This article was originally published in Insurance & Technology.
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, or in the case of some insurance carriers may never have been established properly in the first place.
The current economic shakeout presents an opportunity for insurance carriers that are looking to position themselves for long-term success. With limited options for making money on their investments, insurers should seize the opportunity to create sustainable profitability from their insurance operations by delivering greater value to customers.
To become more customer-centric and optimize customer lifetime value, insurers need to consider the following five variables that create mutual value to the customer and the insurance provider:
1. Coverage: what coverage should we offer to each customer?
Customers have varying degrees of tolerance to risk, and therefore different requirements for insurance coverage. Coverage needs and preferences also change over time. Insurers can do a better job recognizing lifetime events that influence these needs, such as starting a family, a child that is reaching driving age, etc., and proactively offer the appropriate coverage options to each customer at the appropriate time.
2. Cost: at what price?
Traditional risk-based insurance pricing is based on the cost of insurance from the point of view of the insurer, failing to take into consideration the customer view. Insurers can do a better job recognizing other important parameters that influence price sensitivities for different customers and incorporating these into the product–service–price combinations they offer to each customer.
3. Convenience: how important is convenience and time savings to the customer?
Customers have different preferences when it comes to convenience. While some prefer to work through an agent, others prefer doing business online. Some customers are willing to trade cost for convenience, preferring a bundled solution with the convenience of one-stop shopping, while others prefer shopping for each coverage separately to get the best price. Understanding these preferences for each customer and how they change over time can help the insurer better match customer needs and increase customer value.
4. Care: what is the level of service and care that should be offered to each customer?
While a claim is first and foremost a cost item to the insurer, it is also an opportunity to increase customer satisfaction, create greater customer loyalty, and boost retention. The customer lifetime value framework provides the insurer with the ability to optimize the claim process in order to balance these cost and retention considerations and maximize lifetime value for each customer.
5. Compliance: how can all this be done while maintaining compliance with regulations?
To serve as a practical tool for managing customer relationships, the lifetime value optimization framework must incorporate local regulations, which are different from state to state and from one country to the other.
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 Operating Ratio improvements of 1-4 points.
What practical steps can insurers take to get started on the path to optimizing customer value?
- Define profitability goals and time horizon: For example, a carrier that is looking to grow market share and willing to breakeven 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, regulation restrictions should be integrated into the operational model of optimization decisions utilized by carriers.
To optimize customer value, insurers need to adopt a new way of thinking. They also need processes and technologies that can help them model customer lifetime value and apply it to day-to-day customer interactions, ranging from new customer acquisition to policy renewals and claim processing. None of this is going to happen overnight. Recognizing this is the direction insurance must go, especially in light of the current financial meltdown, many of the leading insurers are already taking steps in this direction. With a growing body of evidence to the success of the customer value optimization model, we can only expect others to follow.
John Lucker leads Deloitte’s Actuarial and Insurance Solutions data mining and predictive modeling practice known as Advanced Quantitative Solutions (AQS). He provides leading insurance carriers with end-to-end business, operational, and technical consulting services. Mr. Lucker has helped numerous commercial and personal insurance carriers develop innovative methods and solutions, and is a co-inventor of three predictive modeling patents which are pending.
