As the insurance industry becomes ever more competitive, many insurers are focusing greater attention on customer recruitment. This is a crucial part of marketing programmes, but often far more important than this is customer retention and cross-selling – areas which IBM feels insurers can improve upon.
Indeed, insurance customers are letting their policies lapse at rates as high as 35% and customers generally do not buy more than one product from an insurer. When they do, their decision is usually based on specific features and price, rather than because of the insurance provider.
Often, cross-selling and customer retention provide far more opportunities for insurers than recruitment of new customers. Insurers should remember the management rule "80:20" – that is 80% of business comes from 20% of customers.
However, despite this, many marketing campaigns across the majority of industries are still not focused enough with their targeting. It is not uncommon for a direct mail campaign to receive around a 1-1.5 per cent response rate, and when the cost of mailing to an individual can be around $15 (£9), it can be a very expensive process.
Insurers need to develop a much better understanding of their customers, the relationships they have with them, and how these can be optimised in terms of products and services provided. This process is known as customer relationship management (CRM). CRM programmes can help identify those customers that an insurer should try and retain and those that may not be profitable. It may also provide valuable information regarding the characteristics of "ideal" customers which can be used to tailor marketing campaigns making them more effective and less expensive.
Insurance customers can also benefit from CRM because they can receive a more customised service, insurance products that suit their needs better and in some cases, reduced premiums.
As well as generating further sales, cross-selling can also instil greater loyalty in customers – having more than one product with a particular company can result in the customer developing a stronger allegiance to that company. Loyalty is especially important when one considers the fact that the longer a customer stays with an insurer, the more profitable they can become. On average, general insurance customers start to become profitable for insurers after about four years and those with life insurance and investment based products become profitable when approaching ten years.
Winning through loyalty
Loyalty can also filter down to a customer's family, who on their recommendation, may become customers.
The benefits of customer retention and cross-selling are many but few insurers are able to do this effectively because they do not have a thorough understanding of the relationships they have with their customers.
This is an area that many insurance business solution providers, including IBM, have recognised as being an area of potential growth in the near future.
Last year, IBM launched DecisionEdge for Relationship Marketing Insurance, a business intelligence solution for insurance companies that allows them to gain a comprehensive view of customers and helps determine how individual customer relationships can be maintained and enhanced.
Two leading insurance companies – US-based Farmers Group Inc. and Swiss-based Winterthur Insurance – are both using DecisionEdge.
The former is using it to analyse its claims data to help it determine customer risk more accurately. It has already found that covering a certain type of high-risk sports car is quite profitable – provided the owner also has at least one other vehicle. This information will enable Farmers to change its pricing structure in this area making it more affordable for customers and yet still enable it to meet its targeted margins.
Winterthur is using DecisionEdge to help determine which customers are the most likely candidates for new or existing insurance offerings, and as a result aims to double its campaign response rates and cut its direct mail costs by 50%.
Insurers have a wealth of information on their customers and prospects which can be used to improve sales and profitability greatly. However, they must find ways to access and use this information effectively. They should also be looking to expand on the level of customer data they have.
This can be achieved through obtaining it from third parties or by looking at the type of information they currently generate through their own communication channels with customers and business partners and how this can be improved upon.
In this information age, customers certainly know more about insurers than they did five years ago.
As a result, they are becoming more demanding and insurers can only meet these new demands if they have a better understanding of their customers and what they want. It is imperative that insurers focus more attention on customer relationship management.