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If there is a silver lining in the financial meltdown we are experiencing, it is the reestablishment of basic business principles that seem to have been relinquished in recent years. For insurers, one aspect of going back to basics means making money off insurance policy premiums.
It may sound trivial, but for many years, insurers worldwide have been able to cover operational loses by making money on their investments. Making money on insurance policies is, of course, easier said than done.
Customers have become accustomed to a world in which insurance is a commodity—an undifferentiated product. With access to a growing selection of distribution channels, price-shopping has become easier than ever.
While carriers may be complaining about the commoditization of insurance, they can point at least some of the blame toward their own practices. For insurers to offer a differentiated product, they must be able to differentiate among customers. This is something most insurers don’t do very well.
Traditionally, insurers have maintained their focus on the supply side of the business, adopting an operational mode that limits their view of a customer to a single dimension—risk. While risk models have evolved over time, insurance companies have by and large neglected to learn more about their customers’ preferences.
Delivering value to the customer is the key to sustained profitability in any market, and insurance is no different. To deliver value, insurers need to develop a better understanding of the demand side of the business—namely, customer preferences and demand drivers, not only risk factors.
To turn things around and reverse the commoditization trend, insurers need to adopt a multidimensional view of their customers. By integrating demand and risk characteristics into a holistic view of the customer, insurers will be able to:
• Target the right customers.
Not all customers can be profitable for every insurer. If a carrier is operating a strategy of being the low-cost leader, it should target customers that have high sensitivity to price.
However, an insurer that positions itself as the leader in customer service would want to target customers that are willing to pay premium prices for premium services.
• Offer the right policies and services.
When it comes to property-casualty policies, insurers could do a better job not only presenting customers with a menu of choices but in offering the coverage options that are most likely to be of value to each.
• Price them right.
Even when targeting the right customers and offering them the most attractive coverage options and services, price will always be a key factor in making a choice among carriers.
• Use the best channel to reach each customer.
While some customers may be better served directly through the company’s Web site or call center, others may prefer the more traditional agent relationships.
The results of customer value optimization can be highly rewarding. Insurers that have adopted this approach have been able to achieve business growth and profitability in competitive insurance markets, generating combined ratio improvements of two-to-four points.
What practical steps can insurers take to get started on the path to optimizing customer value?
• Define profitability goals and a time horizon.
For example, a carrier looking to grow market share and willing to break even or incur a loss in the short term may be able to attract customers that will turn highly profitable in the long run.
• Establish a customer-centric analytics platform.
Operating in product-related silos makes it impossible to optimize customer value across products.
To maximize customer lifetime value, insurers must implement a platform that provides an integrated view of the customer and enables decisions at different parts of the organization to be optimized based on cross-product profitability.
• Apply a quantitative approach to optimization.
Historically, a judgmental process has been applied by insurers to balance marketing goals with the underlying loss characteristics of the risk.
Insurers would be better served by applying a quantitative model that can optimize customer offers to best match corporate goals—such as improving profitability, increasing market share, or a combination of factors.
• Incorporate regulations.
Working in a highly regulated environment undoubtedly puts constraints on the freedom that insurers can exercise in selecting their customers, offering new products and formulating rates.
At the same time, regulations should not be used as an excuse for neglecting to do more on all of these fronts. Rather, regulatory restrictions should be integrated into the operational model of optimization decisions used by carriers.
Fortunately for insurers, new technologies enable them to do just that.
Using data they already have about customers, new analytical platforms enable insurers not only to analyze past behavior but also predict future preferences and optimize products, prices, promotions and channels to maximize lifetime value.
New modeling methodologies and predictive technologies enable insurers to optimize customer lifetime value based on the time horizon that best matches the organization’s strategy, while incorporating applicable regulatory constraints to ensure compliance.
Not many companies are going to be willing to go through massive replacement of systems during these tough times. Service-oriented architecture provides insurers with an opportunity to put in place a unified, customer-centric platform that can co-exist and integrate with their existing information infrastructure.
The current economic shakeout presents an opportunity for insurers looking to position themselves for long-term success.
With limited options for making money on their investments, insurers should seize the opportunity to become more customer-centric, optimize customer lifetime value and create sustainable profitability from their insurance operations.