Month: August 2020

Portfolio management is the systematic process of making investment decisions to allocate an individual’s or institution’s funds across various financial instruments, asset classes, and sectors to optimize returns and manage risk according to specific financial objectives, risk tolerance, and investment horizon. It involves continuous monitoring and rebalancing of the portfolio to adapt to market changes or shifts in the investor’s goals. Effective portfolio management seeks to maximize performance and minimize risk through diversification, strategic asset allocation, and careful selection of investments. It encompasses both active and passive management strategies to achieve desired investment outcomes.

Portfolio Management Need:

• Risk Management:

Portfolio management is essential for identifying, assessing, and managing investment risks, ensuring that the level of risk taken aligns with the investor’s risk tolerance and investment objectives.

• Asset Allocation:

It determines the optimal distribution of investments across various asset classes (such as stocks, bonds, and cash) to achieve a balanced risk-reward ratio based on the investor’s goals, risk tolerance, and investment horizon.

• Diversification:

By spreading investments across multiple asset classes and geographic regions, portfolio management helps in reducing unsystematic risk, ensuring that the performance of the portfolio is not overly dependent on the performance of a single investment.

• Achieving Financial Goals:

Tailored portfolio management strategies help investors achieve specific financial goals, such as retirement savings, wealth accumulation, or generating regular income, through targeted investments.

• Performance Monitoring:

Regular review and performance monitoring of the portfolio are crucial to ensure that the investment strategy remains aligned with the investor’s objectives, necessitating adjustments in response to market changes or personal financial situations.

• Tax Efficiency:

Effective portfolio management includes strategies to minimize tax liabilities through tax-efficient investing, such as tax-loss harvesting or selecting tax-advantaged accounts and investments.

• Liquidity Management:

It ensures there is sufficient liquidity within the portfolio to meet short-term financial needs and obligations without incurring significant losses from premature asset sales.

• Rebalancing:

Over time, asset allocations can drift due to varying performance across investments. Portfolio management involves periodic rebalancing to realign the portfolio with the investor’s target asset allocation, maintaining the desired risk level and investment strategy.

Portfolio Management Objectives:

• Capital Appreciation:

Aiming for the growth of the portfolio’s principal amount over time. This objective focuses on increasing the value of the investment through the selection of assets that offer potential for high returns, often accompanied by higher risk.

• Income Generation:

Targeting consistent income production, typically through investments in dividend-paying stocks, bonds, or real estate investment trusts (REITs). This objective is common among retirees or those seeking a steady cash flow to meet living expenses.

• Capital Preservation:

Prioritizing the protection of the original investment amount, suitable for risk-averse investors or those with a short investment horizon. Investments are often made in safer, lower-return assets like government bonds or money market instruments.

• Tax Minimization:

Focusing on constructing a portfolio in a way that minimizes tax liabilities through tax-efficient investments and strategies, such as utilizing tax-advantaged accounts or investing in municipal bonds.

• Liquidity:

Ensuring that the portfolio has enough liquid assets to meet short-term financial needs without the need to sell off investments at an inopportune time, preserving the portfolio’s overall strategy and value.

• Diversification:

Spreading investments across various asset classes, sectors, and geographies to reduce risk and volatility. This objective aims to mitigate the impact of poor performance in any single investment on the overall portfolio.

• Risk Management:

Adjusting the portfolio to align with the investor’s risk tolerance, ensuring that the level of risk taken is appropriate for the investor’s financial situation and investment objectives.

• Time Horizon:

Aligning the investment strategy with the investor’s time horizon, which influences the selection of investment vehicles and risk tolerance. Longer time horizons may allow for more aggressive investments, while shorter horizons typically necessitate a more conservative approach.

Portfolio Management Types:

• Active Portfolio Management:

This type involves a hands-on approach where portfolio managers actively make investment decisions and conduct transactions with the aim of outperforming a specific benchmark index. Active managers rely on research, market forecasts, and their own judgment to try to achieve higher returns, often resulting in higher fees due to the frequent trading and intensive research involved.

• Passive Portfolio Management:

Contrary to active management, passive portfolio management aims to replicate the performance of a specific index or benchmark by mirroring its composition. This strategy involves less frequent trading, leading to lower management fees and transaction costs. Passive management is based on the belief that it is difficult and often not cost-effective to try to consistently outperform the market.

• Discretionary Portfolio Management:

In this type, an investor entrusts a portfolio manager with full discretion to manage the investment portfolio on their behalf. The manager makes all investment decisions based on the client’s objectives, risk tolerance, and investment horizon without needing to seek approval for each transaction. This service is typically offered to high-net-worth individuals through private banking, wealth management services, or specialized investment firms.

• Non-Discretionary Portfolio Management:

Here, the portfolio manager advises on investment decisions, but the client retains control and must approve each transaction before it is executed. This type of management allows investors to have more involvement in the decision-making process while still benefiting from the expertise of a professional manager.

• Index Fund Management:

A subset of passive management, index fund management involves managing a portfolio designed to track the components of a market index. Index funds aim to offer the return of the index they track, minus any fees and expenses. They provide broad market exposure, low operating expenses, and low portfolio turnover.

• Factor-Based Portfolio Management:

This approach involves targeting specific drivers of return across asset classes, such as value, size, momentum, and volatility. Factor-based strategies can be implemented in an active, semi-active, or passive manner and aim to enhance returns or reduce risk compared to traditional market-cap-weighted indices.

• ESG (Environmental, Social, and Governance) Portfolio Management:

Focusing on investments that meet certain ethical, environmental, social, and governance criteria, ESG portfolio management aims to generate sustainable, long-term returns while also considering the broader impact of investments. This approach can be integrated into active or passive management strategies.

Portfolio Management Pros:

• Diversification:

Portfolio management helps in spreading investments across various asset classes and sectors, reducing the impact of any single investment’s poor performance on the overall portfolio. This diversification can mitigate risk and reduce volatility, potentially leading to more stable returns.

• Professional Expertise:

Investors gain access to professional portfolio managers who have the experience, resources, and tools to analyze market trends, evaluate investment opportunities, and make informed decisions. This expertise can be particularly valuable in navigating complex markets and identifying potential investment opportunities.

• Customized Strategies:

Portfolio management services can be tailored to meet individual financial goals, risk tolerance, and investment horizon. This personalized approach ensures that the investment strategy aligns with the investor’s specific needs and objectives.

• Discipline:

Portfolio managers follow a disciplined investment process, which includes regular reviews and rebalancing to ensure the portfolio remains aligned with the investor’s goals. This discipline helps in avoiding emotional investing and maintaining a long-term perspective.

• Time and Convenience:

By delegating the day-to-day management of their investments to professionals, investors can save time and avoid the complexities involved in selecting and monitoring individual investments. This convenience allows investors to focus on their other responsibilities and interests.

• Access to Advanced Tools and Information:

Portfolio managers have access to sophisticated research tools, real-time data, and in-depth market analysis, which can enhance the investment decision-making process. This information may not be readily available to individual investors.

• Risk Management:

Effective portfolio management involves strategies to manage and mitigate risk, including asset allocation, sector diversification, and the use of derivatives for hedging. By managing risk, portfolio managers aim to achieve the best possible returns within the investor’s risk tolerance.

Portfolio Management Cons:

• Costs and Fees:

Professional portfolio management services come with costs, including management fees, transaction fees, and potentially performance fees. These costs can vary widely depending on the management approach (active vs. passive) and the service provider, and they can eat into the overall returns of the investment portfolio.

• Potential for Underperformance:

Especially in the case of actively managed portfolios, there is a risk that the portfolio may underperform relative to its benchmark index or peer group. This underperformance can be due to various factors, including manager selection, investment strategy, and the costs associated with active management.

• Limited Control:

With discretionary portfolio management, investors entrust their portfolio managers with decision-making authority, which means they have limited direct control over individual investment decisions. This may not appeal to investors who prefer to be closely involved in managing their investments.

• Over-Diversification:

While diversification is a key advantage of portfolio management, there is also a risk of over-diversification, where the portfolio is spread too thinly across too many investments, diluting the impact of high-performing assets and potentially leading to mediocre overall performance.

• Risk of Misalignment:

There’s a risk that the portfolio management strategy may not fully align with the investor’s goals, risk tolerance, or investment horizon, especially if there is inadequate communication or a misunderstanding between the investor and the manager.

• Complexity:

Some portfolio management strategies, particularly those involving sophisticated investment instruments or complex financial models, can be difficult for the average investor to understand. This complexity can make it challenging for investors to evaluate the performance and risk profile of their portfolio.

• Market Risk:

Despite the expertise of portfolio managers and the use of advanced risk management techniques, all investment portfolios are subject to market risk. Economic, political, and market conditions can affect portfolio performance, and no management strategy can completely eliminate these risks.

Who would opt for Portfolio management?

• High-Net-Worth Individuals (HNWIs):

These investors often have complex financial situations and diverse investment needs that can benefit from the customized strategies and personal attention offered by portfolio management services. They may seek to diversify their wealth across multiple asset classes globally or require sophisticated tax planning and estate planning services.

• Retirement Savers:

Individuals focused on building or managing their retirement savings may choose portfolio management to ensure their investments are appropriately aligned with their retirement goals, risk tolerance, and time horizon. This can include transitioning from growth-focused strategies to income-generating investments as they near retirement.

• Busy Professionals:

Individuals who lack the time or desire to manage their investments actively may opt for portfolio management services. This allows them to delegate the day-to-day management of their investments to professionals while they focus on their careers or other interests.

• Inexperienced Investors:

Those new to investing or who feel they lack the knowledge to make informed investment decisions may turn to portfolio managers for their expertise and guidance. This can provide a learning opportunity and a sense of security knowing professionals are managing their investments.

• Investors Seeking Diversification:

Individuals looking to diversify their investment portfolios across various asset classes, sectors, or geographies may find portfolio management services beneficial. Portfolio managers can provide access to a broader range of investments than the individual might be able to access or manage on their own.

• Philanthropic Entities and Endowments:

Foundations, endowments, and other philanthropic organizations that need to manage large pools of capital to support their missions over the long term often utilize portfolio management services. These services can help ensure the capital is preserved and grows over time to fund future charitable activities.

• Corporate Treasuries:

Corporations with significant cash reserves that need to be managed efficiently may also use portfolio management services to optimize their returns on surplus cash while managing risk appropriately.

• Institutional Investors:

This group includes pension funds, insurance companies, and educational institutions that must manage large investment portfolios to meet future liabilities. These investors benefit from the specialized investment strategies and risk management expertise that portfolio managers provide.

How Portfolio Management takes place practically?

Establishing Client Objectives and Constraints

• Objective Setting: The first step involves understanding the investor’s financial goals, investment horizon, and risk tolerance. Objectives can range from capital preservation and income generation to capital growth and tax minimization.
• Assessing Constraints: This includes evaluating factors such as liquidity needs, time horizon, tax considerations, legal requirements, and unique circumstances that may affect investment choices.

Developing an Investment Policy Statement (IPS)

• An IPS is created to document the investor’s objectives and constraints. It serves as a guideline for making investment decisions and outlines the strategic asset allocation that aligns with the investor’s goals and risk profile.

Strategic Asset Allocation

• Based on the IPS, the portfolio manager determines the appropriate mix of asset classes (e.g., stocks, bonds, real estate) that is expected to achieve the investor’s objectives within their risk tolerance.
• This allocation is guided by historical performance data, future market expectations, and modern portfolio theory principles to balance risk and return.

Portfolio Construction

• With the strategic asset allocation as a guide, the portfolio manager selects specific investments (such as individual stocks, bonds, mutual funds, ETFs) to construct the portfolio.
• Diversification is key to managing risk, so investments are chosen not only for their expected returns but also for how they interact with each other within the portfolio.

Portfolio Implementation

• The portfolio manager executes the investment strategy by buying and selling securities to create the desired portfolio composition.
• This phase can involve timing considerations and transaction cost management to ensure efficient implementation of the investment strategy.

Monitoring and Rebalancing

• The portfolio is continuously monitored to assess performance against benchmarks and the investor’s objectives. Economic conditions, market trends, and the performance of individual investments are reviewed regularly.
• Rebalancing is conducted periodically to realign the portfolio with its target asset allocation, taking into account changes in market values, the investor’s circumstances, or shifts in the economic outlook. This may involve selling overperforming assets and buying underperforming ones to maintain the desired risk-return profile.

Performance Reporting and Review

• The portfolio manager provides the investor with regular reports detailing portfolio performance, including returns, risk metrics, and how the performance relates to the investor’s goals and benchmarks.
• These reviews are an opportunity to discuss any changes in the investor’s financial situation or objectives and adjust the IPS and portfolio strategy accordingly.

Career as a Portfolio Manager:

A career as a portfolio manager offers a challenging and rewarding pathway for individuals interested in finance and investment management. Portfolio managers are responsible for making investment decisions and managing investment portfolios on behalf of clients, which can include individuals, families, institutions, and corporate clients. Their primary goal is to achieve the best possible return on investments within the parameters of the client’s risk tolerance, investment objectives, and time horizon.

• Educational Background:

Typically, a career in portfolio management requires a strong foundation in finance, economics, business administration, or a related field. Most portfolio managers have at least a bachelor’s degree, but many possess advanced degrees such as a Master of Business Administration (MBA) or Master of Finance. Specialized degrees, such as a Master’s in Financial Analysis or Investment Management, can also be advantageous.

Professional Qualifications and Skills:

• CFA Charterholder: Many portfolio managers pursue the Chartered Financial Analyst (CFA) designation, which is highly regarded in the industry and covers a wide range of investment topics, including ethical and professional standards, securities analysis and valuation, and portfolio management.
• Analytical Skills: Strong analytical skills are essential for evaluating investment opportunities, understanding financial markets, and making informed decisions.
• Risk Management: Knowledge of risk management principles and techniques is crucial for balancing the potential for returns against the risk of loss.
• Communication Skills: Portfolio managers must be able to effectively communicate their investment decisions and strategies to clients and colleagues. This includes both verbal and written communication skills.
• Decision-Making Abilities: The role requires the ability to make timely and well-informed decisions under pressure, often in the face of uncertainty.
• Technical Skills: Familiarity with financial modeling, statistical analysis software, and investment management systems is beneficial.

Work Experience:

Gaining relevant work experience through internships or entry-level positions in finance, such as financial analysis, investment banking, or securities trading, is crucial. Many portfolio managers start their careers in related roles before moving into portfolio management positions.

Career Path:

1. Entry-Level Positions: Roles such as financial analyst, research analyst, or junior portfolio manager serve as entry points into the investment management industry.
2. Mid-Level Roles: With experience, individuals may progress to positions such as senior analyst or associate portfolio manager, where they have more responsibility for investment decision-making.
3. Senior-Level Positions: With proven success and experience, portfolio managers can advance to senior portfolio manager roles, overseeing significant assets or specialized investment portfolios. Some may become heads of portfolio management or chief investment officers (CIOs) within their organizations.

Continuous Learning:

The investment landscape is continuously evolving, necessitating ongoing education and adaptability. Portfolio managers must stay informed about global economic trends, regulatory changes, and advancements in financial theory and technology.

Compensation:

Compensation in portfolio management can be highly attractive, often comprising a base salary plus performance-based bonuses. Compensation varies widely depending on the employer, the individual’s experience and performance, and the assets under management.

Value chain analysis is a process for identifying opportunities for and constraints to increased competitiveness of a sector. Value chain finance analysis prioritizes the financial needs within the context of specific upgrades of a value chain if it is to take advantage of end-market opportunities. This is a critical element of determining where expansion of financial services is tied to the growth and competitiveness of a value chain. A value-chain finance analysis looks not only at demand, but also the incentive structures and capacities of actors to deliver or facilitate financial access within the value chain. Additionally, constraints within the enabling environment and financial sector as a whole that may impact the availability of financing should be examined during the information-gathering stage. Importantly, as financial service delivery is rarely specific to one value chain, the value chain finance analysis should ideally identify key financial bottlenecks that affect the growth of multiple value chains.

Value chain analysis provides information on the upgrading investments needed to take advantage of identified end-market opportunities and improve competitiveness. Building on this, it gathers information on financing constraints to market opportunities from industry stakeholders, firms and financial institutions. Interviews are conducted with financial service providers in and outside the value chain to reveal the degree to which financing is already available. If finance gaps exist, the analysis probes finance providers’ perspectives on why the gaps exist. Interviews include formal financial institutions, (microfinance institutions, banks) as well as input suppliers, brokers and dealers that may provide working capital loans or input supplies on credit to their clients.

Once information is obtained on the availability of and/or gaps in financing, a schematic can be developed showing product and financial flows. This schematic helps identify overall finance gaps that can constrain the prioritized improvements in value chain performance.

Financing gaps are further analyzed to determine why they exist. In general, financing is absent because potential cost or risk is seen to outweigh the potential benefit. Financing may be absent because the finance provider or potential borrower cannot accurately determine the benefits of increased investment, or because the lender or borrower correctly assesses the risk of lending and investing as too high. The analysis of financing gaps can inform donors about what type of intervention may be needed, and whether the interventions should be on the financial side, the enterprise side, or both. A challenge for donors and governments is identifying ways to support a value chain without undermining or crowding out private-sector solutions. Interventions should be geared toward facilitating private-sector solutions, addressing market failures and ensuring a functioning enabling environment.

Opportunities

There are multiple benefits which flow from successful value chain financing arrangements. Through its ability to reduce risk and enhance incentives, value chain finance can enable the sustainable delivery of services, for example ensuring that farmers, brokers and wholesalers have continuous access to a line of products they need that are delivered in a timely manner and meet certain specifications. These arrangements can also improve working relationships (e.g., between buyers and suppliers) and facilitate intra-chain information that lowers the actual or perceived risks of lending. A successful arrangement can often provide a demonstration effect which may prompt larger-scale players and formal financial actors to enter into a new market once the investment opportunities are realized.

Example: In Ethiopia, financial institutions were unwilling to work with agricultural cooperatives until a bank tapped a Development Credit Authority mechanism which shared the risk of loans to cooperatives that provided advances against products deposited by their members. After a successful collaboration, the bank obtained a second guarantee, but did not use it, going on to lend to agricultural cooperatives using their own funds. The bank considered the partnership to be successful on its own merits and continued their on-lending to cooperatives for subsequent on-lending to its smallholder members.

Challenges

One challenge for value chain finance actors is the provision of longer-term loans for capital investments. Most value chain actors supply short-term working capital to clients that require limited monitoring, collateral or paperwork. As with formal financial institutions, value chain actors often struggle with weighing the risks and rewards of offering investment loans. Value chain actors who directly provide financing are also faced with challenges of working in a sector they know little about. There may be costs associated with becoming involved in the lending process; they assume risks for repayment if a guaranteed borrower does not fulfill the repayment obligation; and they risk diverting time and resources away from other activities that might provide a greater return and in which they have more skills and experience. Furthermore, value chain finance takes place within a market system and is based on commercial transactions between value chain actors. The viability of many value chain finance mechanisms can be limited by low or unreliable end-market demand for a product, mistrust among actors, and unsupportive regulatory and policy environment. Contract enforcement and side-selling are common issues that undermine many buyer-based finance mechanisms. Additionally, production and price risks can be major deterrents to finance if they are not provisioned for with other risk mechanisms.

Implications for Design and Implementation

Value chain financing offers a variety of opportunities for creative program design, including opportunities for interventions that strengthen linkages between producers and buyers; encouraging banks to lend to value chain actors; organizing smallholder producer associations to enable production of high value crops; and outreach to financial institutions to design warehouse receipts loan products.

A challenge for donors and governments is to determine ways to support a value chain without undermining private-sector solutions. Interventions should be geared toward facilitating private-sector solutions, addressing market failures and ensuring a functioning enabling environment – not becoming a player within the value chain itself. Below are some general implications for program designers interested in expanding financial services to value chain actors.

• Design sustainable value chain finance interventions.
• Facilitate information flow from the value chain to financial markets.
• Design interventions with ‘integrated components’ that focus on increasing access to finance.
• Identify sources of risk reduction and new incentives.
• Provide training and technical assistance to value chain connector firms.
• Introduce and link value chain firms with financial institutions.
• Identify ways to improve access to longer-term agricultural finance.
• Recognize the limits as well as the benefits of financing by value chain actors.
• Look for solutions for gender-based constraints to finance.

Insurance companies base their business models around assuming and diversifying risk. The essential insurance model involves pooling risk from individual payers and redistributing it across a larger portfolio. Most insurance companies generate revenue in two ways: Charging premiums in exchange for insurance coverage, then reinvesting those premiums into other interest-generating assets. Like all private businesses, insurance companies try to market effectively and minimize administrative costs.

Pricing and Assuming Risk

Revenue model specifics vary among health insurance companies, property insurance companies, and financial guarantors. The first task of any insurer, however, is to price risk and charge a premium for assuming it.

Suppose the insurance company is offering a policy with a $100,000 conditional payout. It needs to assess how likely a prospective buyer is to trigger the conditional payment and extend that risk based on the length of the policy.

This is where insurance underwriting is critical. Without good underwriting, the insurance company would charge some customers too much and others too little for assuming risk. This could price out the least risky customers, eventually causing rates to increase even further. If a company prices its risk effectively, it should bring in more revenue in premiums than it spends on conditional payouts.

In a sense, an insurer’s real product is insurance claims. When a customer files a claim, the company must process it, check it for accuracy, and submit payment. This adjusting process is necessary to filter out fraudulent claims and minimize the risk of loss to the company.

Interest Earnings and Revenue

Suppose the insurance company receives $1 million in premiums for its policies. It could hold onto the money in cash or place it into a savings account, but that is not very efficient: At the very least, those savings are going to be exposed to inflation risk. Instead, the company can find safe, short-term assets to invest its funds. This generates additional interest revenue for the company while it waits for possible payouts. Common instruments of this type include Treasury bonds, high-grade corporate bonds, and interest-bearing cash equivalents.

Reinsurance

Some companies engage in reinsurance to reduce risk. Reinsurance is insurance that insurance companies buy to protect themselves from excessive losses due to high exposure. Reinsurance is an integral component of insurance companies’ efforts to keep themselves solvent and to avoid default due to payouts, and regulators mandate it for companies of a certain size and type.

For example, an insurance company may write too much hurricane insurance, based on models that show low chances of a hurricane inflicting a geographic area. If the inconceivable did happen with a hurricane hitting that region, considerable losses for the insurance company could ensue. Without reinsurance taking some of the risks off the table, insurance companies could go out of business whenever a natural disaster hits.

Regulators mandate that an insurance company must only issue a policy with a cap of 10% of its value unless it is reinsured. Thus, reinsurance allows insurance companies to be more aggressive in winning market share, as they can transfer risks. Additionally, reinsurance smooths out the natural fluctuations of insurance companies, which can see significant deviations in profits and losses.

For many insurance companies, it is like arbitrage. They charge a higher rate for insurance to individual consumers, and then they get cheaper rates reinsuring these policies on a bulk scale.2

Evaluating Insurers

By smoothing out the fluctuations of the business, reinsurance makes the entire insurance sector more appropriate for investors.

Insurance sector companies, like any other non-financial service, are evaluated based on their profitability, expected growth, payout, and risk. But there are also issues specific to the sector. Since insurance companies do not make investments in fixed assets, little depreciation and very small capital expenditures are recorded. Also, calculating the insurer’s working capital is a challenging exercise since there are no typical working capital accounts. Analysts do not use metrics involving firm and enterprise values; instead, they focus on equity metrics, such as price-to-earnings (P/E) and price-to-book (P/B) ratios. Analysts perform ratio analysis by calculating insurance-specific ratios to evaluate the companies.

The P/E ratio tends to be higher for insurance companies that exhibit high expected growth, high payout, and low risk. Similarly, P/B is higher for insurance companies with high expected earnings growth, low-risk profile, high payout, and high return on equity. Holding everything constant, return on equity has the largest effect on the P/B ratio.

When comparing P/E and P/B ratios across the insurance sector, analysts have to deal with additional complicating factors. Insurance companies make estimated provisions for their future claims expenses. If the insurer is too conservative or too aggressive in estimating such provisions, the P/E and P/B ratios may be too high or too low.

The degree of diversification also hampers comparability across the insurance sector. It is common for insurers to be involved in one or more distinct insurance businesses, such as life, property, and casualty insurance. Depending on the degree of diversification, insurance companies face different risks and returns, making their P/E and P/B ratios different across the sector.

Internal environment is a component of the business environment, which is composed of various elements present inside the organization, that can affect or can be affected with, the choices, activities and decisions of the organization.

It encompasses the climate, culture, machines/equipment, work and work processes, members, management and management practices.

In other words, the internal environment refers to the culture, members, events and factors within an organization that has the ability to influence the decisions of the organization, especially the behaviour of its human resource. Here, members refer to all those people which are directly or indirectly related to the organization such as owner, shareholders, managing director, board of directors, employees, and so forth.

Factors Influencing Internal Environment

The factors which are under the control of the organization, but can influence business strategy and other decisions are termed as internal factors. It includes:

1. Value System

Value system consists of all those components that are a part of regulatory frameworks, such as culture, climate, work processes, management practices and norms of the organization. The employees should perform the activities within the purview of this framework.

2. Vision, Mission and Objectives

The company’s vision describes its future position, mission defines the company’s business and the reason for its existence and objectives implies the ultimate aim of the company and the ways to reach those ends.

3. Organizational Structure

The structure of the organization determines the way in which activities are directed in the organization so as to reach the ultimate goal. These activities include the delegation of the task, coordination, the composition of the board of directors, level of professionalization, and supervision. It can be matrix structure, functional structure, divisional structure, bureaucratic structure, etc.

4. Corporate Culture

Corporate culture or otherwise called an organizational culture refers to the values, beliefs and behaviour of the organization that ascertains the way in which employees and management communicate and manage the external affairs.

5. Human Resources

Human resource is the most valuable asset of the organization, as the success or failure of an organization highly depends on the human resources of the organization.

6. Physical Resources and Technological Capabilities

Physical resources refers to the tangible assets of the organization that play an important role in ascertaining the competitive capability of the company. Further, technological capabilities imply the technical know-how of the organization.

Internal environmental factors have a direct impact on a firm. Further, these factors can be altered as per the needs and situation, so as to adapt accordingly in the dynamic business environment.

External environment analysis is an important part of strategic management.

PESTEL Analysis

PESTEL analysis includes Political, Economic, Social, Technological, Environmental and Legal analysis. It is an external environment analysis for conducting a strategic analysis or carrying out market research. It offers a certain overview of the varied macro-environmental factors that the company has to consider.

1. Political factors

Political factors analysis is related with how and to what extent a government interferes in the economy. Specifically, political factors include tax policy, labor law, environmental law, trade restrictions, tariffs, and political stability. Political factors may also be related with goods and services which the government allows (merit goods) and those that the government does not want to allow (demerit goods). The government can have a great influence on the overall health, education, and infrastructure of a country.

2. Economic factors

Economic factors contain factors such as economic growth, interest rates, exchange rates and the inflation rate. These factors may have an influential effect on how the businesses operate and make decisions. For example, interest rates can affect the firm’s cost of capital and thereby influence business growth and expansion. Exchange rates can affect the costs of export and the supply and price of imports.

3. Social factors

Social factors contain issues such as health consciousness, population growth rate, age distribution, career attitudes and emphasis on safety. Trends in the social factors may affect the demand for a company’s goods and how the company operates. For example, ageing population leads to smaller and less-willing workforce (and increases the cost of labor). Moreover, companies may change various management strategies in sync with the social trends (such as recruiting more females).

4. Technological factors

Technological factors include ecological and environmental aspects, such as R&D activity, automation, technology incentives and the rate of technological change. They can determine barriers to entry, minimum efficient production level and influence outsourcing decisions. Furthermore, technological shifts can affect costs, quality, and lead to innovation.

5. Environmental factors

Environmental factors are the conditions such as weather, climate, and climate change, which may especially influence tourism, farming, and insurance sectors. Growing awareness to climate change are increasing the interest in how companies operate and what products they offer; it is both creating new markets and damaging the existing ones.

6. Legal factors

Legal factors include laws pertaining to discrimination, consumer affairs, antitrust, employment, and health and safety. These factors can affect the operations, costs, and the demand for the products. Legal factors can also influence the brand value and reputation of a company. They are increasingly paid more attention to in the current decade.

While in external analysis, three correlated environment should be studied and analyzed:

• Immediate / industry environment
• National environment
• Broader socio-economic environment / macro-environment

Examining the industry environment needs an appraisal of the competitive structure of the organization’s industry, including the competitive position of a particular organization and it’s main rivals. Also, an assessment of the nature, stage, dynamics and history of the industry is essential. It also implies evaluating the effect of globalization on competition within the industry. Analyzing the national environment needs an appraisal of whether the national framework helps in achieving competitive advantage in the globalized environment. Analysis of macro-environment includes exploring macro-economic, social, government, legal, technological and international factors that may influence the environment. The analysis of organization’s external environment reveals opportunities and threats for an organization.

Strategic managers must not only recognize the present state of the environment and their industry but also be able to predict its future positions.

If a business wants to be successful in the marketplace, it is necessary for them to fully understand what factors exert impact on the development of their company. Once they know about both positive and negative effects within and outside the company, they can produce suitable strategies to handle any predicted situation. Therefore, examining internal and external factors is considered the most important task for an enterprise before launch any strategic marketing plan.

Internal Environment Factors

The internal factors refer to anything within the company and under the control of the company no matter whether they are tangible or intangible. These factors after being figured out are grouped into the strengths and weaknesses of the company. If one element brings positive effects to the company, it is considered as strength.

On the other hand, if a factor prevents the development of the company, it is a weakness. Within the company, there are numerous criteria need to be taken into consideration.

(i) Corporate objectives

As with all the functional areas, corporate objectives are the most important internal influence. A marketing objective should not conflict with a corporate objective.

(ii) Finance

The financial position of the business (profitability, cash flow, liquidity) directly affects the scope and scale or marketing activities.

(iii) Human resources

For a services business in particular, the quality and capacity of the workforce is a key factor in affecting marketing objectives. A motivated and well-trained workforce can deliver market-leading customer service and productivity to create a competitive marketing advantage

(iv) Operational issues

Operations has a key role to play in enabling the business to compete on cost (efficiency / productivity) and quality. Effective capacity management also plays a part in determining whether a business can achieve its revenue objectives

(iv) Business culture

E.g. a marketing-orientated business is constantly looking for ways to meet customer needs. A production-orientated culture may result in management setting unrealistic or irrelevant marketing objectives.

Other Internal Environment Factors

• Plans & Policies
• Value Proposition
• Human Resource
• Financial and Marketing Resources
• Corporate Image and brand equity
• Plant/Machinery/Equipments (or you can say Physical assets)
• Labour Management
• Inter-personal Relationship with employees
• Internal Technology Resources & Dependencies
• Organizational structure or in some cases Code of Conduct
• Quality and size of Infrastructure
• Task Executions or Operations
• Financial Forecast
• The founders relationship and their decision making power.

External Environmental Factors

On the contrary to internal factors, external elements are affecting factors outside and under no control of the company. Considering the outside environment allows businessmen to take suitable adjustments to their marketing plan to make it more adaptable to the external environment.

There are numerous criteria considered as external elements. Among them, some of the most outstanding and important factors need to listed the are current economic situation, laws, surrounding infrastructure, and customer demands.

(i) Economic environment

The key factor in determining demand. E.g. many marketing objectives have been thwarted or changed as a result of the recession. Factors such as exchange rates would also impact objectives concerned with international marketing.

(ii) Competitor actions

Marketing objectives have to take account of likely / possible competitor response. E.g. an objective of increasing market share by definition means that competitor response will not be effective

(iii) Market dynamics

The key market dynamics are market size, growth and segmentation. Changes in any of these undoubtedly influence marketing objectives. A market whose growth slows is less likely to support an objective of significant revenue growth or new product development

(iv) Technological change

Consumer and other markets are now affected by rapid technological change, shortening product life cycles and creating great opportunities for innovation. These have to be taken into account when setting marketing objectives.

(v) Social & political change

Changes to legislation may create or prevent marketing opportunities. Change in the structure and attitudes of society also have major implications for many markets.

Other External Environmental Factors

Micro factors

• Customers
• Input or Suppliers
• Competitors
• Public
• Marketing & Media
• Talent

Macro factors

• Economic
• Political/legal
• Technology
• Social an
• Natural

The insurance industry is saturated with national brands making a lot of noise, making it tough for local insurance agencies to be heard by consumers. Smart marketing strategies are necessary so that an insurance agency can stand out from the national and local competition. These are but a few examples of marketing strategies an insurance agency can employ, but every agency should consider the market and exactly what the target market is looking for before implementing any new program.

(i) Go Grassroots in the Community

Most agencies seek to capture the market close to the office. It’s easier to build relationships with customers when you can meet with them. There are a lot of ways to become known and visible within the community that surrounds your insurance agency.

Look at broad marketing strategies such as billboards, bus benches and grocery store advertising as a way to get your agency name and your image out in the world. This develops general credibility but really, it’s a shotgun approach.

More active approaches to marketing will build community goodwill and have a more targeted approach to drive the leads in. Visit local high schools to speak to students about the dangers of drunk or distracted driving. Hold workshops that discuss the benefits of life insurance at a local church. Get a booth at the local chamber of commerce event.

(ii) Piggyback Off the Brand

Big brands such as Allstate, Farmers and State Farm spend a tremendous amount of their annual budgets on marketing. If you have an agency with one of these companies, you know the limitations of being a captive agent. But there are advantages to the marketing funnels these big brands pump money into, and you can piggyback off these funnels.

Allstate agents can host local community cleanups that partner with the city council, using the Allstate tagline, “You’re in good hands.” Farmers’ agents can hold regular insurance and financial workshops, bringing Farmers University directly to consumers. State Farm agents can have fun with, “Jake from State Farm,” an agent who’s wearing khakis and the signature red shirt in the office and to all community events.

When you have the brand behind you, use its well-paid marketing department to create the programs that you only need to execute.

(iii) Build a Referral Network

A referral network is one of the best ways insurance agencies grow the business. Strategic partners for insurance agencies include real estate agents, mortgage lenders, estate planning attorneys and even other insurance agents. If your agency specializes in a specific type of insurance – for example, worker’s compensation – many other agencies are instead focused on auto and home insurance, and they can refer business clients to you.

When it comes to building strategic partners, plan it out and be consistent. Take a box of donuts to a mortgage lender’s office once a week with a stack of your cards and a note thanking them for thinking of you. Offer to sit in open houses with real estate agents. Add value and partners will emerge to provide you with solid referrals.

(iv) Spend Ad Money in Local Social Media

Social media ads allow the insurance agency owner to target specific clients. It also gets them in front of Millennials in ways other traditional advertising might not. Use the tools social media provides to set demographics for certain products. For example, target young families with small children for life insurance prospects.

Effective digital marketing techniques for insurance companies

The modern concept of insurance might have started in the 17th century, but consumers and their decision-making processes have changed drastically over time. Modern-day consumers, with the power of the internet at their fingertips, are more informed now than ever before. Prior to making a purchase decision, they extensively research various plans, read reviews about different providers and ask their peers for recommendations. Insurance companies need to adapt to this changing funnel and target their consumers at every stage of the customer journey. Here’s how digital marketing for insurance companies can help brands widen their audience and revamp their marketing strategies.

1. Cohesive brand message across channels

Insurance companies in India today largely operate in the offline space, both in terms of marketing and operations. When transitioning to digital, companies need to ensure that their branding is cohesive on all platforms. Having a uniform, strong brand image is crucial to improving recall value among customers. All of your future communications, promotions and other marketing activities will depend upon the brand image that your company creates.

In some cases, companies might need to rebrand themselves to adapt to the digital space. If you do decide to update the look and feel of your brand to make it stand out better on digital platforms, you also need to ensure that your offline branding follows suit. Consistency between your online and offline personas is key to creating a strong brand.

2. Create a comprehensive & performance driven website

When it comes to digital marketing for insurance companies, a website is more than just a tool for branding. While one of the most important uses of a website is to communicate your brand image to your audience, it should also be a useful resource of information for them. When it comes to making a decision about which insurance provider to partner with, customers do so only after carrying out extensive research. The Customer Behaviour and Loyalty in Insurance report by Bain & Company found that more than half of all insurance holders choose a provider only after conducting research on digital platforms. Does your website provide consumers with all the information they need to make a decision?

When developing a website for your insurance brand, you need to ensure that it isn’t just aesthetically pleasing, but is also easy to navigate and user-friendly. Personalization of home pages is becoming increasingly important for a positive user experience. It’s also important to ensure that the pages are focussed on driving action and driving enquiries or purchases. You can consider creating a login for your customers, which allows them to see details of their plans and customised suggestions based on their needs. It’s also important that you optimise your website with strong SEO techniques to drive organic traffic and gain greater visibility. Apart from supporting your content marketing, local SEO techniques like getting featured on Google Local Listings and Google My Business can help your audience learn more about your company.

3. Build thought leadership through content marketing

Content marketing is uniquely suited to the marketing needs of insurance brands. Choosing an insurance provider isn’t a quick decision, nor is it a one-time process. Customers need to renew their plans periodically, at which time they can even decide to switch providers. Effective content marketing techniques can help you gain the trust of your audience by establishing your brand as a thought leader in the field. When backed by effective SEO strategies to increase organic traffic and help your content rank higher, content marketing can be one of the most useful ways to reach a wider audience.

Content marketing can take the form of blog posts, informative videos and how-to guides. This can help engage with your customers right from the awareness stage to acquisition and finally the retention phase. When developing a content marketing strategy it’s important that you think from the perspective of your audience and create content that they will actually find useful. The blog by Sundaram Business Services, for example, doesn’t just have information related directly to their services. Instead, it caters to all related queries that their audience might have. In this way, your customers will be able to recall your brand when they need to choose an insurance provider.

4. Engage consumers actively on social media

Social media isn’t commonly associated with insurance brands, but it is as important for this segment as it is for any other. There are currently around 240 million Indians on Facebook and this number is only going to grow from here. Insurance, on the other hand, hasn’t penetrated as far in India. Currently, only 20 per cent of women and 23 per cent of men in the country are covered by health insurance. Social media is a powerful way to develop your brand identity and consistently engage with your target audience. Through creative posts, digital marketing for insurance can develop awareness of your product, while at the same time, entertaining your audience.

5. Use chatbots for improved customer service

Large insurance companies typically handle huge volumes of customer queries every single day. The Google India 2017 Year In Search Report revealed that there has been a 64 per cent growth in queries related to motor insurance, which has also been a key driver in generating leads. Timely resolution of these queries is crucial to improve a customer’s experience with your brand and to generate leads. But insurance companies might not always have the manpower to do this effectively. To streamline their processes and handle large-scale customer queries, many insurance brands are turning to AI-powered solutions like chatbots.

6. Leverage digital advertising to acquire leads

Paid advertising can be a fast and effective lead generation tool in digital marketing for insurance companies. There are over 25 platforms available today for insurance companies to advertise their services and gain customers. Some of these include Google Search and Display, LinkedIn, Times Internet, Native and Affiliate ad networks. When coupled with high-performing landing pages, these tools can turn your insurance marketing strategy into a lead generation machine. The advanced targeting options available in digital advertising platforms make it easy for insurance companies to find their target audience online. Companies can target audiences by age, locality and intent, which can help them generate high-quality leads. Since insurance companies are also interested in finding younger audiences to build a relationship with them from the start, advertising on Facebook through video ads, carousel ads and more can help them engage with this segment.

Bijlipay was able to capitalise on the power of Google ads to achieve an unprecedented number of leads in a cost-effective way. They used A/B testing to run different landing pages and altered the copies to communicate with different segments of their audience in a targeted manner. This strategy helped Bijlipay achieve 3,569 conversions at a cost-per-conversion of just Rs. 285. Here are some tips on improving the quality of your leads via digital advertising.

7. Nurture leads through digital media

Digital platforms have helped to improve the quality of audience targeting and retention in a way traditional media hasn’t been able to. The variety of lead targeting and nurturing methods available today makes it possible to engage with your customers at various touchpoints. In the insurance segment, this is very important to gain new policyholders and to retain existing ones even after their plan expires.

One of the most effective lead nurturing strategies for insurance companies is drip email marketing. With this technique, you can create targeted communications for your customers in every phase of their purchase decision process.

A drip email marketing campaign can be broadly categorised into three phases:

• Welcome emails: This is an automated email sent out as soon as a consumer expresses interest in your brand by signing up on your website or filling out a form. A consumer in this stage is usually evaluating various insurance providers and hasn’t made a decision about which one to choose. A welcome email can provide them with details of your company and your USPs, to give them a clearer idea of your brand.
• Nurturing emails: The second stage goes deeper to provide consumers with more specific details about your various services, details of your plans and your value propositions. Each of these emails should provide consumers with a clear reason as to why they should convert. The exact number of nurturing emails can vary.
• Activation emails: If you have effectively used strong lead nurturing emails, your audience should be ready to convert into actual customers. Activation emails can include a link to sign up for an insurance plan or to get in touch with a representative from your company. These emails include a clear call-to-action which gives your audience the final push to convert.

Apart from email marketing, the introduction of WhatsApp for Business offers insurance companies another medium for lead nurturing. However, since WhatsApp is still largely a personal inbox, companies need to ensure that they keep their communications through this app concise. Sending too many messages to consumers can be seen as spam.

Digital marketing has a number of clear advantages for insurance companies. While this segment has traditionally not been active on digital platforms, it’s clear that making the shift will help insurance companies widen their audience and gain more visibility.

Insurance companies, no matter their size, need to be constantly building their customer base if they want to stay competitive and profitable. There are many different ways for an insurance agency to reach out to new clients, so it’s important to choose the ways that will have the most impact and focus marketing and advertising efforts on those specific areas. Whether your agency is well-established or just starting, you can always step up your marketing by looking into a new area.

Marketing of Insurance

First of all, it’s important to understand the strengths of your agency and what makes your insurance company different than all the rest. Look at the plans you offer and the price points, of course, but also evaluate your customer service side as well. Being able to provide friendly, helpful tech support and answer most questions customers have about insurance plans is becoming as important to some customers as the cost of the plan itself. Having a system in place that ensures current and potential customers can get information quickly — since today’s world moves faster than ever — can be a key strength separating one agency from another.

The marketing strategy will want to focus on these strengths in a way that allows the message to be about those advantages. Consider your resources and your team. An incredibly efficient agency might focus on the speed with which they can get answers quickly; an agency with a lot of industry contacts might focus on the variety of insurance packages they can offer.

Personable people make good service a notable highlight; coverage options mean a competitive price. Review your current strengths and decide what makes sense to be the central message from your agency.

Networking and Referrals

Most new customers traditionally find insurance agencies through word-of-mouth, based on recommendations from current customers. This is a critical way to find new clients, and yet, the agency is entirely dependent on their existing clients to do so. To take advantage of this, make it as easy as possible for current clients to refer you.

• Brush up on the insurance company’s website. Make sure it’s professional-looking, that it contains helpful information and other content and that it gives an easy way to contact your agency with questions or for a quote.
• Make sure current clients are highly satisfied with the quality of service and coverage they have. Before they leave or hang up the phone, be sure to ask whether they’re pleased with the results and if there’s anything else they might need. Make sure all agents are leaving a good impression on their customers.
• Make business cards or magnets with the agency’s information on them, including a phone number leading directly to a person and the website address. Encourage clients to take them, to give out to other people.
• Consider offering a small reward for every referral, like a one-time discount or a small gift card. It lets people know you appreciate the business being brought in and makes your clients more likely to remember to recommend you when an opportunity arises.

Use a Personal Network

In addition to customer referrals, agents can use their own professional and personal networks to help attract potential new clients. To encourage this, consider things like a community day, where your team might get involved in a local volunteer project.

Connecting with people on a personal level makes referrals and suggestions much more meaningful, and more likely to stick. It also never hurts to give back to the community and will help the agents feel more engaged with their work.

Online Marketing

There are so many aspects of online marketing that it’s easy to get lost. Remember, the top priority of your insurance business strategy is to build awareness and interest in your particular agency and its brand. Spend resources on the kinds of marketing that best reflect the brand and will easily get the message across. There’s no need to do everything; depending on location, size and specialty, some will be more effective than others.

1. Website

As mentioned above, having a clean-looking, professional website that’s easy to navigate and contains useful information is key to an online presence. Consider hiring a designer to be sure the look is inviting and engaging, but easy to update from the back end. Keep information current and check thoroughly to make sure everything works both on computer and mobile platforms.

2. Website Content/Blog

One way to draw readers to a website is to regularly post interesting things for them to see, watch or read. For this, you’ll need to offer knowledgeable information that will help readers understand why they need your insurance products and what your agency can do for them. Consider hiring a professional or technical writer for this content; in order for it to stand out among the millions of internet sites, it needs to be excellently and flawlessly written. And don’t stop with words: photos of satisfied customers will help personalize your brand and brief videos with agents remind consumers that there’s a skilled individual waiting to help them.

3. Social Media

Pervasively everywhere, social media has become a key part of life for many people, so it may seem an obvious place to start, but do consider whether your agency fits the type of social media you’re looking to set up. An insurance company marketing long-term client relationships and stable packages may not have much use for a Twitter account, for example, but could likely use Facebook to its benefit.

4. Advertisements

Social media, content websites, even Google advertisements are everywhere, and that can be used to your benefit. Offering promoted posts and advertisements on Facebook can increase the number of hits your page gets; likewise, a Google ad or a sponsored link can increase traffic. Many advertising agencies will tailor this as needed to a known demographic, which can make costs reasonable. Ask them what insurance ad ideas they might have, if you’re stumped.

Customer Relationship Management (CRM)

Customer relationship management is the industry name for the set of strategies, tools and processes used to examine customer relationships and work to improve them. CRM software, or a CRM agency, will help streamline the existing information on clients, examine current growth and customer relationships and make suggestions as to how the business can expand and where it should focus its efforts.

CRM packages start with current customer information. They’ll build an automated database so that the contact information is available for access no matter which agent is working with that particular customer that day; this includes customer history like policy changes, previous phone calls and so on. This saves time and makes sure the customer doesn’t have to spend their valuable time repeating information.

They can also automate processes, like sending reminder emails to existing customers when it’s time for a policy renewal, highlighting potential changes or new deals. This level of service helps agents keep up on where customers are at any point in their policy cycle, which lets them adjust their service to fit that individual’s specific needs.

Benefits of CRM

CRM services also make it easy to reach out to new potential customers. By integrating CRM with the business website, queries looking for information or a quote can be directly sent on to the first available agent, for example, including all available contact information. Over time, historical data can be used to project customer base expansion and identify new opportunities for advertisements or special offers. It’ll make it clear which advertising efforts have been fruitful and which have not, so that going forward you can spend your time more efficiently on marketing strategies that will yield the most fruit.

Effective Marketing Plans

In order to be successful, all the elements above need to be streamlined into a coherent marketing plan that makes strategic sense. Individual efforts in certain areas can be fruitful, but being able to combine methods into a powerful overall plan is the best way to effectively grow clientele and build the business.

1. Research

This step includes defining the agency’s strengths and its message, and researching target groups that will respond positively to that message. Also, research the competition — local and online — and compare their latest offerings against yours. Determine what differentiates your agency and add it to the message.

2. Objectives

Review the agency’s short-term and long-term goals. If possible, break down goals to monthly targets, to help the company understand what you’re working toward. Setting a target for new customers is a good start, but also consider milestones like daily hits to a website, questions answered or the number of phone queries. This will help focus on the methods being used, not just the overall outcome.

3. Choose Tactics

Looking at the goals should help narrow down marketing options. Decide what you want to do, how you intend to do it and what your budget is for it. Budget is important: employee hours cost the company, so be careful about the division of work between internal and external resources. For things like building a website or maintaining a social media presence, it can be more effective for the cost to hire a professional, so don’t assume everything will be done with the agency’s existing staff.

4. Measure

Keep track of new customers as well as loyal customers who choose to expand services. Consider asking how they heard of you was it a personal referral, an online ad, a Google search? Listen to what’s working to bring customers in, but also what’s keeping customers with your agency. Then recycle this information, compare it to the objectives set and reevaluate your tactics as needed.

Insurance as a Competitive Field

Insurance today is such a competitive field because the competition isn’t just local, it’s online as well. Customers don’t even have to leave their house to get a quote and sign up for insurance policies. So the marketing plan also has to focus on what your insurance agency offers over those other options, especially if you want to encourage office visits over online signups and phone calls.

This is another piece of the strategy and objectives to consider; your agency may want to reward office visits or you may want to do your best to automate things online as much as possible. What sort of service best fits the brand of this agency? Keep in mind, also, that this focus might change over time.

In the end, that’s the best kind of marketing plan: one that fits the strengths of the agency while also representing what the agency is looking to grow into. Tailoring the marketing strategy makes more sense than simply, say, buying out a set of online ads or printing a bunch of brochures: It focuses resources and will have the most impact with the most value. While it might seem like more offerings means more business, remember that it’s also about the quality of offerings, and the quality of service, not just the number of things in your insurance portfolio. You’ll draw in more customers who’ll stay longer by focusing on the things that build that important customer loyalty.