mutual funds
offered under one umbrella to satisfy completely and
fulfil the financial needs of a person.
Initially bundling does not enable product mix, as
customer was required to go to different providers to
satisfy his different financial needs. With increase in
customer focus, the trend now is to provide all that the
customer wants as a single package rather than what the
seller has. Hence product mix is all about product
bundling now.
some of them:
—
Externalizing rules provides flexibility
—
Build once and reuse infinitely Rules and rates can
be built once and reused a number of times to
achieve 'Speed to Market'
Other
Finance
Provider
Life &
Annuity
Provider
P&C
Provider
Base price of the independent products
E- Commerce Portal
Distributor 2
Distributor 1
Below table depicts the Products and Needs map:
Product\ Need
Term Insurance
Endowment
Whole Life
ULIP
Variable Life
Universal Life
VUL
Annuities
Variable annuities
VA Guarantees
Accident benefits
Disability benefits
Premium waiver benefit
Long Term Care
Reverse mortgages
Bank deposits
Mutual funds
Insurance
?
?
?
?
?
?
?
Savings
Market
based
return
?
?
??
??
?
??
?
??
?
?
?
?
Guaranteed
Return
Commission
Agreement 1
Commission
Agreement 2
Regular
income
?
?
?
Base Prices of different
products + Commission
Base Prices of various products +
Commission
?
?
?
?
?
?
?
?
?
?
?
?
??
Business drivers for bundling
Some of the business drivers for bundling are:
—
Value maximization through cross sales
—
Value added attractive product delivery
—
Better and innovative products
—
Lesser time to Market
—
Easier sales than individual products
—
Economies of scale through parasitic bundling of
complex and less attractive products like
Payment Protection Insurance
Implications to Life Insurers' systems and how IT could
help
Bundling changes the way a product is administered.
Bundling impacts product features of the bundle,
underwriting rules, rates, billing and documentation for
varied premium and term of rider. Claims, cash value
calculations and other areas need to be revisited to deal
with the complexity created by bundling. In a nutshell,
insurer needs to re-jig his systems across the product life
cycle, with more emphasis on New Business and Claims.
IT plays a major role in bundling of financial products like
insurance and at times is indispensable, listed below are
Customer 1 Customer 2
—
White Labeling Bundling of products across the
companies using industry standards
—
Product Innovation Bundling of products across
product lines, varying features
Trends in Product Bundling:
Bundling need not be restricted to Life Insurance
products alone. Bundling can happen across Life and P&C
lines and Insurance and non-insurance products. For
example, retirement segment of the population can be
targeted with Long Term Care products tied up with
specific caregivers at a lower rate for the customer. Life
insurance combined with Fire and Home Insurance adds
value to the customer, reduces costs and risks to a
certain extent.
Product Bundling Factory-gate pricing:
Another possible innovation in Product Bundling is
Factory-gate pricing Independent Intermediaries can
offer products from providers across the industry by
combining base-priced products from various providers
and adding up their commission as agreed with the
customer.
Association of British Insurers (ABI) asserts that such a
model is likely to increase demand for financial advice
and products. A logical extension of this would be where
the customer fulfills his particular needs through product
from several providers through an independent
intermediary vendor. Technology can enable such a
portal where products and services from different
providers are brought together to a selling place.
Customer is given a choice and is not forced to buy a
particular institution's products for all of his needs just
because he/she makes the purchase decision at the
same moment.
Bundling has not remained a choice for the insurer, but is
inevitable to survive in the competitive market. Bundling
enables an Insurer to:
—
Enhance product offering
—
Stick to core competencies
—
Outsource product value adds
—
Increase and retain customers
—
Increase distribution bandwidth and
—
Reduce overheads
Thus, it is necessary for an insurer to continuously revisit
their product offering designs and leverage
opportunities through innovative bundling.
References:
1. Manakkal Kartik, Renuka Sridhar & Shrinivas
Susarla (2006), “Provider or Distributor An Insurer's
Dilemma”, The Actuary India, October 2006.
2. Stefan Stremersch & Gerard J. Tellis (2002),
“Strategic Bundling of Products and Prices: A New
Synthesis for Marketing”, Journal of Marketing,
January 2002.
3. http://www.newyorklife.com/custom_whole_life_
insurance/
4. http://www.sunlife-usa.com/spotlight.cfm?page=3
5. https://www.allianzlife.com/ProductsServices/
Annuities/Variable/HighFiveOverview.aspx
6. “The Economic Benefits of Bundling Payment
Protection Insurance with Primary Credit Products” by Maarten Janssen1, Nils von Hinten-Reed and Ewa
Mendys
7. ABI RESEARCH PAPER 6 “Customer Agreed
Remuneration - Research into the market impact of
encouraging Customer Agreed Remuneration”
January 2008 Source: http://www.abi.org.uk
8. Guidance received from Mr. Biju Simon, Actuary, ING
Life Insurance India.
Srinivasan Varadharajan is a Life and Pensions Domain Consultant with a combined experience of over 15 years in Life
Insurance industry and Information Technology services. He holds FLMI (LOMA, USA) and, AIII (Associate of Insurance
Institute of India) Certifications. He has experience in Estimation, Requirement Development, Requirement Management,
Gap Analysis and, Quality Control activities apart from Insurance Industry business areas. His work experience spans
across India, United States and the United Kingdom. He holds a graduate degree in Mathematics.
The opinions expressed and conclusions reached by the authors are their own and do not represent any official position of
Wipro Technologies. Unless explicitly stated, the information and views expressed in this article may not be construed as
those of Wipro Technologies.