The Key to Keeping Customers Is Getting to Know Them

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.

As the economic downturn stretches on, many insurers are feeling increasingly anxious about their ability to retain their most profitable customers. Martyn Green, chief actuary in the underwriting department of Lloyds TSB Insurance (LTSB), a division of London-based Lloyds TSB Group (US$637 billion in assets), however, insists that the company's pricing optimization initiative was undertaken in a spirit of opportunism rather than necessity.

That opportunity, he explains, resided in the potential for an accurate understanding of customer lifetime value to yield tremendous value across LTSB's large book of personal lines insurance. "Pricing is one of the biggest levers of that value, and that's where it could be added most quickly," Green comments. "The lifetime value model of a customer translates into massive amounts of value, and you can change it very easily by changing pricing."

Acting on that insight, LTSB engaged Ramat Gan, Israel-based Earnix to provide pricing optimization and advanced analytics for its underwriting division. According to Green, the broker/underwriter conducted a pilot to compare Earnix Optimiser with its existing pricing processes and tools, revealing opportunities to substantially increase profit without affecting retention. LTSB was able to identify customer segments with high probability of cancellation and devise a plan of pre-preemptive actions to retain the business, he relates. On the strength of those results, LTSB signed a contract in early 2008 to implement Earnix as its standard pricing and customer optimization platform.

LTSB plans to create a fully automated process for price optimization that will reduce the rate creation cycle to about three weeks -- speeding the creation of value, Green says. Currently, he notes, it takes five to six months to launch rates, log the experience, analyze it and launch new rates.

Achieving the automated process requires full integration of the Earnix solution with LTSB's policy admin systems, which is scheduled for completion by the end of the year, according to Green. In the meantime, LTSB has been using Earnix in a more decoupled fashion. "What we're doing today is using the analytical tool and then shoe-horning that into existing rating platforms," Green says.

While this arrangement lacks the short life cycle and the ability to offer real-time optimized prices through the company's online and call center channels, it already has resulted in substantial benefits on renewal business pricing for LTSB, Green asserts. The Earnix software, he adds, represents an investment of about US$6.3 million within a larger project to bring policy administration in-house, with estimated costs of US$25.4 million.

"We've spent about £12 million [US$19 million] and we're seeing in excess of that in the pricing benefits from our preliminary work," Green reports. "From the analytical piece alone, the benefits are probably in excess of £15 [US$23.8] million a year -- and that's before we have the live, built-in system."

Challenging Times

LTBS's success would be notable at any time, but in today's business environment it underscores not only the opportunity for the insurers that achieve a better understanding of their customers, but also of the threat faced by those that don't. These are challenging times, notes Michael Costonis, executive director of Accenture's global claims practice, pointing out that capital has been impacted by investment losses and recent significant claim losses, the economic downturn is depressing sales of homes and automobiles, past pricing premiums are eroding, competition is intense and customer churn is high.

To win in the current customer acquisition-and-retention battle, insurers need to know who the most profitable customers are in order to offer them differentiated service, Costonis counsels. Though customers differ in both profitability and behavior, he says, carriers' service efforts often operate oblivious of the consequences of these differences. (For more on differentiated service, see related article, page 33.)

For example, about 30 percent of the insurance buying population is price-motivated "serial shoppers" without loyalty, according to Costonis. Yet many carriers service these customers no differently than profitable customers with multiple products, who tend to be loyal, he adds. They thus waste resources on customers indifferent to their efforts and underserve those who expect more. "We know from Accenture global customer satisfaction research that there is an expectations gap between what customers want, expect and value, and the experience that is often delivered to them," Costonis says.

It's not hard to find examples of such customers. Craig Weber, the San Antonio-based SVP of Celent's insurance practice, laments the gap between insurance and other industries in this regard -- both as an industry consultant and as a customer. Following the recent birth of his son, he says, a variety of vendors seemed to be aware of the life-changing event -- but not his insurers. When Weber deals with American Express, for instance, its call center representatives not only solve whatever his problem might be, they also find interesting and subtle ways to offer him products or services based on his recent life event, he relates. But, "There's zero chance that an insurer would do that today," Weber contends.

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio