Insurance for a Smarter Planet: An Interview with IBM’s Mark Lewis

Mark Lewis is the general manager of IBM’s Global Insurance Industry. He is responsible for IBM business with insurance clients as well as worldwide strategy, development of skills, assets, and capabilities to better serve IBM’s Insurance clients in all parts of the world.

Q: What are some of the key trends you are seeing in the insurance industry?

 

New research about Online Insurance and Price Optimization

I came across two very interesting new research papers by Nicolas Michellod from Celent – both relevant to our discussions on Customer Value and Price Optimization for non-life Insurance.

Price Optimization in Insurance – A Revolution in Progress provides an in depth discussion on what price optimization is (also sometimes referred to as “demand driven pricing” or “market pricing”), how it is applied in the Insurance industry, and key factors to its success. It touches on subjects like real time price optimization and dynamic pricing, competitive pricing and even notes different vendors of price optimization software, including Earnix.

I found Celent’s description of the different levels of sophistication in demand based pricing to be very concise and accurate: Reactional analysis defines what has been performed, using Reports and Dashboards; Strategic analysis defines what lessons can we draw from the Reactional analysis, using Analytics; Scenario simulation answers what-if questions, using Predictive analytics; and finally Scenario comparison (and selection) defines what is the optimal approach (i.e. action to take), and requires Pricing Optimization.

Another trend Celent deeply analyzes for the first time (that I have seen) is the benefit for real time price optimization, or as they put it comparing “Back Office vs. Front Office” approaches. Rightfully the report focuses on online and European markets as the current segment leading this advancement, but we at Earnix are already starting to see other segments that are moving into the “Front Office” world of Price Optimization.

Celent also reviews some success stories in this area such as Progressive in the USA and Lloyds TSB Insurance in the UK (See related article about Lloyds TSB).

The Perils of Success – Rethinking the Maturing Online Insurance Landscape in Europe discusses the state of online insurance and its foreseeable future, and the evolution of online insurance IT architecture.

In the report Celent notes the reasons for the growth of Internet based Insurance purchase. The growth trend is indeed clear, and there are many good reasons for it. However for me, the most difficult question to “crack” on this topic is why some countries are taking significantly longer than others in developing a significant internet insurance markets. It is no secret that the USA and UK have taken off quite a few years ago, whereas countries like Germany, Italy and France are yet to achieve any significant internet market share. Celent is confident the “lagging” counties will follow this trend soon, but I would like to know “how soon?” and “if it hasn’t happened until now, why would it happen any time soon?”

I enjoyed very much reading these papers as they provide important insights on what we believe are key trends around Pricing and general performance in the insurance market. These research papers can be purchased on the Celent web site.

If you’ve had a chance to read these or other relevant research papers – please join the discussion and let us know your thoughts.

Many ways to say Customer Value & Price Optimization

Ever since starting this blog in 2007, not long after I joined Earnix we have been trying to find the most appropriate phrase to define the topic of our discussion. At Earnix we use the same phrases all the time and understand each other – Customer Value & Price Optimization for Insurance companies and Banks, so we expect the world to understand us also, easy – right? Well, not really…

As is often the case when new market categories are formed, different phrases are used to describe the same thing, and sometimes we are not sure what that “thing” is. As the market develops, that “thing” becomes clearer and a new terminology is established. For example, who really knew what ERP or CRM meant in the early 1990s? Now these terms are well understood and have a unique meaning. We at Earnix believe this is happening right now in the Insurance and Banking industry around Customer Value & Price Optimization.

So let’s discuss some of the different ways of saying “Customer Value & Price Optimization for Insurance companies and Banks”.

Let’s start with “Price Optimization.” Is it the analytical components of pricing such as demand modeling and pricing analytics, dynamic pricing, price elasticity, and price sensitivity? Or is it the business part – competitive pricing, pricing management, revenue management, profit management, or good old value based pricing, price execution, and revenue optimization?

Continuing on this point, the mathematical term of “optimization” is sometimes misused in this context. “Profit Optimization” is not a technically-correct term because what is actually implied is “profit maximization”. That is, pricing is the means while profit/revenue/value are the goals, therefore you optimize price to maximize these goals under constraints.

And what about the “Customer Value Optimization” part? Do we mean customer lifetime value, or maybe customer centric, or maybe a combination – customer centric lifetime value?

Or maybe we are talking about the predictive analytics technology we use, or putting it all into a software solution – i.e. pricing software? Or customer lifetime value software?

Well as you are probably aware, I have no answers here except that we are in a fascinating market that is developing as we speak, and so is the terminology around it.

What is clear is that “Customer Value and Price Optimization” software is providing exceptional benefits to our customers – including many of the world’s leading Insurance companies and Banks – some of which have been made public, and many more which have not. Last year, Insurance & Technology featured a number of insightful articles about customer retention and acquisition – here is one of many interesting quotes from one of these articles – “carriers that get to know their customers well — by effectively leveraging collected data and by simply listening to what they say — have a huge advantage in a tough insurance market.” You can find additional relevant articles and discussions from Insurance companies and Banks using Customer Value & Price Optimization solutions on our website.

Please join the discussion – and let me know what Customer Value and Price Optimization means to you.

Insurance Pricing Best Practices and Trends: An Interview with José Moreno Codina, Principal, Towers Perrin

José Moreno Codina is a Principal with Towers Perrin and market manager in Madrid. He has 33 years of experience in the property and liability and life insurance businesses, and his areas of expertise include market entry, company management and bancassurance distribution. Mr. Moreno has a degree in Economics and an M.B.A. from IESE (the business school of Universidad de Navarra).

Q: We want to talk about pricing, but we cannot start without touching on the current economic situation.  How do you see the insurance industry, and particularly in Europe, dealing with the effects of the financial meltdown?

Carriers that Get to Know Their Customers Have a Huge Advantage

The recent issue of Insurance & Technology features a number of very well-written and insightful articles about customer retention and acquisition.  As Anthony O’Donnell rightly states, “carriers that get to know their customers well — by effectively leveraging collected data and by simply listening to what they say — have a huge advantage in a tough insurance market.”

The cover of the print edition features Lloyds TSB’s chief actuary Martyn Green, who says, among other things “The lifetime value model of a customer translates into massive amounts of value… From the analytical piece alone, the benefits are probably in excess of £15 [US$23.8] million a year…”

Sounds pretty compelling, doesn’t it?

You can read more about the Lloyds implementation of customer value optimization as well as other cases of leveraging customer insight on the I&T site.

The Five C’s of Insurance Customer Value Optimization

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.

Thoughts from Madrid #2: Pricing and Customer Value Optimization – Is it Fair?

(Posted by Guest Blogger Barak Melnik)

Another popular topic at the Madrid conference was the question surrounding the fairness of differentiating prices, services, and offerings based on customer characteristics. “I am not sure I would like it if my bank offered a lower loan price to someone who has the same exact risk level as me.” “Once customers will find out there is price discrimination between regions in the same bank they will rebel”. Needless to say, I received many questions about the regulatory compliance of price optimization.