Navigating the "New Normal"

In a business environment of changing customer and regulatory demands and challenging economic realities, insurers need to respond, and we have to respond profitably, quickly and flexibly to change with more customer-centric business models.

Something interesting is happening in the insurance industry. A few months ago, I happened upon the results of a survey that Celent, an insurance research consultancy, conducted with a broad group of insurance industry CIOs in 2011. Celent noted that insurers are experiencing a "new normal" – "an economic and insurance industry environment with an extended period of flat, minimal, or negative economic growth; persistent high unemployment; very low interest rates; and reluctance by businesses and consumers to make major purchases and investments." One of the key questions asked in the survey was to understand at what level insurers are thinking and acting differently as organizations in the face of this "new normal": 90 percent of small insurers, 44 percent of mid-size insurers and 85 percent of large insurers responded that they were thinking and acting in either somewhat or significantly different ways. As noted by one CIO and echoed by others, "Building out stronger analytics and self-service models for business units to challenge the 'new normal'," emerged as a top priority.

Insurance companies and analytics go hand in hand – analytics have been used in the industry for years in support of pricing and underwriting strategies, risk management, customer acquisition and retention activities – just to name a few. But many insurers operate in analytic silos. Insights developed by one part of the organization or functional area often are not leveraged in other areas of the business. For example, are the marketing teams using pricing or underwriting model decisions or insights to drive marketing strategies? For most insurers, the answer is no. Without an integrated business analytic strategy, how can insurers bring disparate insights together to grow and profit in the face of this "new normal?"

In tandem with the "new normal," power continues to shift towards consumers. Historically, insurers focused on understanding and managing internally-focused transactional customer/producer relationships. Today, it's becoming more important to deliver a more emotional and interactive experience that results in a better predictive understanding of customer/producer needs and wants. Additionally, consumers have heighted expectations around how they want to interact with the company. Providing a multi-channel customer experience is no longer a nice to have, it's a must have. As a personal example, a few years back I ditched my agency insurance company in favor of a competitor simply because I wanted to access and service my policy online. Obviously, agent-sold insurers have taken notice as they've expanded their business models to encompass direct distribution channels (the Allstate acquisition of Esurance is a notable example) as well as expanding their capabilities across interaction channels (mobile claims apps anyone?).

For insurers with third-party distribution, another transition is in play. For many of these organizations, the producer-client relationship has been sacrosanct. The producer "owns" the customer relationship. There are indicators that that is changing as well: I've had discussions with several life insurers this year that are rethinking that model and changing the dynamics of those relationships. These insurers are working on strategies not only to enable producers, but also increase direct interaction and develop stronger relationships with policyholders. Another "new normal" materializes.

The most amazing thing is how fast the "Age of Consumerization" is changing and evolving an industry not typically known for speed to action. When this "Age" collides with the New Normal you're left with a need to dynamically respond to and drive consumer demand in a profitable way. The exciting news is that the industry is rising to the challenge. In the past year, I have seen several large insurers refocus their businesses around holistic consumer-driven strategies encompassing a complete insurance analytic lifecycle around distribution, pricing, risk, and profitability. These cross-organizational initiatives are doing things like integrating pricing strategies and expected profitability indicators in their marketing campaigns to ensure that they are acquiring and retaining the most profitable customers. Imagine – actuaries, marketers, underwriters and risk managers working in harmony! (I am reminded of the line from Ghostbusters, "Dogs and cats living together…mass hysteria!").

Organizations like Bank of America are revolutionizing their financial model around the customer. In a panel discussion at a recent industry event, a representative of the company said: "In the consumer bank, we shifted to a customer segment view – this may seem strange coming from a product executive, but this was the right way [to manage our business]. In the past, we were incented to sell product, but we changed our focus. Now, we never ask how many products are sold – we ask about customer interactions. We're changing our general ledger to focus on customer segment profit and loss (P&L) and are moving away from product P&L – we need to keep score of the way we run our business; we need to walk the talk."

Outside of the organizational and cultural challenges that you might expect as insurers are going down this path, they are also rapidly discovering that their technology and data infrastructure is not optimized to support these strategies.

The volume of social media and external consumer information that companies can tap into has exploded – and this information is not just important to understanding customer needs – it's critical in helping the insurer understand the impact of assuming policyholder risk and expected profitability. Traditional data warehouses struggle to support this new paradigm: If you're lucky, you probably have the information in your warehouse that helps answer the question "what are my customers doing?" The external data – all the interaction and behavioral information – adds to the context of your transactional data and helps answer why your customers are doing something. And if you capture that information in a timely manner and understand what's relevant, you'll be able to act on it more quickly.

But is the industry ready to capitalize on all that data? In the Celent CIO survey, respondents were asked: "What is the total multi-year cost of your three most significant IT initiatives?" and data mastery popped up as the number three initiative behind policy administration and core system replacement. In the words of one of our insurance clients, "We've overused the data warehouse pattern – it doesn't work for analytics." The industry is still struggling with managing their data and gaining the ability to quickly adapt their infrastructure — and, as noted in the survey, continuing to spend a lot of money on it.

[For more on navigating a difficult economic environment, see Slow Growth, Regulation Driving Insurer Focus on Tech-Driven Operational Improvements, KPMG Survey .]

The insurers mentioned above that are developing these cross-functional customer-centric analytic strategies need to redesign their data infrastructure and strategies to support these initiatives. These customer-centric visions of data don't replace, but rather leverage, investments made in existing data warehouses (I mean, someone still has to do statutory and financial reporting, right?). The architecture only represents one leg of the stool – data management and governance remain critical.

This all seems a little overwhelming – the world moves faster and faster, economic pressures are squeezing the industry, business models need to be more customer-centric, and we have to respond profitably, quickly and flexibly to change. How do we do this? Think big and act iteratively. The most successful initiatives that I have seen involve business strategy (with a capital S) componentized in ways that allow the insurer to prove out concepts, learn from them, and build on them. Align your goals around the customer. Think about process-centric organizational models that bring together teams across functional areas to tackle these big initiatives together.

About the Author: Rachel Alt-Simmons is Senior Industry Consultant for Insurance at Cary, N.C.-based SAS. Simmons has driven business intelligence initiatives at Travelers and Hartford Life and has been Research Director for Life & Annuity at research firm TowerGroup.