Competitive Advantage through Multi Distribution

Mike Bishop

Well, thank you James, and good afternoon everybody. As you know, Korea is the newest life operation within Prudential corporation Asia. So I would like to just spend the next 10 minutes or so talking through with you, some of our experiences over the last 3 years since we acquired the business, and showing you how we've used the multi distribution strategy to build a company of reasonable scale in a relatively short period of time.

Let me start with a brief market overview, and I think the first thing to say about Korea is that although the market has been in decline for the last couple of years, it's still a very large market indeed. It's the 2nd largest market in Asia, after Japan, and the 7th largest market in the world. So even a 1% market share in Korea is a big business by the standards of most countries. In terms of regulations, I think they can best be summed up as somewhat challenging, but they have improved consistently over the last five years, and we're very optimistic for the future. Korea has a big aspiration to be a financial hub of Asia, and I think that with that, we will see continued de-regulation which gives us great opportunities for the future. The competition in Korea is also somewhat unusual. The big three local players dominate the scene, and have a 75 percent market share between them. But the foreign competitors are making a lot of headway, including ourselves, and over the last 3 years have been taking significant market share from the local players.

Now, we have been very committed to a multi distribution strategy from day one, and although a few of the competitors have followed us in this regard, most have issues with channel conflict, so most are restricted to one or two channels for their distribution strategy. So I think we have a competitive advantage there moving forward. In terms of product design it is very restricted and behind what you would believe for such a large market, due to the strict regulations that Pete Lloyd described earlier.

Now this slide shows you a brief evolution of PCA Life in Korea in the three years since we acquired the business in November 2001. We re-launched as PCA Life with a new brand in February 2002, and followed that with the launch our Financial Consultant or FC channel in July 2002. This was really an re-incarnation of the agency force that we inherited, and we followed that with a general agency channel in October 2002, and I will explain what the general agency channel in Korean terms is in the next slide. In July 2003 we launched direct marketing, and this was followed by bancassurance in September 2003. Believe it or not, bancassurance hadn't been allowed up until that stage, it was only deregulated in September 2003, so along with a number of competitors we entered at that time. And then in October of the same year, we actually pioneered a completely new distribution channel, which was home shopping on cable TV, and I will explain that in greater detail at the end of the presentation. But you can see the effect that this had on our sales performance, which is shown in red in the background.

This slide shows our 4 core distribution channels, and I'll start with the financial consultant or FC channel, which is a tied in-house professional agency force, but very different from the models you've heard about in Viet Nam, India and China. Of the 127,000 agents that Dan talked about this morning, I only had 320, but they are highly productive; in fact, in US dollar terms they are the highest productivity in the whole of Prudential corporation Asia. And they sell traditional face to face type products that you can see listed there, as does our general agency channel. Now, the general agency channel in Korea is a non-tied agency, or multi-tied, typically working with 2 or 3 life companies, similar to an IFA in the UK, but certainly not independent. Our direct marketing channel consists of two distinct elements: one is the home shopping channel that I talked about earlier, and the other is outbound telemarketing. And those two channels, or the whole direct marketing channel, focuses on simple and cheaper type products, such as cancer, ladies, kids, personal accident, etc.

Bancassurances, as I mentioned, was deregulated in September 2003, but it is still a very restricted model. To give you an example, only branch sale staff are allowed to sell, and they can only sell the products that I have listed there, no protection products at all. And they're only allowed two sales people per branch, whether the branch has five staff or a hundred and five staff, only two can sell, and they cannot sell insurance at the same time that they sell a loan, or mortgage. So there's a lot of opportunity to come, as Korea deregulates on the bancassurance front.

Now this slide really shows you the impact of our multi distribution strategy. You can see the dramatic change from 2001, when half of the business was group business, which we no longer even sell, because it was not profitable. If you look at the last quarter, Q3 of 2004, you can see that each of our channels now makes a material contribution to the overall business performance of the company, and each channel at some stage this year has been the largest channel, which gives us the flexibility to change our focus quickly as circumstances dictate.

Now, as Pierre mentioned earlier, with any multi distribution approach you need good partners, and in Korea we're lucky enough to have some very good partners. On the bancassurance side, we work with HSBC, Korea First Bank, Samsung Securities and Citibank-Koram. And on the direct marketing side, we have partnerships with Hyunday Home Shopping, Joins.com and a subsidiary of Korea Telecom, which is KT Sodis. Obviously, to maximize the results from a multi distribution approach we have to develop products specifically for each channel, as well as that a constant theme that we've spoken about today already is the move towards unit linked products. The Korean market is dominated by guaranteed products, guaranteed traditional products, because that's what the regulators have dictated. We were only the second company to launch variable universal life, and the first company to have a policy without a guaranteed minimum death benefit, something very unique and new in Korea. And you can see the tremendous effect this has had on our sales performance and the structure of the business, with over half of our sales in Q3, 2004, coming from variable universal life. Obviously good for profitability and very good for capital efficiency.

So how is all this translated into results? For 2002 was a year of building, as you've seen earlier, but nevertheless with a significant growth on 2001 when it was owned by YoungPoong Life. But the real growth story came in 2003, particularly Q4 2003, as all the channels came on stream, and that growth has continued into 2004 where we are at 150% up, more than 150% up, on the prior year, after the first three quarters of 2004. However, I am sure that some of you will have noticed that 2004 has been somewhat flat, and I think that I should just put this into context. Not only is the economy in Korea in very poor shape right now, but the actual life insurance market trend is quite significantly down over the last two years, so we believe that most of our competitors will experience negative growth this year, and we will actually gain significant market share.

Now this home shopping that I talked about earlier, let me tell you a little bit about that. When my marketing team came to me with this proposition of selling life insurance on home shopping channel, you can probably imagine that I was somewhat sceptical, but the more I looked at it and the more they talked to me about this, the more that I thought there was something in it and that we should at least pilot it. And in the first show alone, we had over 4,000 calls, so we knew that we were on to a winner.
The process is quite simple, as you can see here, and enhanced by the fact that we're very clear about our target audience. Generally, it's middle aged housewives or "Ajumas" as they are so affectionately known in Korea, who are all avid viewers of home shopping channels, and avid consumers. And you can see that as well as the chance to acquire significant numbers of customers, we also have the opportunity to cross-sell using our (incomprehensible) channel, which adds value to the overall proposition. Now this next slide shows a step by step process as well as the very subtle branding we use on the show. This is Korea! Basically, we run a one-hour infomercial, which is an advert for one hour, and anyone who is interested will phone in to the show and we will basically call those people back over the next 48 hours, and hopefully sell a PCA life product. It's underwritten by PCA Life and an external fulfilment house sends out all the policy documentation.

Home shopping may or may not be a short term success, it has become extremely competitive with even the industry giant Samsung Life following our lead, but we do have one great advantage: we are the only company that has an exclusive contract with any of the cable TV channels. All of our competitors are sharing the other three home shopping channels, so we do have a strategic advantage there. But it has given us a lot more than just sales, it has given us nation-wide coverage, it has enhanced our brand significantly, and we've created an image as a dynamic and innovative player in Korea. We've sold over 45,000 policies through cable TV alone, and just to put that in context, when we bought the company, which had been operating for more than 10 years, they had only had 20,000 policy holders.

We have been the fastest growing life company in Korea, and this is largely due to our multi distribution strategy. It has given us a much faster start than most companies have experienced, and given us flexibility so that events such as the Koram Bank strike, that occurred earlier this year, don't decimate our sales. We have the flexibility to move the focus. We pioneered home shopping distribution in Korea, which has enhanced not only our sales, but also our brand and the image of the company. We have developed specific products for each channel, and each channel, as you have seen, is now making a material contribution to the business. I hope this has given you a flavour of the great opportunity that we believe exists in Korea, and the competitive advantage that we think we have through multi distribution strategies. I think it's now a Q and A session, which Mark is going to host.

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