Now more than ever, carriers need to focus on keeping today's skeptical customer satisfied.
When a company is the size of Travelers Property Casualty ($66 billion in assets), a one percent increase in customer retention is worth millions of dollars. And since acquiring a new customer costs most carriers five to 10 times more than retaining an existing one, it would behoove all insurers to get their retention strategies-and the technologies that support them-in line.
But despite the fact that it takes carrier's two to five years to recoup the resources spent in getting a customer on board, "most insurers are set up for acquisition rather than for retention," says Arthur Hughes, vice president of the Database Marketing Institute (Fort Lauderdale, Fla.), and director of database marketing strategy for DoubleClick (Schaumburg, Ill.). "If you allocate $1,000 to acquisition and $1,000 to retention, you will get more bang for your retention buck."
So if retention is much more profitable than acquisition, why are carriers' marketing strategies slanted towards acquisition? Hughes offers: "One reason is because retention profits are hard to measure." But through the use of technology, carriers have the ability to identify the most profitable customers, keep them loyal and prove the success of their retention efforts. And for carriers that don't want their policyholders snatched away, now more than ever, an effective retention strategy is essential.
This is due partly to the fact that "customers are becoming more and more savvy, as well as skeptical of large corporations," contends Ron Shevlin, principal analyst and an author of Forrester Research's (Cambridge, Mass.) report Winning the Changing Financial Consumer. "Because they are becoming more insecure about their financial lives, they are looking for people that will make recommendations that are honest, open and beneficial," according to Shevlin, "not ones that are made based on a firm's bottom line. Today's customers have been conditioned to identify marketing hype."
And carriers that think they can get away with not playing nice in this buyer's market need to think again. "Because of technological investments like the Internet there is a lot of competition between insurers," relates Ritu Jain, global insurance industry strategist, SAS (Cary, N.C.). "And for policyholders, the Internet makes it easy to switch providers."
In an effort to encourage retention, carriers are leveraging technology to identify their most profitable customers-whether the customer is an agent or a policyholder-as well as those who have the most profitability potential. Armed with this data, a carrier can specialize its marketing efforts to ensure that the most profitable will keep coming back for more.
"Insurers are using various data mining and other business intelligence tools," says Jain. "Some are using external applications, but most have developed models internally to help them understand the costs of servicing the policyholder, as well as the generated premium."
When it comes to assessing an agent's profitability "carriers look at the agent's book of business," reports Tim Plunkett, global industry consultant leader, PeopleSoft (Pleasanton, Calif.). "Carriers can examine frequency and severity of loss in order to help them better manage their agents."
The level of technological sophistication of carriers' methods varies, reports SAS's Jain. "Some may use 20 to 30 variables, and some are utilizing a hundred or more." But despite the number of factors that play into prediction, "more and more insurers are getting interested in understanding the overall customer lifetime value," says Jain.