Gulf insurance Essay

ABSTRACT

The following research is being carried out for Gulf Insurance Company which has its operations worldwide. However, the focus of this research will be on Kuwait market only and the problem in question is to identify key factors which shape customer’s decision making process when they decide to purchase a life insurance policy and to understand customers’ perceptions about the products and services offered by GIC and the reasons for marketing strategy failure of their product: Misk.

The main findings of the study show that GIC commands a leadership position in the marketplace. Also, if GIC holds that position, then it should be setting the benchmark in terms of the products being released. For a product that is going to provide for people’s future, it is important to deliver steady results over a period of time, and this explains the clients’ interest in international markets and fixed deposits. However, a large percentage of the cancellations could be attributed to a sales force that is not competent enough to market the product successfully.

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Although this is an applied research and primarily it is aimed to benefit the main sponsor that is, Gulf Insurance Company, in improving their future marketing strategies and gaining valuable insights about their customers preferences and attitudes, however, this research will also help to enrich the database of insurance research and how the target population perceives about the concept of life insurance considering the religious thoughts and marketing limitations of the region and also in the existence of plenty of other options available to them for investing.

Keywords: Gulf Insurance Company; Misk; Annuity; pension; long term savings;

APPENDIX
A-1
Population & Sample Characteristics
68
A-2
Questionnaire
70
A-3a
Questionnaire Results for those who have Cancelled, Lapsed or Surrendered
77
A-3b
Questionnaire Results for those who are Current Clients
83

LIST OF TABLES
1-1
Insurance Market – Kuwait
09
1-2
Real Investments Returns by Asset Class (% per Annum)
14
1-3
New business of Misk from Jan to Oct 2006
15
2-1
Reasons why Customers do not Shop Around
24
4-1
Misk Sales
59
A-1
Population & Sample Characteristics
68

LIST OF FIGURES
1-1
Trends in Equity Investments
14
2-1
Percentage of Annuitants who shopped around or considered Shopping Around
23
2-2
Percentage of Customers who exercise the Open Market Option, by Monthly Income
24
2-3
An Annuity works on the basis of pooling so that each individual who dies early effectively finances those who live longer
25
2-4
Management Expenses per policy in force
39
2-5
Relationship between Fund Size and Fund Management Fee
40
4-1
Break-up of Percentage of Clients who consulted Insurance Companies
50
4-2
Customers’ first Interaction with GIC
51
4-3
Marketing Efforts & Marketing Material
53
4-4
Staff Service & Sales Person’s Knowledge
55
4-5
Preferred Period & Modes of Payment
57
4-6
Product Lifecycle Stages
58

Chapter 1: Introduction

1.1 Background & Overview

Situation in Kuwait

The current economic situation in Kuwait can be best characterized by another year of exuberant growth for the Kuwaiti economy, backed by high oil prices and increased oil production levels. Nominal GDP increased to KD16.4bn in 2006 as compared to KD13.8bn in 2005, a surge of 19.3% (Global Investment Home, 2005). At the same time, real GDP is estimated to have grown by 8.52% to KD10.4bn. Real GDP growth in Kuwait was one of the highest in the world. This was the second consecutive year of oil price-led high growth in the country, as in the case of other GCC countries.

As a logical effect of the general economic growth in Kuwait, the local insurance market has enjoyed the benefits of higher government spending since the removal of the threat of Iraq which had stagnated the country for so long. Economic development, strong economic structure, and growing population of Kuwait have turned the country into an insurance market with tremendous potential. The growing economic activity in Iraq presented opportunities to insurers in Kuwait which provide insurance coverage for international companies working in Iraq. National insurance companies have also benefited from the relaxed market environment of having almost a monopoly over the government insurance contracts and low levels of risks as well as almost no natural disasters (Aghion & Bolton, 1987, p. 388-400; Crocker & Masten, 1988, p.327-343).

The recent increase in the economic activity has resulted in new projects along with the implementation of the new compulsory medical insurance scheme for expatriates, which has helped the local insurance industry grow by more than 58.5% over the last three years. Another positive development in this period has been the introduction of Takaful companies, which has created its own demand in the market (Guiso & Parigi, 1999, p. 185–228). Currently, there are twenty two insurance companies in Kuwait, of which eleven are national companies, eight are Arabic, and three foreign companies. The foreign and Arabian insurers are allowed to operate as agencies in which they pay a local sponsor a fixed percentage of the gross premium. Six of the national companies are shareholding companies listed on the stock exchange. They are Kuwait Ins., Gulf Ins., Al Ahleia Ins., Warba Ins., Wethaq Takaful, and First Takaful. The insurance industry in Kuwait is governed by law number 24 for the year 1961, and is monitored by the Insurance Department in the Ministry of Commerce and Industries (MOCI).

In order to evaluate the insurance market, three parameters have to be studied: Total insurance premiums, premium per capita, and premiums as a percent of Gross Domestic Product, which shows the insurance penetration in the country. All these parameters will be examined in depth, and applied to the thesis problem being examined. The International Monitory Fund (IMF) issued a report in 2005 titled “Financial System Stability Assessment” of Kuwait. Their comments on the insurance market of Kuwait are summarized below, with a description of the reasons for each (GIC, 2006):

The local insurance penetration is substantially lower than the 3.4% of GDP for emerging markets and 9.0% for advanced markets.
Non-life products count for 75% of the market, which is substantially higher than other developing countries.
National companies function more as insurance brokers than underwriters because they cede around 63% of their premiums. Insurers that are considered financially strong are able to keep more of their premium, and cede less of it to reinsurers.
The national companies earn most of their income from reinsurance commissions. This means that their profits are not derived mainly from the core business of insurance, but from acting as brokers for the reinsurer.

In recent years, the landscape in Kuwait’s insurance industry has changed substantially. There has been addition of four new Takaful insurance companies, which specialize in Islamic insurance. Those four companies- Wethaq in the year 2000, First Takaful in 2000, Wateniya in 2004, and Al-Kaleejeya in 2005, have promoted more competition in the market (Shleifer, 1985, p. 319-327), which posed a threat to the four largest insurers in Kuwait, who had control over the market for so long (Williamson, 1975). If those four big insurers were to stay competitive in light of the Takaful invasion, they had to come up with innovative new approaches to market their insurance products, instead of “splitting the pie” in terms of collecting the premium pool available in the market. Those four companies had, over the past four decades, made a large percentage of their profits by simply splitting the government expenditure on insurance, and had thus no motivation or incentive to improve. With the arrival of the new insurers to the marketplace, relying on splitting the government premium will no longer be feasible for these insurers, since they will be getting less and less of the premium.

Life insurance sector

In addition to the increased competition being faced by the insurers in Kuwait, another important development has been the steady increase in the life insurance segment. Table 1-1 below shows the break up of the Kuwait insurance market over the past decade:

Table 1-1: Insurance Market – Kuwait

Segment
1996
1997
1998
1999
2000
2001
2002
2003
General
87.2
86.5
84.35
82.74
80.93
76.9
76.11
75.75
Life
12.8
13.5
15.65
17.26
19.07
23.1
23.89
24.25

It should note that despite the growth in the life insurance segment, the market size of life insurance is still much lower than the general world average. Life insurance for the world average accounts for over 60% of the insurance market, which is more than twice the rate in Kuwait. The reason for this low rate in Kuwait is the strong and generous social welfare system offered by the government for Kuwaiti citizens. It is expected that there will be an increase in the life insurance sector with the privatization of certain services, such as health care.

Move towards private pensions

In light of this recent worldwide movement towards life insurance, and the pressure faced by the introduction of newly founded insurance companies, the big four insurers in Kuwait have focused their efforts on establishing successful life insurance departments, and many of these companies have even started separate subsidiaries that focus mainly on life insurance. Gulf Insurance Company (GIC), the subject of this paper, decided to enter the life insurance market with the release of its MISK life insurance/annuity product. This product is essentially a retirement plan that also provides insurance over the life of the person being covered, thus distinguishing it from a regular pension that only provides retirement income.

A pension is a steady income given to a person, usually after retirement (Barr, 2002, p. 3-36). Pensions are typically payments made in the form of a guaranteed annuity to a retired or disabled employee. Some retirement plan designs accumulate a cash balance, through a variety of mechanisms, that a retiree can draw upon at retirement, rather than promising annuity payments. These are often also called pensions (Barr, 2002, p. 3-36). In either case, a pension created by an employer for the benefit of an employee is commonly referred to as an occupational or employer pension. Labor unions, the government, or other organizations may also sponsor pension provision.

Occupational pensions are a form of deferred compensation, usually advantageous to employee and employer for tax reasons. Many pensions also contain an insurance aspect, since they often will pay benefits to survivors or disabled beneficiaries, while annuity income insures against the risk of longevity. While other vehicles may provide a similar stream of payments, the common use of the term pension is to describe the payments a person receives upon retirement, usually under pre-determined legal and/or contractual terms (Crocker & Masten, 1988, p.327-343).

Kuwait began to apply the pensions system on January 1st, 1955 within the employees and retirement system in the government. The first independent law of pensions was issued by the Law, Decree No. 3 of 1960, which included government civil and military employees, followed by an independent law for the retirement pensions and indemnities for military persons, issued by the decree, law No. 27 of 1961. None of the above systems were integral for the Social Security (Bowman, 2003), as they handled and covered specified categories, such as government workers and those appointed on permanent professions and military persons. Finally, the first integral Social Security Law was issued in 1976, and the result was the establishment of the Public Institution for Social Security, which was aimed at providing the citizens the following security (SSPTW 2004, p. 116-117):

·         Security of old age, disability, sickness and decease, for civil workers in the government sector, private and oil sectors (Title III of the Law).

·         Security of old age, disability, sickness and decease for the self-employed, working at their own account and their affiliates (Title V of the Law).

·         Security of occupational diseases.

Misk

It is against this background of intense competition and need for innovative new products that Gulf Insurance Company (GIC) had introduced its new Financial Programme – MISK. Misk is a retirement and life insurance program that is aimed at securing a financial income in retirement, as well as providing a lifetime of personal financial protection. GIC had exploited a need in the marketplace for such a product, since despite the generous national social security system of Kuwait, few Kuwaitis can expect to retire on 100% of their final salary. For non-Kuwaitis, this figure would be much less. Due to dramatic advances in medical science, and growing expectations of early retirement, people nowadays are expected to spend about 20% of their lives in retirement.

The critical element that differentiates Misk’s policy from state pensions is the concept of “unbundling”, which refers to the separation of the constituent parts of the insurance policy; the investment element, expense and administration charges, and benefit charges. This separation is at the heart of the policy, and it is represented by a series of mathematical formulas that are prepared by the actuary designing the product. This formula determines how much of the premium being paid goes towards the investment portion of the policy, the life insurance part, and towards covering the administrative expenses of running the product, plus profits. The portion that goes towards investment is then distributed amongst three investment vehicles: local stock markets, international stock markets, and low-risk bonds. The percentage distribution of the funds amongst these three options is left up to the client and his appetite for risk. A client who is prepared to take on more risk will reduce his investment in bonds, and will opt for the other two markets.

Until the 1960s, most life insurance policies were conventional policies, whereby the client was not aware of what portion of the premium covered expenses or benefits, nor of how investment returns were allocated to the policy (Salinger, 1990, p. 287-321). The first step to unbundling was to identify the investment element separately from the other elements of the product. Because this was explained to the client and formed a legal part of the policy, it was the real start of unbundling. Some more years passed before the level of unbundling that we see today was achieved (Munich Re Group 2000a).

As time went on in the 1960s and 1970s, the other major parts of life insurance policies (mortality and expenses) also became unbundled. Product designers did this by setting out the way that expense and mortality costs would affect the policy. It was then a short step to design products that reduce, or do not offer, guarantees for these parts- subject to local regulations and the competitive environment allowing this. Unbundled products are also said to be transparent because the client can see the progress of the policy. This is aided in some countries by the requirement to send an annual report on the status and performance of the policy, including explicit reporting of charges taken from, and investment returns allocated to, the policy (Salinger, 1990, p. 287-321). In practice, however, the details of unbundled policies are quite complicated and whether transparency is achieved from the client’s point of view depends primarily on the clarity of the communication from the insurer and the extent to which the client is interested in such detail. To comply with these self-imposed regulations, GIC send a yearly report of the status and investment return for each policyholder.

GIC has realized that Misk will only provide good sales volumes in a market if it meets the requirements of the parties involved in the transaction. For an insurance product, this means meeting the requirements of the client, the distributor (the brokers that GIC deals with), and the insurer. In recent years, unbundled policies have been generally referred to as being “unit-linked”, because the investment element of the policy is housed in funds that are divided into units of equal value. A unit-linked policy is one whose underlying investments are identifiable and determine its cash values, and this is needed because each person’s investment decision is made irrespective of other policyholders.

Unit-linked policies can be designed to do almost anything a conventional policy can, but they can also offer more flexibility. The notable exception is achieving the smoothing of investment returns, which was traditionally the objective of conventional policies. Over the years, the smoothing of investment returns on conventional policies has been reduced as actuaries, through competitive pressures, have increased the bonus element of maturity payouts. The volatility of investment returns under conventional policies has therefore increased and the main perceived advantage of such policies has diminished. The major disadvantage of conventional policies lies in their bundled nature, and specifically, that the cash value of the policy at a particular time is not clear to the client. The transparent nature of a unit-linked policy hence has a major appeal to clients who wish to monitor the progress of the value of their investment. This has enabled single premium life insurance policies to compete successfully with mutual funds and other open-ended collective investment schemes (Latzko, 1999; SEC, 2000).

Another important advantage of unit-linking is that the client has control over the investment strategy for the policy and may be more comfortable with unit linking, since the concept is closer to other collective investment vehicles than a conventional policy. Under this scheme of unit-linking, clients can control the degree of investment risk by directing premiums to the funds most appropriate in relation to their risk tolerance. Providers publish in their literature the objectives of each fund, asset mix and investment strategy and customers then choose with help from their advisers as appropriate which fund best matches their investment strategy. The industry operates a system of fund definitions which ensure information on different classes of fund is comparable and that the risks of the investment remain aligned with the customer’s preference. Those clients willing to take on more risk, for example by investing more heavily in an equity share fund, would expect to earn better returns over the long term, as has been demonstrated by historical returns in many countries (Munich Re Group 2000a).

Table 1-2: Real Investments Returns by Asset Class (% per Annum)

Equities have yielded the highest rate of return, the longer the period being measured (Table 1-2). As a result, consumers have been investing a higher share of their premiums in equities (Figure 1-1).

Figure 1-1: Trends in Equity Investments

When GIC introduced Misk into the market in (199?), it was a response to a demand from the market (Guiso & Parigi, 1999, p. 185–228), and due to the belief that market conditions will support unit linked products, and that it can make a sufficient profit. Clear indications of where unit-linked plans may be successful are flat or stagnating sales of traditional with-profits products, and increases in sales of pure investment trusts (or mutual funds). Currently, mutual funds and investments have been returning above-average rates of return in Kuwait, and this had prompted higher management to consider attracting some of these funds into its Misk product (Table 1-3). Offering Misk has been a method of retain existing customers or attracting new customers who may otherwise purchase pure protection insurance (term insurance) and place their savings in investment-linked trusts or other pure investments, elsewhere. Unit-linked policies are usually less capital intensive than conventional with-profits policies, meaning that the capital required for supporting equal volumes of with profits and unit-linked business is lower for unit-linked business, and this provided GIC with an attractive option in starting Misk (Table 1-3).

Table 1-3: New business of Misk from Jan to Oct 2006

2006
No. of policies
Booster Premium
Annualized premium
Month
January
59
150.000
23,700.000
February
48
2,360.000
25,732.000
March
108
540.000
51,662.000
April
84
0.000
39,420.000
May
147
8,500.000
68,976.000
June
108
3,000.000
50,260.000
July
79
0.000
34,163.000
August
124
400.000
54,210.000
September
139
5,660.000
66,240.000
October
70
200.000
33,360.000
November

December

Total
966
20,810.000
447,723.000
# Excluding booster premiums.

In order for GIC to be successful in creating Misk, certain other factors have to be present, and these will be presented below, with a brief note on the presence of each in the Kuwaiti market in which Misk operates (Munich Re Group 2000a):

A key area in which a unit-linked policy differs from a conventional with-profits policy is that the investments of the unit-linked policy should be able to be valued at any point in time. This means that a price for the individual investments of a unit-linked fund should be available at any time through an efficient investment markets (Agnew, 2004). This covers not only share markets but also government bond markets, corporate bond markets, and- as far as possible- property markets. In this regard, Kuwait has long enjoyed a reputation as the financial center of the Persian Gulf, with a well-backed bond market and stable interest rates.    In markets where shares, bonds and property are popular investment tools, there is a general inclination towards investments that can be easily valued, and this puts the advantage on the side of a unit-linked policy rather than a conventional policy.

In addition to having a well developed financial market, the environment also needs a well-developed life insurance market to cover the other element of the policy- life insurance. In order to have such an environment, the following needs must be present (Mas-Colell, Whinston & Green, 1995):

• A need for protection and savings

• A stable economic background

• Consumer wealth

• A sophisticated banking system able to process mass transactions

• An advanced supervision system which allows the introduction of new classes of business

Having the Central Bank of Kuwait behaving as the head supervisory role for all financial and insurance transactions in the country has instilled the necessary supervisory and regulatory standards needed. The bank has also taken measures to stabilize the economy and interest rates, pegging the Kuwaiti Dinar to the US Dollar.

The fact that Misk is a unit-linked policy makes it open for a wide range of options for the consumer. These options include the choice of add-on insurance benefits, the term of the policy, and whether the cash value is payable as part of the sum insured or in addition to the sum insured on the occurrence of the insured event. Therefore, a complex point-of- sale illustration systems or sales technique is required to support Misk. Once written, unit-linked policies are also complex from a record-keeping point of view, as there are large amounts of data required to be held and large numbers of transactions to be processed. A powerful and efficient administration system is needed to manage a unit-linked portfolio, and GIC has taken advantage of its separate Life Insurance Department to maintain the necessary record-keeping and analysis.

In order to reach the market, GIC has relied on a sales force that is employed on a part-time basis, and trained specifically for selling Misk. These employees are rewarded on a commission basis, thus linking their reward with the output produced. Finally, in order to be successful in the unit-linked market, an insurer must be able to demonstrate a consistently good history of investment performance. For a newly formed program such as Misk, the performance history of the fund manager becomes part of the marketing message in selling the product.

1.2 Problem Definition

GIC’s Misk policy was instituted in 2001 as a way to tap into the growing life insurance and pension market. The life insurance sector in Kuwait has been growing at a 20% rate over the past 5 years, and Misk has been introduced to capitalize and gain a market share in that. Misk has been considered a success by GIC’s top management, with premiums reaching the 1 million KD level recently, in 2004. The success of Misk has carried GIC from the fourth biggest in terms of pension sales in the market, to be the largest grossing, in a matter of four years. However, once GIC reached that level of sales with Misk, it has been complacent, and has since been happy keeping only a small percentage of the target market. The challenge ahead of GIC is to grow that market share by reaching a bigger portion of the insurable population. GIC should not look at the premium being written, but rather at expanding their market share for this class of business.

The author’s initial hypothesis is that there are four main obstacles facing Misk, and its expansion in terms of market share in Kuwait. First of all, Kuwait is a Muslim country, with over ninety five percent of its local population being Muslims.  Historically, Islam has had a view that may not go hand in hand with the concept of life insurance, and especially annuities. Many Muslims believe that the determination of people’s lives and how long they live, is in the hands of God. Therefore, any attempt to determine how long people live, which is a technique used by life insurers in the construction of mortality tables, is usually frowned upon. GIC faces a challenge in convincing these people, and in portraying an image of the product that appeals to the Islamic majority.

Another problem facing all insurers, and especially life insurers, is that of solvency. As it stands today, there is no guarantee, from the customer’s point of view, that GIC will be operational in, say, twenty years’ time. The company could go bankrupt, face legal liabilities, or just overextend itself in writing business that its reserves do not provide adequate cover for that volume of business. Insurance companies are basically a mechanism for the transfer of risk from one party to another, in this case from the customer to the insurance company. As a result, when bad times hit, the insurer is at a risk of having to pay out in claims more than it has reserves, at which point the company could face the risk of bankruptcy. Therefore, there is a need for portraying an image of stability, which will convince prospective clients of the financial stability of the company.

Tying into that previous point, Misk has access to only a few marketing channels, as the client has to go through one of the salespeople to get the policy. In many more advanced countries, a policy such as Misk would be offered through the bank that the insurer works with, and this would lend more credibility to the policy, since people tend to have more confidence in a bank’s liquidity and stability than an insurer. GIC, which is a subsidiary of KIPCO, Kuwait’s largest conglomerate, has access to the banking division of the group, Burgan Bank. Offering Misk through that channel will not only increase the product’s exposure, but also increase the credibility that prospective customers have in that product. In addition to exploring alternative channels of distribution, GIC has to focus on increasing the size and budget of its marketing department.

1.3 Research Objectives

The purpose of this research paper is to find the reasons behind the under-performing job done in marketing the Misk policy, and in the process understand the Kuwaiti market by carrying out research that has not been done before into pensions and the process of marketing them in Kuwait. However, the objectives include:

1.      To understand potential and current customer perceptions and attitudes towards Life Insurance

2.      To identify key factors which shape customer’s decision making process when they decide to purchase a life insurance policy

3.      To understand customer perceptions about the product and after sales service offering by GIC

4.      To understand the reasons of the failure of marketing of Misk policy

5.      To find the effectiveness of marketing channels used in the past by GIC

1.4 Research Questions

1.      What are the perceptions and attitudes of potential and current customers about the concept of life insurance?

2.      What are they key factors which influence the decision making when the customers are purchasing a life insurance policy?

3.      What are the reasons behind the failure of marketing strategy of Misk Policy?

1.5 Relevance of Research

Although this is an applied research and primarily it is aimed to benefit the main sponsor that is, Gulf Insurance Company, in improving their future marketing strategies and gaining valuable insights about their customers preferences and attitudes, however, this research will also help to enrich the database of insurance research and how the target population perceives about the concept of life insurance considering the religious thoughts and marketing limitations of the region and also in the existence of plenty of other options available to them for investing.

1.6 Research Methodology

This is an applied research to find potential and current customer perceptions and attitudes towards Life Insurance and the reasons for Misk marketing failure therefore; initially data analysis was conducted to acquire population characteristics from the Misk Database. These took more time and resources as compared to quantitative instruments like a survey but gave us the orientation to carry out this research effectively and explore by probing the right participants on the research topic. After this analysis, a questionnaire-based survey was also conducted based on the conceptual concept formed in the literature review and population characteristics which were gained from the analysis done earlier. To take note of internal validity, a pilot survey was conducted on the employees of GIC who were also the bearers of the Misk Life insurance policy. The final questionnaire was tailored according to the feedback of the pilot survey and then was used for the final survey.

Preliminary data and other pertinent information was gathered by using the Misk Database which was the primary data source used for this research. For the same purpose, the CEO of Gulf Insurance Company, Mr. Khaled Al Hasan, has authorised the author of this paper to use. Access to the complete database of information about the client, including details such as age, income level, and a number of other fields is available, and was used and analyzed extensively. The data was analyzed using SSAP statistical software, which measures the relationship between the variables being measured, and provides graphs and tables to illustrate those relationships.

The survey questionnaires were designed and administered through the telephone. The decision to use a questionnaire was based upon the need to get the clients’ opinions and attitudes regarding the particular questions being asked. The questionnaire contained both scale five answers and yes or no type of questions. The use of scale five allowed the author to measure the opinion of the respondent more accurately. The questionnaire was constructed in a logical fashion, where qualifier questions were asked, and the order of the questions reflected a logical thought process that is aimed at getting the user’s opinions in an efficient manner.

1.7 Limitations & Ethical Considerations

The most important barrier faced during this research was to select a sample which was a true representation of the target population. This barrier was overcome by extensive analysis of population definitions in Misk database and then random selection of an appropriate sample, details of which can be found in the third chapter. The following are a few other limitations faced by the researchers:

1) Limited Budget

2) Limited Time

3) Lack of Knowledge in a few technical areas

The following rights of the participants were reserved throughout the process of this research:

à   Informed Consent: The participants of telephonic interviews were informed about the details of the study and how they can most effectively add value to this research.

à   Right of Withdrawal: Participant can withdraw at any stage during the research process.

à   Right of Refusal: Participant can refuse to share information.

à   Privacy: The information shared by the participant will not be disclosed to others.

à   Anonymity of Data: The identity of the participant will remain anonymous.

1.8 Organization of this Research

The opening chapter of this research introduces the problem to the reader along with the purpose and objectives to carry out this entire study. It is aimed to give the background and a thorough problem definition to provide a complete frame of reference to the reader along with the rationale of conducting this research. The second chapter forms the conceptual context by conducting a review of the various studies and researches already conducted by various researchers. Third chapter explains the research methodology with the target population, sampling methods and the research design. Then the fourth main chapter of findings and data analysis follows which gives the insights obtained from the interviews and the results of the pilot study and survey. Finally the thesis has been concluded by chapter five which is a summary of the entire study along with a conclusion and recommendations for GIC which can be beneficial for them in repositioning the Misk and reviewing its marketing programming or improve their work processes.

Chapter 2: Literature Review

2.1 Introduction

In order to find the reason why people purchase pensions, it is important to understand their attitudes towards pensions and the thought process behind their decision to purchase them (Turner & Beller, 1989; Whitehouse, 2000). Much research has been done regarding that subject, and regarding the decision of clients to shop around until they find a suitable product. According to the Association of British Insurers (2002) research, it was found that a small majority (52%) of people buying annuities shopped around for an annuity (ABI, 2002). Despite this, almost 60% of annuitants continue to buy their annuity from their pension company (Figure 2-1). Most of the clients take this decision after shopping around and making sure that their pension savings company has offered them the best deal in terms of annuity rate. Other clients, however, continue to fail to maximize the value of their pension savings. Therefore, it is not a surprise that the survey conducted by ABI found that those who rely more on their annuity for their retirement income were more likely to take advantage of the Open Market Option than those who had other more significant sources of income. (ABI, 2002)

Figure 2-1: Percentage of Annuitants who shopped around or considered Shopping Around

The research by ABI (2002) further shows that in terms of income distribution, shopping around for an annuity is usually clustered at the top and bottom of the income scale (ABI, 2002). As one expects, the proportion of those on higher incomes (more than £3,800 a month) shop around is higher than the proportion of those on lower incomes (less than £250 a month) – 67% compared to 47%. On the other hand, those on lower incomes are more likely to shop around and have more concern than those on middle incomes (Figure 2-2).

Figure 2-2: Percentage of Customers who exercise the Open Market Option, by Monthly Income

There are several reasons why many customers do not shop around (Table 2-1). It is reassuring to see that only 10% either did not know they could shop around or did not know where to go to shop around (ABI, 2002). What is less reassuring is that 17% of those polled had their pension savings with a provider and simply decided to stay with them, since this indicates that their decision is being made on a poorly informed basis, without looking around for alternatives.

Table 2-1: Reasons why Customers do not Shop Around

2.2 Understanding Annuities

An impression has been created on customers’ minds, especially by the media, that annuities are a ‘bad deal’ for all (Dezyk & Slater, 2004). Consumers are said to object to having to buy an annuity to turn their pension savings into an income in retirement, while little is said about just how much consumers in general understand about annuities (Dezyk & Slater, 2004). One of the main advantages of an annuity is that, in general, it provides an income which is guaranteed for the rest of an individual’s life. Effectively, it insures against an individual living longer than their pension savings would have provided an income for. Out of the sample surveyed by the Association of British Insurers (ABI) in the UK, 90% understood that an annuity provides an income that is guaranteed for life.

In the ABI (2002) report, almost two-thirds of those questioned understood that annuities worked on the basis of pooling, with each individual who dies early effectively helping finance those who live longer (ABI, 2002). The findings of that study show that understanding the basic features of risk pooling varied by the level of customer’s household retirement income, as expected, since a certain level of awareness is affected by education, and hence income level. 57% of those with a retirement income of less than £250 a month understood the pooling involved in annuities, compared with 88% of people with a retirement income of more than £3,800 a month (Figure 2-3).

Figure 2-3: An Annuity works on the basis of pooling so that each individual who dies early effectively finances those who live longer

For many customer especially those who are on the upper income band understand the benefits of an annuity. However, knowledge of the differences between pension savings and annuities is not so strong. The research found that 45% thought that a pension and an annuity were the same thing. Given this, it is perhaps unsurprising that the overall number of people shopping around to buy an annuity has not increased to the level which might have been expected by policymakers. On the other hand, different elements of annuities were better understood. For example, as the study states, 62% of people correctly disagreed with the statement that an annuity must be bought as soon as an individual retires. Also, 81% of those questioned were aware that it is possible to take a 25% tax-free lump sum from their pension savings (ABI, 2002). All these figures demonstrate that for the majority of people, knowledge is imperfect but they have a basic understanding of annuities.

2.3 Confidence in long term savings

Treasury Select Committee (2004) states that the investment in market securities (both shares and bonds) has given Kuwaiti savers a strong stake in the growth of the real economy for many decades (Treasury Select Committee, 2004). The insurance industry has played a key part in channeling these savings, both through pension funds and private saving vehicles. It has worked together with successive governments’ policy, which has consistently encouraged the growth of long-term private and company saving, in addition to the state pensions and benefits (Pensions ; Savings Team, 2005). This policy of encouraging alternative channels of investments and savings has, over the years, given savers considerable returns, alleviating the pressure on the country to deliver the crucial social security benefits (Bowman, 2003).

As the size of the Kuwaiti population is growing, and especially with the extremely high rate of growth in the 18-25 year old demographic, the insurance and saving industry’s role is even more important today as ever. As the retired population increases in size, a need for a step change in the amount of provision for retirement incomes increases. The Kuwaiti government has recognized that saving habits need to start early in our lives, and has to be instilled if the aging population expects to retire on the same standard of living it is used to. Otherwise, a ‘Savings Gap’ will be opened up between what is currently available for people’s incomes in retirement, and the resources that will be needed if decent living standards for the next generation of pensioners are to be preserved (Palacios, Rutkowski ; Yu, 1999; Holzmann, 2000, p.11-34; Lindeman, Rutkowski ; Sluchynskyy, 2000). A number of solutions exist, and they include a mixture of longer working lives, state pension reform especially for lower-income class and non-working people (Pensions ; Savings Team, 2005) and more access to the equity in people’s homes. In addition to those solutions, private saving will also need to play a part.

To facilitate the growth of private pensions alongside state pensions as a means of providing for the retiring Kuwaiti population, an effective financial system must be present, and has to be built on confidence. Savers whether individuals or institutions must trust the firms through which they invest their money (Casey, 2004). In particular, customers should be confident that the advice they receive will be driven by their needs, not providers’ commissions, and that the products they buy and their attendant risks will be clearly explained to them. In addition to that, other areas where confidence has to be present are:

Confidence that they will receive good value for money and high standards of service.
Confident that they will be treated fairly, and that redress will be available if mistakes are made.
Confidence that individual companies are well-run and financially sound, with top management focused on enhancing shareholder value and reputation through quality products and service.
Confidence that financial regulation will be rigorous and effective, and that regulation of products and sales will be clear, proportionate and cost-effective.
Confidence that Government policies on pensions, benefits and saving will ensure that it pays to save and be broadly consistent over time.

Once the private and institutional investors are convinced on the above mentioned points, they can start placing their investments and pensions with comfort (Benartzi ; Thaler, 2002, p. 1593-1616; Myners, 2001). In recent years, however, confidence in the long-term savings industry has fallen short of these principles. The sustained period of stock market growth over the last quarter of the twentieth century dampened the pressures for change which were evident in most other retail markets. Poor standards of advice, and too much emphasis (by both firms and regulators) on technical matters rather than customers’ needs, became evident in some areas. When the economy shifted from high inflation and high investment returns, to low inflation and lower returns, the industry and regulator were slow to respond. And the rapid market falls, in the USA and Europe, of the last two years, gave rise to some high profile and unacceptable problems.

Therefore, restoring confidence is essential if clients are to be convinced to voluntary increase industry, which is the primary aim of the Kuwaiti government’s policy regarding social security. The industry’s interest and the public interest are, fortunately, identical on this fundamental point. It has been widely recognized for some time that fundamental changes in the savings market, and in the legislative and regulatory environment in which it operates, are needed to restore confidence. Some of these changes are already being driven by market and competitive forces. The insurance industry’s costs and prices have fallen and continue to fall with the introduction of new companies and increased competition (Shleifer, 1985, p. 319-327), and this will certainly help increase the level of service being provided.

2.4 Client Brochures

The product development process for a unit-linked policy is considerably different from the process for any other type of life insurance contract (Aghion ; Bolton, 1987, p. 388-400; Crocker ; Masten, 1988, p.327-343). For a unit-linked product such as Misk, it is important to consider the target market for the product and the marketing message to be conveyed. In addition to that, it is essential to develop material to support the sales to be conveyed. The two key sales messages to be stressed are outlined in the below paragraphs.

First, it is required to stress the major advantage of the product, namely that it is unbundled in nature, meaning that the investment and insurance elements of the policy can be controlled separately. As a result, it must be demonstrated that the clients can structure their insurance benefits to meet their exact needs, control the amounts that will be invested, and the nature of the investments, depending on their risk appetite.

Secondly, the possible application or applications of the savings element in the future, for example as mortgage repayment, pension provision, school fees, and similar applications, must be stressed, as it is a major advantage of Misk. The various applications may be covered in one client brochure, but more often specific applications or groups of applications are covered in separate client brochures.

The client brochure concentrates on these messages but adapts them to any particular requirements of the chosen target market. The point-of-sale illustration system should be able to reinforce the messages in the client brochure, since the most common point of reference for clients after the sale is the printed illustration given to them at the point of sale. Client brochures should ideally also deal with investment performance, but in many countries what can be said is limited by regulation. Such limitations are usually imposed following very aggressive selling in the hope for future investment returns based on the then very high investment returns in the early 1980s. To illustrate that idea, when the salesperson calculates the policy maturity values based on a certain percentage investment return before expenses, the effect of expenses reducing this return still leaves an impressive figure at maturity (Munich Re Group 2000a). However, when expenses reduce an investment return of, for example, 6% to 3%, the resulting maturity value is considerably less impressive.

In the cases where high projected returns fail to materialize, it becomes clear that the investment was in fact a very poor investment. As a result, many countries took action by limiting the rates of investment return that could be used in projecting maturity values. As a result, client brochures should provide basic details on the range of investment funds available and the level of risk relating to each, but should not ideally discuss possible investment returns (Munich Re Group 2000a)

.

2.5 Pricing and Profit Testing

This is the process of determining the charges that will result in a profitable product for GIC from the introduction of Misk. This process is done by choosing a charging structure and projecting the cash flows (charges taken less costs incurred) over the life of a portfolio of business. Performing this analysis requires a set of per policy expenses to go with the charging structure. The objectives of the profit-testing process are to produce a charging structure that is marketable, meets the insurer’s financial targets, and can be supported by the administration system. Also, it is to produce a charging structure that is reasonably insensitive to the mix of business written (in terms of age, sex, premium level, etc.). In this regard, it is important to keep in mind that as the frequency of charges matches the frequency of incurred expenses, the better and more profitable the product is, and the easier it is for the insurer to make predictions for the future regarding the product’s success. Also, it becomes easier to calculate the reserves needed to be kept in place for the portfolio of business. In insurance, a certain reserve is kept aside, and this is imposed by the regulatory body in Kuwait, the Central Bank. In general, the less volatile the portfolio, the less is needed to be kept as reserve and the more money the insurance company can use to fund other areas of business, such as expansion or spending on research and development. Therefore, it is very beneficial for GIC to calculate the expenses accurately, and to match them with the charges, in order to produce a more profitable product.

The expenses charged part of the equation includes the costs associated with running the portfolio of unit-linked business. Identifying these costs is a complex issue and must allow for, amongst other variable, the following:

Administration systems development costs
Other product development costs
A share of distribution overhead costs
Administration costs (including overhead costs)
Investment management costs, which are the expenses paid for investment managers and associated administrative costs.

All costs need to be split up between acquisition costs and renewal costs. For a start-up insurer, this is a simple procedure, but for an insurer writing other lines of business, such as GIC, identifying and projecting these expenses is much more difficult and time consuming. For this reason, insurers often set up separate companies to deal with their unit-linked business and expenses are recharged from the existing company on a time and materials basis. There is a movement in GIC’s top management towards that separation, and this has been done by other insurance companies in Kuwait such as Warba Insurance. As the unit-linked business develops, formulas for the distribution of expenses can be refined, but in the early days they will be somewhat approximate, out of necessity. The list of expense assumptions required is relatively simple, but derivation of amounts is much more difficult. They must also allow for economies of scale in the future, which will benefit the insurer as it becomes less and less costly to attract and run business.

Choosing a charging structure was the next step for GIC in introducing Misk There are certain constraints on the charging structure imposed by the market and the regulators, the Central Bank in this case. The key constraints will be in the areas of:

Whether an initial charge or surrender penalty is acceptable.
The maximum fund management charge that is acceptable.
The maximum bid/offer spread that is acceptable.

Within these constraints, the insurer must choose a charging structure that allows it to pay competitive levels of commission, meet its financial targets and not be sensitive to small changes in the mix of business. To a certain extent, this will be a matter of trial and error, initially.

In terms of the assumptions required to be made regarding the expenses, GIC has had to consider the following points: Initial expenses, renewal expenses, inflation of renewal expenses, initial commission, and renewal commission. To balance these out, Misk has to charge the following charges:

Initial charge, which was decided to be 10 KD.
Renewal charges, which considers the bid/offer spread, policy administration charge, and similar expenses
Fund management charge, for the investment side of the policy
Allocation rates
Add-on benefit charges, which are not included for GIC

Other considerations exist, which will need to command a charge to enable GIC to keep the policy profitable:

Mix of business, which considers the age, sex, premium level of the applicant, all of which are factors that affect the risk level of the policy, and which directly affect the profitability of it.
Fund returns
Mix of funds
Lapse rates, which is the percentage of cancellations out of the total number of policies issued, and which represents a major expense and loss of revenue to the company.
Valuation and reserving methods, which are imposed under the primary regulator in Kuwait. As explained above, the higher the reserves, the less capital the insurer has to develop other areas of business, and the more money it has tied up to meet the reserves, which makes it less profitable overall.
Tax computation, which is not applicable in Kuwait, a tax-free country until now.
New business volumes and projections

 Finally, before the product is released, it becomes necessary to profit test a portfolio of business to allow for economies of scale to take effect, which will give a better indication of the level of success or failure expected in the future. The portfolio profit test will generate a present value of future profits (PVFP) at the discount rate used. To decide whether the result is acceptable, the insurer will have a financial target to meet. For any company, and specifically for an insurer, this can be expressed in one of the following ways:

To generate a return of at least x% on capital. The minimum required rate should be the risk free rate plus an allowance for future inflation plus the insurer’s allowance for provision of capital. If the return on investment (ROI) is equal to or greater than x%, the product would be considered
To generate a present value of future profits of x% of new premiums based on a discount rate of y%.
To generate a contribution to overhead of $x per policy based on a discount rate of y%.

The setting of profit objectives is not an easy matter and should always take into account the degree of risk of a product (in consideration of its guarantees and  options), the level of competition, and the insurer’s financial objectives. Profit targets should be set such that an adequate return is earned on the capital that is used to support the business (thus earning a rate that will satisfy shareholders) and may be set even higher if the company wants to increase its free surplus and improve its ratings and/or fund future growth.

In addition to achieving certain levels of profit in the best estimate scenario, there are usually constraints that the sensitivity of the results to changes in the assumptions should lay within certain bounds and that the break-even point should be before a certain time. For a unit-linked policy, the break-even point is the point in time at which the accumulated value of profits and losses first becomes positive using a specified accumulation rate.

Most commonly, insurers calculate the break-even point based on the return they expect to earn on shareholders’ funds that are not used to finance new business (Munich Re Group 2000b). This rate of return will often be that for a fairly conservative investment portfolio and will often be similar to the projected rate of return on the balanced unit-linked funds. The rate of return can therefore be viewed as the rate of return that could be obtained by following a relatively conservative investment strategy as opposed to investing in expanding the insurer’s business. The precise form of the targets will vary between insurers depending on the requirements of the shareholders and the way in which the performance of the company is measured.

2.6 Commission

Commission is frequently regarded as a significant factor in the conduct of long term savings business, including life insurance and it is often thought that it is a source of unneeded complexity, cost and inefficiency. In addition to that, it is often thought as? creating a conflict of interest between sellers of savings products and buyers, especially when the commission reward system is used. As a result, many potential customers view it as a necessary evil for the conduction of life insurance transactions, namely Misk.

As it is today, and despite its many drawbacks and negative publicity it receives, commission remains the main compensation model in the retail long – term savings industry, just as it is in many other intermediated sectors. This, however, does not mean that no other viable model exists. Other models include salaried advisers and fee-based advice, which market intelligence suggests is on the increase, especially when it comes to serving higher-income clients. The following is a brief summary of the debate and the evidence on the role of commission in retail financial services.

The Financial Services Authority (FSA), Britain’s principal regulator for the financial sector, stipulates in its Conduct of Business rules the suitability requirement, which exist because of the potential conflicts of interest between buyers and sellers. Other regulatory bodies also recognize the potential conflict of interest, with The Association of British Insurers (ABI) condemning sales practices that enrich advisers by delivering unsuitable products to consumers. In its opinion, the ABI believes that such practices breach client trust as well as the rules. Senior managers in firms that work on the above basis of compensation have a responsibility to ensure the implementation of compensation schemes and incentives that are designed to avoid and eliminate such practices.

In practice, however, most consumers are unaware of how their adviser is paid, do not consider that his reward might depend on the product he sells them, and do not realise they might have other options for paying for their advice. More sophisticated consumers may be aware of those aspects, and might negotiate with their advisers to rebate some of the commission. In order to level the playing field, improved disclosure and explanation of adviser compensation is needed, and the ABI supports any action that will help in that regard. (Treasury Select Committee, 2004)

2.7 Staff

As mentioned previously, the selling of Misk is different than that of a conventional life insurance policy, because it combines both an insurance and an investment side to it. Therefore, staff briefings on the new product should be tailored to the needs of the staff in question. This means that three or four separate briefing seminars could be required. For a unit-linked product like Misk, this means seminars for (Munich Re Group 2000a):

Staff who deal directly with intermediaries. These staff will need to be familiar with all the details of the new product, and be able to demonstrate the benefits and advantages to the client. Here, the emphasis is to create a need for the customer, and to show them how Misk will complement their public pension, and how it will compliment the state pension in their retirement years. Because of the insurance element attached to the policy, this seminar will also require a briefing about the insurance coverage being offered.
Administration staff, which need to be aware of how the administration system for the product works. This includes a briefing of all the costs being charged to the customer, and where they are being distributed. Underwriting staff, who issue the policy and specify the terms and conditions, and whether or not the policy should be issued to the client, may require a separate briefing, particularly if there are new types of add-on insurance benefit being offered under the product. For Misk, there are no specific add-on benefits, and the policy cannot be customized for an individual client, so this point can be ignored.
Investment department staff who need to be aware of the investment aims of each of the funds available, and their historical performance. As mentioned above, there can be no promises of the returns expected, since this will violate the rules set out by the FSA and other international and local regulatory bodies, such as the Central Bank of Kuwait. The employee here has to ensure that a rough approximation is given to the client regarding expected returns, and that the figures be realistic. A potential conflict of interest may arise otherwise, where the employee, who is rewarded purely with commission, may inflate the expected returns for the purposes of selling more Misk policies.

2.8 Collection and Processing

As the CBO study on the administrative costs of private accounts in social security argues, the additional costs of collecting contributions should adopt the procedures currently used by agencies such as the Social Security Administration and the Internal Revenue Service. (CBO 2004) GIC should be aware of some expensive additions that would make the product more appealing, and realize that although they make the product easier to sell, their benefits sometimes do not justify the costs. In a defined-contribution system with asset choice, for example, information on asset allocation would also have to be collected and processed. If the choice of assets was restricted, little additional information would be required, and the costs of collecting and processing it could be reduced. In the extreme, if the system permitted investing in only one asset, no additional information would be necessary. By contrast, if the system allowed unlimited choice of assets, much more information would be required, generating higher costs. Minimizing the cost of collection would limit services, of course. If the existing collection procedures were used, the system could credit contributions to specific workers only after a delay (Papke, 2004), meaning that workers would not be able to allocate contributions to their chosen investments immediately and might lose some returns in the meantime. In addition, workers might desire a broad choice of assets to tailor their portfolio to their own preferences.  (CBO, 2004)

2.9 Administrative and Management Expenses

The administration of any pension system involves a number of essential tasks.  Identifying those tasks is crucial to any comparison of the costs of different systems. The requisite administrative tasks typically consist of the collection and processing of contributions (Papke, 2004); asset management; the calculation and payment of benefits; enforcement and oversight; and, in some cases, marketing and sales. Because each system may assign a task to a different agency or individual, it is also important to determine who is responsible for performing each task. Some proposals would shift the administrative burdens to employers or spread them among different government agencies; a comparison of costs that focused on only one level of administration could therefore be misleading. Furthermore, any comparison of systems has to acknowledge differences in the level and quality of services. Some systems may provide additional value for workers by keeping them informed about expected benefits, for example, or by giving them a range of investment choices. To the extent that workers desire and are willing to pay for those services, participants may be better off even though their retirement resources are likely to be reduced.

Any pension system must collect contributions in some form (Holzmann, 2000, p.11-34; Lindeman, Rutkowski ; Sluchynskyy, 2000). In many systems, those contributions, as well as information that will ultimately determine benefits, must then be transmitted to institutions that either invest the contributions in some sort of assets (in a funded system such as a private pension) or pay them out directly as benefits (in a pay-as-you-go system such as Social Security) (Myners, 2001). Theoretically, individuals could be required to make their contributions after they received each paycheck. In practice, however, most systems impose the task of collection on employers by requiring them to withhold the contribution from the paycheck. That arrangement has the advantage of reducing non-compliance. The administrative burden of collecting and processing the contributions depends partly on the amount of information that must be gathered under a given system. In a simple system, the amount of each worker’s contributions is the only information required.

However, matters can be more complicate and administrative costs higher in a defined-contribution system with multiple investment funds. In that case, the collector must also convey the worker’s choice of funds. More frequent collection and transmission will also tend to increase costs. The time required to collect and transmit contributions and information may be more important in a defined contribution system than in a defined-benefit system. In a defined-benefit system, errors in transmitted information can be corrected at any time up to (or even after) retirement simply by changing the recorded earnings history.

In a defined-contribution system, however, delays in transmitting workers’ choices of assets could lead to lost returns. If a system suffers from delays in transmission of information about asset choices, administrators may have to designate a default investment for contributions that have not been allocated. In a funded system, additional costs arise from managing retirement assets. If the contributions are invested in a mutual fund, for example, some payment must go to the fund managers for researching and choosing investments and making trades (Latzko, 1999).  Management fees depend heavily on how actively the fund is managed and the type of assets in the fund. More actively managed funds tend to be more expensive because the investment manager devotes more resources to making asset choices, and the fund’s assets have higher turnover. By contrast, funds that seek to match the assets in a published index of stock values (such as the Dow Jones Industrial Average or the S;P 500) do not require research into particular investments and have lower turnover of assets. (Those funds may, however, miss investment opportunities.) Funds holding assets that require more extensive research, such as international funds, also tend to have higher costs. Note, though, that the cost of research tends to be largely fixed—additional participants or total assets are likely to have little impact on the costs of research.

In a defined-contribution system with a choice of assets, record keepers must also track contributions, returns, and balances for each type of asset, including transfers between asset types. All of that information must be recorded and processed—a task that becomes more costly as more asset types are allowed and more frequent contributions and transfers are permitted. A defined-contribution system with a choice of assets could involve multiple record keepers: if workers can simultaneously invest in funds from different providers, records for the same worker could be held by several providers. (CBO, 2004)

Another important aspect that affects the ability to sell a service, and especially a life insurance/pension policy, is the fees charged by management, since this is money spent by the client on running the operations, and not being diverted into their savings or towards their life insurance portion of the policy. According to research done by the Association of British Insurers (ABI), between 1983 and 2001, average management expenses per individual long-term policy (in-force) in the UK increased from £45 to £118 (Treasury Select Committee, 2004). Taking inflation into account, this reflects a decline in real terms (Figure 2-4).

Figure 2-4: Management Expenses per policy in force (deflated by average earnings index)

An assessment of the relationship between fund size and management fees in the UK, according to an Oxera study, shows that there are economies of scale in fund management (Figure 2-5). This is also confirmed by the economic literature. While there are significant economies of scale up to a fund size of £500m, these become less significant beyond £500m and in particular once funds under management reach around £1 billion. While this is not applicable to the scale of operations of GIC, it does show a relationship between those two variables. (Oxera, 2006)

Figure 2-5: Relationship between Fund Size and Fund Management Fee

3.0 Chapter Conclusion

This chapter frames the conceptual context for this study and builds an overview of research which has been conducted in the past. It has been established that the majority of annuitants continue to buy their annuity from their pension company. However, knowledge of the differences between pension savings and annuities is not so strong. Restoring confidence is essential if voluntary saving is to be encouraged and increased, which is the primary aim of the Kuwaiti government’s policy regarding social security. On client brochures it must be demonstrated that the clients can structure their insurance benefits to meet their exact needs, control the amounts that will be invested, and the nature of the investments, depending on their risk appetite. Client brochures should provide basic details on the range of investment funds available and the level of risk relating to each, but should not ideally discuss possible investment returns. Before the product is released, it becomes necessary to profit test a portfolio of business to allow for economies of scale to take effect, which will give a better indication of the level of success or failure expected in the future. Most consumers are unaware of how their adviser is paid, do not consider that his reward might depend on the product he sells them, and do not realise they might have other options for paying for their advice. In a defined-contribution system with a choice of assets, record keepers must also track contributions, returns, and balances for each type of asset, including transfers between asset types.

Chapter 3: Methodology

3.1 Introduction

A research design and methodology is the strategy for answering the questions or testing the hypotheses that stimulated the research in the first place. Survey designs may be distinguished as cross-sectional or longitudinal, depending upon whether they exclude or include explicit attention to the time dimension (Pinsonneault ; Kenneth, 1993). Appropriate research design thus depends on the problem or question the researcher addresses. When the researcher’s aim is to describe a population or document and test differences in subset of the population at one point in time, the cross-sectional design is probably the most appropriate.

Sampling is concerned with drawing individuals or entities from a population in such a way as to permit generalization about the phenomena of interest from the sample to the population (Pinsonneault & Kenneth, 1993). The most critical element of the sampling procedure is the choice of the sample frame that constitutes a representative subset of the population from which the sample is drawn. The sample frame must adequately represent the unit of analysis. Sampling is also concerned with representation in selection of individual respondents from the sample frame. In this research, the aspect of representation in the study concerns giving each potential or current customer an equal chance of being included in the sample. This requires random selection of participants from the sample frame (Bartlett II, Kotrlik & Higgins 2001, p. 43-50).

Regardless of the unit of analysis, the units for data collection in survey research are usually individuals (Pinsonneault & Kenneth, 1993). Individual responses are often aggregated for larger units of analysis such as role, work group, department, or organization. Depending upon the nature of the research, it may be sufficient to have a single individual as respondent for each of these units of analysis. More often, however, it is necessary to have several individuals as respondents because people function in different roles, at different levels of the hierarchy (Williamson, 1975) and, consequently, have differing experiences and perceptions of the technology and its impacts in the organization (Krosnick, 1999, p. 537-567).

The choice of data collection method, such as mail questionnaire, telephone interview, or face-to-face interview, is significant because it affects the quality and cost of the data collected. For example, mail questionnaires are very good for gathering factual data, but they are less effective when sensitive or complex data are needed. In general, quality and cost are highest with face-to-face interviews or telephone interviews whereas quality and cost are lower with mail questionnaires and group administration.

3.2 Problem Definition

The research problem can be stated as:

“To identify key factors which shape customer’s decision making process when they decide to purchase a life insurance policy and to understand customers’ perceptions about the products and services offered by GIC and the reasons for marketing strategy failure of Misk.”

3.3 Research Objectives

1.      To understand potential and current customer perceptions and attitudes towards Life Insurance

2.      To identify key factors which shape customer’s decision making process when they decide to purchase a life insurance policy

3.      To understand customer perceptions about the product and after sales service offering by GIC

4.      To understand the reasons of the failure of marketing of Misk policy

5.      To find the effectiveness of marketing channels used in the past by GIC

Apart from these primary objectives researches were very careful to keep this research free from any bias or preconception on part of the researches and they were extremely careful not to manipulate any findings or results to give a clear insight to the sponsor that is, GIC.

3.4 Methodological Framework

The primary method of data collection is survey in this research for the following reasons: Survey research can be used for exploration, description, or explanation purposes (Pinsonneault & Kenneth, 1993). The use of survey research for these purposes is different, however, from the use of case studies or experiments for such purposes. The purpose of survey research in exploration is to become more familiar with a topic and to try out preliminary concepts about it. A survey in this context is used to discover the range of responses likely to occur in some population of interest and to refine the measurement of concepts. The exploratory survey focuses on determining what concepts to measure and how to measure them best. The exploratory survey also is used to discover and raise new possibilities and dimensions of the population of interest. Usage of survey research for exploration as an end in itself is almost never warranted. Exploratory surveys should be used as the basis for developing concepts and methods for more detailed, systematic descriptive or explanatory surveys. In short, the purpose of an exploratory survey is to elicit a wide variety of responses from individuals with varying viewpoints in a loosely structured manner as the basis for design of a more careful survey (Pinsonneault & Kenneth, 1993).

Another purpose of survey research is in description which is to find out what situations, events, attitudes, or opinions are occurring in a population (Pinsonneault & Kenneth, 1993). Survey research aimed at description asks simply about the distribution of some phenomena in a population or among subgroups of a population. The researcher’s concern is simply to describe a distribution or to make comparisons between distributions. Analysis stimulated by descriptive questions is meant to ascertain facts, not to test theory. The hypothesis is not causal, but simply that common perceptions of the facts are or are not at odds with reality.

Finally, survey research can also be used in explanation which is to test theory and causal relations (Pinsonneault ; Kenneth, 1993). Survey research aimed at explanation asks about the relationships between variables. It does so from theoretically grounded expectations about how and why the variables ought to be related. The theory includes an element of cause and effect in that it not only assumes that relations exist between the variables, but assumes directionality (e.g., that the relationship is positive or negative, or that variable A influences variable B) (Pinsonneault ; Kenneth, 1993). Explanatory questions may extend not only to establishing the existence of a causal relationship but also to asking why the relationship exists.

3.4.1 Barriers

The main barrier as also identified in the limitations section in the first chapter was to select the most appropriate sample which can be the best representative of the target population. This barrier was overcome by extensive analysis of population definitions in Misk database and then random selection of an appropriate sample. Other barriers included limitations of time ; resources and also a few times some very key people used to be unavailable.

3.4.2 Research Design

This is an applied research to find potential and current customer perceptions and attitudes towards Life Insurance and the reasons for Misk marketing failure therefore; initially data analysis was conducted to acquire population characteristics from the Misk Database. These took more time and resources as compared to quantitative instruments like a survey but gave us the orientation to carry out this research effectively and explore by probing the right participants on the research topic. After this analysis, a questionnaire-based survey was also conducted based on the conceptual concept formed in the literature review and population characteristics which were gained from the analysis done earlier. To take note of internal validity, a pilot survey was conducted on the employees of GIC who were also the bearers of the Misk Life insurance policy. The final questionnaire was tailored according to the feedback of the pilot survey and then was used for the final survey.

3.4.3 Data Analysis Method

During the entire course of this research Data were analysed in two frontiers. Initially extensive data analysis was conducted on the Misk population database using the SPSS software. Later after accumulating and tabulating the results of the survey SPSS software was used to analyse them and results were derived.

3.4.4 Target Population ; Sampling Methods

The target population comprises of potential, current and former clients of GIC’s Life insurance policy and pension program (Refer to Appendix: A-1). For the pilot study a convenience sample of participants which were current GIC employees who have Misk policy were asked to answer the questionnaire and then the original questionnaire was tailored accordingly. The targeted participants were selected randomly (Bartlett II, Kotrlik ; Higgins, 2001, p. 43-50) and were logically divided in two groups: those who were the current active clients; and those who had their policies lapsed or cancelled. The responses of both the groups were recorded and separately analysed for a realistic view if insights.

3.4.5 Brief Description of the Questionnaire

The questionnaire was based on a quantitative paradigm and usually the questions are objective and close-ended (Refer to Appendix: A-2). It comprises of multiple choice, single-selection, yes-no and various option questions. There were in total 55 questions out of which the first 10 were more generic and concerned data related to client demographics, the rest of the questions were more relevant and of applicative to the research.

3.5 Chapter Conclusion

This chapter introduced the research methodology and design of this study. The research was conducted by an initial analysis of Misk database which was followed by conducting a pilot survey within the GIC organisation. The feedback of the pilot survey was used to tailor the questionnaire. The main findings were gathered from a survey of two group: those who had lapsed or surrendered their policies and those who are the current policy holders. The results were compiled and analysis was completed with the help of SPSS software.

Chapter 4: Analysis

4.1 Introduction

To analyse the role of marketing for the selling of Misk, it is helpful to start with a generic economic framework for the function of marketing, before considering how this applies to pensions. Marketing typically has two roles in a market: to inform consumers about the characteristics of different products, and to persuade consumers to buy a product. These roles tend to overlap, because all advertising contains at least some information on product characteristics.

               In principle, since advertising raises costs (considering output to be constant and compared to a situation where no marketing takes place), then it might be presumed to raise prices. However, advertising also has a role in reducing consumers’ search costs, informing them about products and prices, and helping them to choose between brands. Furthermore, it may facilitate the entry and expansion of new firms, which can use advertising to expand their market, exploiting economies of scale and capturing the demand of established firms. As a result, marketing activity should, in principle, increase the intensity of competition in a market, helping to keep costs low for the consumer over time.

High expenditure on brand advertising can be a concern for efficiency, however. This is because, to the extent that brand advertising does not inform consumers about real differences between products, it may increase rather than reduce consumers’ search costs by creating product differentiation that is perceived rather than real. This can reduce the intensity of effective competition, such that firm’s efforts to improve their market shares are channelled into marketing expenditure rather than low prices.

This section therefore analyses brand marketing cost in the Industry model to see whether the forecast levels of expenditure for personal pensions such as GIC’s Misk could be considered excessive, and examines firms’ incentives to escalate brand marketing expenditure beyond forecast levels.

The introduction of a new pension system will require a minimum level of marketing expenditure in order to encourage consumer awareness and need. Given the government’s policy objective of increasing retirement savings and the experience of the 2001 introduction of the UK stakeholder pensions, where much of the target market of middle-income, low savers was missed, the role of marketing deserves careful consideration. The situation in Kuwait is very similar too, as the government is actively looking for alternative sources of pensions, specifically from the private sector. Since the initial market promotion is not unique to the Industry model, unlike the ongoing marketing costs as firms compete for a share of the fixed pension market, it should be discounted in a cost comparison between pension providers. Therefore, only the ongoing costs should be examined, argues the Oxera Final Report. (Oxera 2006)

4.2 Main Results of the Survey

(Refer to A-3a AND A-3b)

4.2.1 Understanding annuities and confidence in long term savings

As the ABI paper argues, the marketing of annuities require a certain approach that is different to marketing most other services. Since Misk is a product that pertains to a person’s wealth into his retirement years, it is usually well- researched by the client before he decides to commit to it. In addition to that fact, Misk is also made of both a savings and a life insurance portion, so it requires a highly technical person to fully explain it, without mis-selling it.

In terms of the number of insurance companies consulted before making their decision to purchase Misk, almost all the respondents to the survey (83%) did not go to any other insurer for a similar product, reflecting either very good marketing from GIC or a desire to shop around for the best product (Figure 4-1). In a follow up question to that, 75% of the respondents were not aware of any other insurer that offers a similar product to Misk. Therefore, GIC cannot be credited with having a strong marketing campaign on this issue, but rather that other insurers have failed in getting their message across to market their own pension/life insurance plans.

Figure 4-1: Break-up of Percentage of Clients who consulted Insurance Companies

GIC needs to determine the reasons why their clients are purchasing Misk in order to be able to direct its marketing campaign towards emphasizing that quality. According to the survey conducted, the majority of the clients purchased Misk for its savings plan, with a distant second being for protection. None of the respondents chose Misk because of its dual characteristics of protection and savings. As a result of this finding, it would be more beneficial to GIC to concentrate on the savings aspect of the policy, and train its sales team to be more knowledgeable and qualified in the aspect, perhaps employing those who have worked in the financial sector before. Explaining the savings part of the policy in a clearer way would be a step towards convincing the potential customers to take an interest in Misk.

Once the investment side of the policy is emphasized, the next question would be to find the risk appetite of the prospective client in investing this premium. Asked about their preferences in selecting the investment vehicle for investing the premium, 55% of the respondents chose the international markets. After the international markets came fixed deposits with 25%, and that reflects a risk averse decision, or a means of diversifying their portfolio. Only 8% had placed their money in the local Kuwaiti market. The reason for this may be the volatility of the Kuwait stock exchange, which has increased by 300% over the past 4 years, and the current sentiment that a cooling off period might be underway. Over the past year (2006), the stock markets in Kuwait and the rest of the GCC have experienced big drops, with Kuwait falling by almost 20%. In contrast to that, international markets deliver a much more stable performance, with either steady gains or steady losses. For a product that is going to provide for people’s future, it is important to deliver steady results over a period of time, and this explains the clients’ interest in international markets and fixed deposits.

Figure 4-2: Customers’ first Interaction with GIC

In order to get an idea of how customers came to GIC in the first place for Misk, respondents were asked whether GIC was the first insurance company the client had purchased insurance from. Almost 60% responded by saying yes (Figure 4-2). This could be interpreted as GIC having a leadership position in the marketplace. Also, if GIC holds that position, then it should be setting the benchmark in terms of the products being released. Also, a whopping 75% of those surveyed had indicated that they had heard of GIC through a friend, which emphasises the power of word of mouth (Figure 4-2). Seeing how word of mouth is important to the success of Misk, GIC should avoid negative publicity, and should strive to set the benchmark for service quality for Misk. Also, twenty percent of the respondents indicated that TV was the medium that introduced GIC to them, meaning that the company’s marketing campaign on the TV are successful.

4.2.2 Client Brochures and Marketing Material 16, 17, 25, 26, 27, 33, 35, 36, 54, 55

Given that most customers have purchased Misk more for its savings quality than any other quality, it makes sense to demonstrate the investment returns made by the product over its inception. This, and other highlights of the program, should be emphasised in the client brochures and marketing material to be used by the company for advertising. Asked what the first medium of interaction between them and the sales team was, 25% of the respondents indicated face to face. For a product like Misk that requires substantial time with the client before convincing them to sign up, this is a logical way of meeting with them. Also, the salesperson requires the use of diagrams and charts to describe the product more fully.

In terms of cross selling, respondents were asked whether they were offered other GIC products by their representative at Misk, in order to evaluate the effectiveness of their cross selling. 67% of the respondents indicated they had not been approached for any other GIC product. An interesting issue was discovered, in that of the clients who were offered other products, the majority had been offered products pertaining to the life insurance department. The lack of cross selling to other departments business could be seen as a result of not having a compensation scheme in place to reward sales in products other than the one being assigned- Misk in this case. This issue should be addressed by the company, since it does not matter where the premium is coming from, as long as it is taken by GIC. Also, it is much easier to acquire business from an existing customer who is satisfied than from a new customer, who needs to be convinced of the company- a task that requires a separate marketing message.

In order to get an idea of how the customers perceive the quality and efforts of GIC’s marketing campaign for Misk, respondents were asked to rate a number of questions on a 5- scale, with the average grade being 3, and anything higher or lower indicating a more positive or a more negative grade. Asked what they thoughts of GIC’s efforts to market Misk, the average answer was a 3.17, indicating a moderate positive response (Figure 4-3). This is in accordance with the previous result that ranked GIC highly in terms of exposing Misk as the local market leader in private pensions. Regarding Misk’s brochures and marketing material, however, a grade of only 2.25 out of 5 was given (Figure 4-3). Given that it is the brochures and demonstrations that are first seen by the client, this should come as a concern to GIC. The clients appear to be disappointed by GIC’s marketing material, even though it is credited with having the best marketing efforts out of the local insurance companies. This disparity in GIC’s efforts and the customer’s expectations could create an expectations gap. Closing this expectations gap would help in reinforcing the company’s brand name and image to its customers. Clearer brochures and demonstrations would be required to satisfy the client’s needs and to better inform them of the product they are purchasing.

Figure 4-3: Marketing Efforts ; Marketing Material

Finally, it was necessary to take the respondents’ views regarding GIC’s other sales and marketing channels, such as the internet. With the growing use of the internet as the front page of the company, its importance has increased. Asked whether our existing customers had visited GIC’s website, a very disappointing 92% had indicated a “no” answer. For a company that is in the leadership position in the market, a website marketing promotion should be a priority, as should be efforts to provide more of the services offered through the website. Customers should be able to pay their premium or modify their details online, an issue that will be demonstrated by my colleague, Mr. Moath Al Manayes in his complementary paper regarding cancellations of the policies. In regards to the company’s branches, 75% of the respondents were unaware of their presence, and this is also another issue considered by Mr. Al Manayes in his analysis of reasons for cancellations. For this paper’s purposes, GIC should increase its marketing awareness for its website and its branches, which are two main advertising channels that should be utilized.

4.2.3 Pricing and profit testing 40

The pricing of Misk is an issue that has to be studied, since having a product that is both competitively priced and in demand is the goal (Guiso ; Parigi, 1999, p. 185–228). The process of pricing, as mentioned previously, is done by choosing a charging structure and projecting the cash flows (charges taken less costs incurred) over the life of a portfolio of business. Performing this analysis requires a set of per policy expenses to go with the charging structure. The objectives of the profit-testing process are to produce a charging structure that is marketable, meets the insurer’s financial targets, and can be supported by the administration system.

In the survey, Misk customers were asked to evaluate the pricing of Misk compared to similar products in the market. On a 5-scale system, GIC was given a 3.2, a slightly above average grade, indicating that their prices are slightly higher compared to their competitors’. This result can be explained by the clients’ opinion that GIC is more active in marketing their pension product than other local insurers are. As a result, GIC’s marketing expenses are presumed to be higher, thus pushing the administrative costs higher. Customers appear to believe that Misk is more expensive than its competitors, and are willing to pay for the price difference, so the level of after- sales support should be higher to compensate them for that. Asked why they chose Misk over its competitors, only 12% of respondents chose price as the reason, further reinforcing the point that Misk’s price is perceived to be high. GIC has to take this point into account, and find ways to reward its customers with more features in its product, better levels of service, or any other value-added benefit.

4.2.4 Staff 26, 34, 37

Going through the results of the survey, it is clear that most of the clients have the salespeople as their first point of contact. Since the selling of Misk is different than that of a conventional life insurance policy, because it combines both an insurance and an investment side to it, staff must be especially trained and briefed on the various aspects of the policy. As mentioned in the “client brochures” section, the emphasis should be on the investment and savings aspect of the policy, since this is what the clients appear to be more interested in. Conducting seminars pertaining to investment and the recent performance of Misk’s investments should be highlighted, since they will appeal to prospective customers.

Figure 4-4: Staff Service ; Sales Person’s Knowledge

When asked to rate the level of service received by the Misk staff in answering their questions, respondents had an average answer of 2.0 on the 5-scale (Figure 4-4). This should be extremely worrying to GIC, since these customers perceive Misk as a superior, where they are willing to pay extra for it. Falling short of their expectations in an important area like customer service will certainly lead to discontent and cancellations. This relationship will be analyzed in depth by Mr. Al Manayes in his related study, and that will shed more light on the strength of the relationship between customer service and cancellations.

Misk clients were also asked to evaluate the Misk salesperson assigned to them in terms of product knowledge, a point that is of paramount importance when it comes to a complex product like Misk. The disappointing result was a grade of 2.67 only, indicating a response that is well below expectations for product knowledge (Figure 4-4). The danger this poses to Misk’s existence cannot be overstated, since customer service and product knowledge need to be at least adequate, in the mind of the customer, for them to continue buying the product and pay premium. A large percentage of the cancellations could be attributed to these two factors, indicating a sales force that is not competent enough to market the product successfully.

4.2.5 Collection and Processing 21, 22, 23, 41

As the CBO study states in its paper, it is beneficial to offer many collection channels for clients, making the process of premium payment easier for them (CBO, 2004). From the insurer’s standpoint, the more payment collection channels are offered, the higher the costs of overseeing them, and the higher the administrative costs. As a result, GIC needs to find the optimal number of channels that suit the most customers, thus reducing fixed costs and making Misk more profitable. To find this optimum level, the author of this paper asked respondents to its questionnaire who are, or were, customers of Misk, a number of questions regarding that subject.

Firstly, it was widely agreed, by 75% of the respondents, that the current installment period for paying premiums, monthly, is their preferred period (Figure 4-5). 20% of them, however, wanted to pay their premium annually, an option which should be offered by GIC to cater to these clients (Figure 4-5). In terms of the current method of payment, 67% paid through a messenger, while only 16% paid through a standing order (Figure 4-5). The percentage of respondents who paid in any other way, including the sum of branches, cash at the bank, and through the head office, only amounted to 17% (Figure 4-5). It should be noted that the use of a messenger is the costliest method for GIC, and it adds to the general and administrative costs, making Misk less profitable and less competitively priced. Following this question, the clients were asked to choose a new payment method, if it was introduced. Here, an overwhelming majority, 68%, chose to do so online, through the company website. An additional 18% chose to pay through the internet, but through their bank account. Therefore, the decision to pay on the internet is emphasized, and it should be adopted by GIC, seeing how in demand and cost effective it is for GIC.

Figure 4-5: Preferred Period ; Modes of Payment

A secure website should be advertised it along with an option to pay through it. The site could serve the dual purpose as a payment collection method, and a marketing tool. Cross-selling could then be more easily performed with the client having complete access of GIC’s other lines of business at their fingertip. The website would also feature rotating banners for its other products, in addition to newsletters informing the current client of any new offerings and releases. Finally, the customer would have the ability to update their information online using their secure password and login. This would resolve the issue of having to contact the customer to get any new changes to their details, including changes to the premium or address, or any other detail. When asked to rate Misk’s customer information system, which includes access to customers’ relevant data, details, and changes to details, respondents rated GIC with a 2.0 grade, implying a sub-par level. Integrating this onto GIC’s website would help alleviate this problem and increase customer satisfaction in a broad sense.

4.2.6 Product Lifecycle Analysis: Misk

Figure 4-6: Product Lifecycle Stages

Table 4-1: Misk Sales

2001
2002
2003
2004
2005
2006*
Policies
355

1089
207%
2099
93%
3079
47%
1132
-63%
1042
-8%
Amount
186,259

590,035
217%
1,026,798
74%
1,400,164
36%
595,410
-57%
489,443
-18%
*As of November 31 2006

Introduction Stage
In the introduction stage of introducing the product, GIC has actively seeked to build product awareness and develop a market for the product (Figure 4-6). The price of the product is based on a complex actuary mathematical formula and is thus not subject to fluctuations in price. As a result, it was not possible for GIC to use either market penetration pricing to build market share rapidly, or high skim pricing to recover development costs.

Growth Stage
In the growth stage, the marketing objective is to build brand preference and increase market share (Figure 4-6). In terms of the product, it was important to add new features and options for the customer in order to differentiate Misk from its competitors (Table 4-1). As the survey indicates, respondents have expressed a substantial interest in new options, such as alternative methods of collection and processing and new marketing channels, to list a few. During this phase, additional distribution channels are added as demand increases and customers accept the product. Also, all these options could be marketed as an added value to the policy, helping to attract more sales. GIC is required to introduce these options and perhaps provide different packages to appeal to different market segments.

Maturity Stage
At maturity, the strong growth in sales diminishes. Competition may appear with similar products (Figure 4-6). The primary objective at this point is to defend market share while maximizing profit. As in the previous stage, product features should be enhanced to differentiate the product from that of competitors. More importantly, however, is the focus on operations, which include collection and keeping in touch with the customer. Here, collection methods become more varied in order to give the client maximum options. Incentives may be offered to encourage preference over competing products, and the survey results indicate the need for alternative collection channels. A majority of those surveyed were interested in making payments through the internet, and this would require an instant emphasis on diverting customer to GIC’s website, with the availability of the option to pay premium online. Promotions that take place during this period should emphasize those product differentiations that distinguish Misk from market competitors (Table 4-1).

Decline Stage
As sales decline, a company usually has several options (Figure 4-6). First, it can maintain the product, possibly rejuvenating it by adding new features and finding new uses to appeal to as wide a market segment as possible. Harvesting the product would also be possible. GIC would reduce the price of the policy by trimming costs and continuing to offer it to a loyal niche segment. This would require an extensive analysis detailing the fixed and variable costs of the Misk, ensuring at least a break-even sales level (Table 4-1). The third option would be to discontinue the product, which is usually an attractive option for firms that sell a tangible product, but not with a service such as Misk. A manufacturer has the option of liquidating remaining inventory or selling it to another firm that is willing to continue the product. Discontinuing Misk would not yield a return in terms of recovering costs, but it would be an option if sales volumes do not meet costs, both fixed and variable.

Chapter 5: Conclusions ; Recommendations

5.1 Conclusions

The findings in the data analysis chapter show that GIC commands a leadership position in the marketplace. Also, if GIC holds that position, then it should be setting the benchmark in terms of the products being released. For a product that is going to provide for people’s future, it is important to deliver steady results over a period of time, and this explains the clients’ interest in international markets and fixed deposits. However, a large percentage of the cancellations could be attributed to a sales force that is not competent enough to market the product successfully.

The data analysis shows GIC cannot be credited with having a strong marketing campaign on this issue, but rather that other insurers have failed in getting their message across to market their own pension/life insurance plans.  The majority of the clients purchased Misk for its savings plan, with a distant second being for protection. None of the respondents chose Misk because of its dual characteristics of protection and savings.

Since twenty percent of the respondents indicated that TV was the medium that introduced GIC to them, meaning that the company’s marketing campaign on the TV are successful. When participants were asked why they chose Misk over its competitors, only 12% of respondents chose price as the reason, further reinforcing the point that Misk’s price is perceived to be high. GIC has to take this point into account, and find ways to reward its customers with more features in its product, better levels of service, or any other value-added benefit.

5.2 Recommendations

The following are a few recommendations for GIC:

à   It would be more beneficial to GIC to concentrate on the savings aspect of the policy, and train its sales team to be more knowledgeable and qualified in the aspect, perhaps employing those who have worked in the financial sector before.

à   Majority participants indicated that they had heard of GIC through a friend, which emphasizes the power of word of mouth. Seeing how word of mouth is important to the success of Misk, GIC should avoid negative publicity, and should strive to set the benchmark for service quality for Misk.

à   Given that most customers have purchased Misk more for its savings quality than any other quality, it makes sense to demonstrate the investment returns made by the product over its inception.

à   An interesting issue was discovered during the survey, in that of the clients who were offered other products, the majority had been offered products pertaining to the life insurance department. The lack of cross selling to other departments business could be seen as a result of not having a compensation scheme in place to reward sales in products other than the one being assigned- Misk in this case. This issue should be addressed by the company, since it does not matter where the premium is coming from, as long as it is taken by GIC. Also, it is much easier to acquire business from an existing customer who is satisfied than from a new customer, who needs to be convinced of the company- a task that requires a separate marketing message.

à   Given that it is the brochures and demonstrations that are first seen by the client, this should come as a concern to GIC. The clients appear to be disappointed by GIC’s marketing material, even though it is credited with having the best marketing efforts out of the local insurance companies. This disparity in GIC’s efforts and the customer’s expectations could create an expectations gap. Closing this expectations gap would help in reinforcing the company’s brand name and image to its customers.

5.3 Suggestions for Further Research

This was an applied study conducted to identify key factors which shape customer’s decision making process when they decide to purchase a life insurance policy and to understand customers’ perceptions about the products and services offered by GIC and the reasons for marketing strategy failure of Misk. The findings of this research gave valuable insights which can be used by GIC in their future marketing strategy programs.

In future research alterations can be made to the selection of sample by incorporating those people who are clients or have lapsed or surrendered a policy of a competitor of GIC. This will give diverse views to the company and people with a whole new perspective will contribute to the research. These findings can be used by GIC to make a strategy to force switch to their brand from other competing products.

References

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Munich Re Group, (2000b) Pricing and profitability of Unit-linked Insurance. Central Division: Corporate Communications. 80802 München, Germany.

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Appendix

A-1 Population & Sample Characteristics

(Source: Misk Database)

Working Sector

Full MISK Portfolio
Government
5241
0.61
Private
3350
0.39
Non-Profit
0
0
Self Employed
0
0
Retired
0
0
Total
8591

Annual Household Income

Full MISK Portfolio
0-499
0

500-999
859
10%
1000-1499
2061
24%
1500-1999
1375
16%
2000+
4296
50%
Total
8591
100%
Age

Full MISK Portfolio
Age group

21-30
4338
51%
31-40
2878
34%
41-50
773
9%
51-60
602
7%
61+
0
0%
Total
8591

Gender

Full MISK Portfolio
Gender

M
5037
59%
F
3554
41%
Total
8591

Governate

Full MISK Portfolio

Sold

ASIMA
3643
42%
AHMIDI
2012
23%
HAWALLI
938
11%
FARWANIYAH
629
7%
JAHWA*
0
0%
MUBARAK
1369
16%
Total
8591
100%

Educational Level

Full MISK Portfolio
Less then HS
0
0
High School
1375
16%
Diploma
3608
42%
College
2319
27%
Higher Education
1289
15%
Total
8591
100%

A-2 Questionnaire

A-3a Questionnaire Results for those who have Cancelled, Lapsed or Surrendered

Population = 3,925 which consists of those who have cancelled, lapsed, and surrendered their policy.
·         Sample size targeted = 120

Distributed questionnaire = 170
Usable questionnaires retrieved = 143 (response rate = 84%)
Used = 120
·         Please note that the following questions are used for marketing purposes only: 17, 25, 28, 30, 33, 34, 35, 36, 37, 39, 40, 41, 54, and 55.

·         Questionnaire was put under a pilot test by GIC employees who have Misk policy, to test it. We took the response and amended the questionnaire accordingly before sending it to the targeted sample.

10. Did you have any insurance policy with GIC before MISK?

Yes  [ 25% ]  No   [75%  ]

11. Did you buy any insurance policy from GIC after MISK?

Yes  [17%  ]  No   [83%  ]

12. How long have you been a MISK customer?

Less than 2 years [ 91%  ]  2 – 4 years  [ 9% ]

4 – 6 years  [ 0% ]  More than 6 years [0%  ]

13. How many insurance companies have you considered before purchasing MISK?

0   [ 83% ]  1   [17%  ]

2   [0%    ]  3   [0%   ]

More than 3 [0%   ]

14. Do you know any other non-Kuwaiti insurance company in Kuwait that sells a policy similar to MISK?

Yes  [ 25% ]  No   [ 75% ]

15. Did you have any religious concerns before buying MISK?

Yes  [ 50% ]  No   [ 50% ]

16. Why did you buy MISK?

Investment  [ 16.7% ]  Friend recommendation [15%  ]

Consultant is a friend [ 25% ]  Protection  [ 25% ]

Investment & Protection     [ 33% ]

17. Which MISK policy do you have?

Protection  [ 0% ]  Savings  [ 25% ]

Both  [ 17% ]  I don’t know  [ 58% ]

18. Which fund did you choose? (Mark several)

International Fund [ 50% ]  Kuwait Market Fund [ 8.3% ]

Guaranteed Fund [ 25% ]  I don’t know  [ 17% ]

19. What is your monthly premium?

Less than KD50 [75%  ]  50 – 100  [ 25% ]

100 – 150  [ 0 ]  150 – 200  [ 0 ]

More than 200 [ 0 ]

20. Did you change your premium since joining the program? Yes[ 8.3% ]  No[ 91.6% ]

Increase  [ 0 ]  Decrease  [ 100% ]

21. What is your preferred installment period for paying premiums?

Monthly  [ 66% ]  Quarterly  [ 0% ]

Semi-annually [ 16% ]  Annually  [ 18% ]

22. How do you pay?

Branch  [ 8.3% ]  Standing Order [ 16% ]

Cash at the bank [ 0 ]  Messenger  [ 66% ]

Head Office [ 8.3% ]

23. If new payment method is introduced, which one would you use?

Online – Website [ 66% ]  Online – bank account [ 17% ]

Kiosks  [ 0 ]  Phone   [ 0 ]

Other  [ 16% ]

24. With whom do you deal in GIC on MISK?

Consultant  [ 67% ]  Branch   [ 8.3% ]

Broker  [ 8.5% ]  Head Office  [ 16% ]

Other  [ 0 ]

25. How did the consultant made contact with you first time?

By phone  [ 17% ]  Face-to-face  [ 25% ]

Friend or relative [ 33% ]  Referral  [ 0 ]

Other  [ 25% ]

26. Would the consultant stay in GIC affect your MISK policy?

Yes  [ 33% ]  No   [ 50% ] I don’t know [ 16%]

27. Did any one from GIC contact you to offer other products?  Yes[ 33% ]  No[ 66%]

Group Life  [ 8.3% ]  Group Medical [ 8.5% ]

PGH  [ 16.5% ]  BUPA   [ 16.5% ]

Travel  [ 8.5% ]  Fire + Theft  [ 0 ]

Home  [ 0 ]  Marine   [ 0 ]

Car TPA  [ 0 ]  Car Comprehensive [ 8.2 ]

Other  [ 0 ]  Private Banking [ 0 ]

28. Do you know that you can take a loan against your MISK policy after a certain period?

Yes  [ 15% ]  No   [ 85% ]

29. Did you take a loan?

Yes  [ 80% ]  No   [ 20% ]

30. Are you aware that after two years, if you stopped paying the premium, the company will start deducting from your investment reserve the life insurance premium until it is exhausted?

Yes  [ 18% ]  No   [ 82% ]

31. Why did you cancel your policy? (Only for people whom their policy is cancelled)

No longer needed [ 79% ]  Bad service  [ 33% ]

Too expensive [ 25% ]   Better product  [ 19% ]

Wrong/Lack Info [ 16% ]

32. Would you purchase another product from GIC after cancelling MISK? (Only for people whom their policy is cancelled)

Yes  [ 58% ]  No   [ 25% ]  I don’t know [16%]

For the following questions, use the following rating scale:

Rating: 1 – 5, 5 = Excellent, 1 = Bad

(Using a scale-5 system)

 5  4  3  2  1

33. GIC’s efforts to sell MISK to the market?    3.17

34. Level of service by the MISK’ staff in          2.0

answering any questions you have had?

35. GIC’s method of collecting premiums?        2.08

36. GIC’s brochures and marketing material      2.25

regarding MISK?

37. MISK salesperson in terms of product          2.67

knowledge?

38. The salesperson’s after-sale support?            2.08

39. Did the level of after-sales service meet       1.75

the advertised promises by GIC?

40. MISK’s pricing compared to others in           3.17

the market?

41. How would you rate MISK’s customer         2.0

 information system (Having access to

 your relevant data, details, and changes

 to details)?

42. How long have you been a customer of GIC? (Don’t answer if Q10 answer is NO)

Less than 2 years [ 75% ]  2 – 4 years  [ 25% ]

4 – 6 years  [ 0 ]  More than 6 years [ 0 ]

43. Was GIC your first insurance company?

Yes  [ 59% ]  No   [ 25% ] I Don’t know [16%]

44. How did you hear about GIC?

Friend  [ 75% ]  TV   [ 16% ]

Newspaper [ 0 ]  Work place  [ 0 ]

Online  [ 0 ]  Other   [ 16% ]

45. Why did you choose GIC?

Service  [ 0 ]  Product  [ 25% ]

Price  [ 0 ]  Friend advice  [ 67% ]

Other  [ 0 ]  Work Policy  [ 8% ]

46. How many policies do you have with GIC? (Don’t answer if Q11 answer is NO)

1   [ 75% ]  2   [ 8.3% ]

3   [ 16% ]  4   [ 0 ]

More than 4 [ 0 ]

47. What are they? (Don’t answer if Q11 answer is NO)

Group Life  [ 0 ]  Group Medical [ 40% ]

PGH  [ 20% ]  BUPA   [ 40% ]

Travel  [ 0 ]  Fire + Theft  [ 0 ]

Home  [ 0 ]  Marine   [ 0 ]

Car TPA  [ 0 ]  Car Comprehensive [ 0 ]

Other  [ 0 ]  Private Banking [ 0 ]

48. Do you have any other policy with another insurance company?

Yes  [ 42% ]  No   [ 58% ]

49. What kind of policies?

Life  [ 0 ]  Medical  [0  ]

Travel  [ 40% ]  Fire + Theft  [ 0 ]

Home  [ 0 ]  Marine   [ 0 ]

Car TPA  [ 40% ]  Car Comprehensive [ 20% ]

Other  [ 0 ]

50. How often do you contact GIC? (Don’t answer if Q11 answer is NO)

Daily  [ 0 ]  Weekly  [ 0 ]

Monthly  [ 8% ]  Yearly   [ 0 ]

I don’t remember [ 92% ]

51. How do you contact GIC? (Don’t answer if Q11 answer is NO)

In person  [ 33% ]  Telephone  [ 34% ]

Email  [ 0 ]

Meeting with our Customer Service Representative [ 33% ]

52. Why do you contact GIC? (Don’t answer if Q11 answer is NO)

Problem  [ 41% ]  Payment  [ 75% ]

Complaint  [ 0 ]  New product  [ 16% ]

General info [ 8% ]

53. How do you rate our services? (Don’t answer if Q11 answer is NO)

3 (on a scale-5 )

54. Have you ever visited GIC’s website? Yes[ 5% ]  No[ 95% ]

Daily  [  ]  Weekly  [  ]

Monthly  [  ]  Yearly   [  ]

I don’t remember [  ]

55. Do you know GIC has Branches’ network?

Yes  [ 25% ]  No   [ 75% ]

A-3b Questionnaire Results for those who are Current Clients

Population = 73 which consists of those who still have the policy since inception 5 years +
·         Used random sampling technique

·         Sample size targeted = 50

Distributed questionnaire = 73
Usable questionnaires retrieved = 60 (response rate = 82%)
Used = 50
Please note that the following questions are used for marketing purposes only: 17, 25, 28, 30, 33, 34, 35, 36, 37, 39, 40, 41, 54, and 55.
·         Questionnaire was put under a pilot test by GIC employees who have Misk policy, to test it. We took the response and amended the questionnaire accordingly before sending it to the targeted sample.

10. Did you have any insurance policy with GIC before MISK?

Yes  [ 80% ]  No   [20%  ]

11. Did you buy any insurance policy from GIC after MISK?

Yes  [53%  ]  No   [47%  ]

12. How long have you been a MISK customer?

Less than 2 years [ 0%  ]  2 – 4 years  [ 0% ]

4 – 6 years  [ 100% ]  More than 6 years [0%  ]

13. How many insurance companies have you considered before purchasing MISK?

0   [100% ]  1   [0%  ]

2   [0%    ]  3   [0%   ]

More than 3 [0%   ]

14. Do you know any other non-Kuwaiti insurance company in Kuwait that sells a policy similar to MISK?

Yes  [ 0% ]  No   [ 100% ]

15. Did you have any religious concerns before buying MISK?

Yes  [ 0% ]  No   [ 100% ]

16. Why did you buy MISK?

Investment  [ 22% ]  Friend recommendation [5%  ]

Consultant is a friend [ 25% ]  Protection  [ 25% ]

Investment ; Protection     [23% ]

17. Which MISK policy do you have?

Protection  [ 25% ]  Savings  [ 35% ]

Both  [ 40% ]  I don’t know  [ 0% ]

18. Which fund did you choose? (Mark several)

International Fund [ 73% ]  Kuwait Market Fund [ 3% ]

Guaranteed Fund [ 33% ]  I don’t know  [ 0% ]

19. What is your monthly premium?

Less than KD50 [15% ]  50 – 100  [ 25% ]

100 – 150  [ 47% ]  150 – 200  [ 13% ]

More than 200 [ 0 ]

20. Did you change your premium since joining the program? Yes[ 0% ]  No[ 100% ]

Increase  [ 0 ]  Decrease  [ 0 ]

21. What is your preferred installment period for paying premiums?

Monthly  [ 55% ]  Quarterly  [ 14% ]

Semi-annually [ 8% ]  Annually  [ 23% ]

22. How do you pay?

Branch  [ 0% ]  Standing Order [ 11% ]

Cash at the bank [ 0 ]  Messenger  [ 86% ]

Head Office [ 3% ]

23. If new payment method is introduced, which one would you use?

Online – Website [ 70% ]  Online – bank account [ 15% ]

Kiosks  [ 15% ]  Phone   [ 0 ]

Other  [ 0% ]

24. With whom do you deal in GIC on MISK?

Consultant  [ 55% ]  Branch   [ 0% ]

Broker  [ 0% ]  Head Office  [ 45% ]

Other  [ 0 ]

25. How did the consultant make contact with you first time?

By phone  [ 80% ]  Face-to-face  [ 3% ]

Friend or relative [ 15% ]  Referral  [ 2% ]

Other  [ 0% ]

26. Would the consultant stay in GIC affect your MISK policy?

Yes  [ 0% ]  No   [ 80% ] I don’t know [ 20%]

27. Did any one from GIC contact you to offer other products?  Yes[ 100% ]  No[ 0%]

Group Life  [0% ]  Group Medical [ 0% ]

PGH  [ 28% ]  BUPA   [ 22% ]

Travel  [ 25% ]  Fire + Theft  [ 0 ]

Home  [ 0 ]  Marine   [ 0 ]

Car TPA  [ 0 ]  Car Comprehensive [ 20 ]

Other  [ 0 ]  Private Banking [ 0 ]

28. Do you know that you can take a loan against your MISK policy after a certain period?

Yes  [ 75% ]  No   [ 25% ]

29. Did you take a loan?

Yes  [ 0% ]  No   [ 100% ]

30. Are you aware that after two years, if you stopped paying the premium, the company will start deducting from your investment reserve the life insurance premium until it is exhausted?

Yes  [ 80% ]  No   [ 20% ]

31. Why did you cancel your policy? (Only for people whom their policy is cancelled)  (Irrelevant question to this case)

No longer needed [ 79% ]  Bad service  [ 33% ]

Too expensive [ 25% ]   Better product  [ 19% ]

Wrong/Lack Info [ 16% ]

32. Would you purchase another product from GIC after cancelling MISK? (Only for people whom their policy is cancelled) (Irrelevant question to this case)

Yes  [ 58% ]  No   [ 25% ]  I don’t know [16%]

For the following questions, use the following rating scale:

Rating: 1 – 5, 5 = Excellent, 1 = Bad

(Using a scale-5 system)

 5  4  3  2  1

33. GIC’s efforts to sell MISK to the market?   3.20

34. Level of service by the MISK’ staff in          4.3

answering any questions you have had?

35. GIC’s method of collecting premiums?        4.5

36. GIC’s brochures and marketing material      2.7

regarding MISK?

37. MISK salesperson in terms of product          3.1

knowledge?

38. The salesperson’s after-sale support?            4.22

39. Did the level of after-sales service meet       3.2

the advertised promises by GIC?

40. MISK’s pricing compared to others in          3.9

the market?

41. How would you rate MISK’s customer        3.6

 information system (Having access to

 your relevant data, details, and changes

 to details)?

42. How long have you been a customer of GIC? (Don’t answer if Q10 answer is NO)

Less than 2 years [ 0% ]  2 – 4 years  [ 0% ]

4 – 6 years  [ 20% ]  More than 6 years [ 80% ]

43. Was GIC your first insurance company?

Yes  [ 70% ]  No   [ 25% ] I Don’t know [5%]

44. How did you hear about GIC?

Friend  [ 25% ]  TV   [ 30% ]

Newspaper [ 45% ]  Work place  [ 0 ]

Online  [ 0 ]  Other   [ 0% ]

45. Why did you choose GIC?

Service  [ 62 ]  Product  [ 25% ]

Price  [ 10% ]  Friend advice  [ 3% ]

Other  [ 0 ]  Work Policy  [ 0% ]

46. How many policies do you have with GIC? (Don’t answer if Q11 answer is NO)

1   [ 0% ]  2   [ 75% ]

3   [ 15% ]  4   [ 9% ]

More than 4 [ 1% ]

47. What are they? (Don’t answer if Q11 answer is NO)

Group Life  [ 0 ]  Group Medical [ 33% ]

PGH  [ 22% ]  BUPA   [ 45% ]

Travel  [ 0 ]  Fire + Theft  [ 0 ]

Home  [ 0 ]  Marine   [ 0 ]

Car TPA  [ 0 ]  Car Comprehensive [ 0 ]

Other  [ 0 ]  Private Banking [ 0 ]

48. Do you have any other policy with another insurance company?

Yes  [ 10% ]  No   [ 90% ]

49. What kind of policies?

Life  [ 0 ]  Medical  [0  ]

Travel  [ 20% ]  Fire + Theft  [ 0 ]

Home  [ 0 ]  Marine   [ 0 ]

Car TPA  [ 60% ]  Car Comprehensive [ 20% ]

Other  [ 0 ]

50. How often do you contact GIC? (Don’t answer if Q11 answer is NO)

Daily  [ 0 ]  Weekly  [ 0 ]

Monthly  [ 58% ]  Yearly   [ 30% ]

I don’t remember [ 12% ]

51. How do you contact GIC? (Don’t answer if Q11 answer is NO)

In person  [ 20% ]  Telephone  [ 68% ]

Email  [ 0 ]

Meeting with our Customer Service Representative [ 12% ]

52. Why do you contact GIC? (Don’t answer if Q11 answer is NO)

Problem  [ 15% ]  Payment  [ 75% ]

Complaint  [ 0 ]  New product  [ 8% ]

General info [ 2% ]

53. How do you rate our services? (Don’t answer if Q11 answer is NO)

4.2 (on a scale-5 )

54. Have you ever visited GIC’s website? Yes[ 10% ]  No[ 90% ]

Daily  [ 0 ]  Weekly  [ 0 ]

Monthly  [ 0 ]  Yearly   [ 80% ]

I don’t remember [ 20% ]

55. Do you know GIC has Branches’ network?

Yes  [ 91% ]  No   [ 9% ]