When economic times are tough, executives turn their focus to increasing revenues and reducing costs. It's easy to say, but executing this simple idea can prove much more difficult, especially in the insurance industry.The events of Sept. 11, 2001 and the recession have brought the healthy profits the insurance industry saw in the 1990s crashing down into the depths of financial hardship.
And while terrorist attacks and economic instability may seem like old news to some, when these factors are combined with accounting irregularities, fraud and corporate bankruptcies, the result is a dramatically destabilized insurance sector. Shriveling investment portfolios, rising claims costs and increased government scrutiny and regulation have all increased the pressure on insurance executives.
Legislation to counter the concerns of security, privacy and the threat of such white-collar crimes as money laundering, as well as rising costs of claims fraud, have demanded greater emphasis on regulatory compliance and risk management. Certain risks such as operational risks, previously not much of a priority, are increasingly on the top of many executives' minds.
Declining investment gains, increasing risk exposure and regulatory compliance aren't the only issues keeping insurance executives awake at night.
Customers' needs are changing and they are becoming more and more demanding. A plethora of choices has made switching providers easy, and insurers are struggling to retain their existing customers.
Vagaries of capital markets have forced decision-makers to take a good look at their strategies for improving profit margins. They are fast realizing that organic growth is essential for success and that they must have an effective customer-focused strategy in place.
But the concept of customer-centricity does not simply mean that more money must be spent on marketing campaigns to acquire new customers. Rather, the key to profitability lies in spending intelligently and making the best use of available resources.
A foundation of data
By its very nature, the insurance industry generates revenue through careful, calculated risk assessment. One central concept of risk assessment is that all customers are not alike. They exhibit different behaviors and attitudes, and should be treated accordingly.
Customer differentiation that helps maximize revenue from customers while minimizing the costs to serve them is particularly valuable for insurance companies. However, it is not so easy to implement such a strategy. Companies need workable, effective solutions that enable them to take intelligent actions quickly in response to rapidly changing economic conditions.
Unfortunately, few insurance companies have been able to access and analyze their data effectively enough. Many organizations have invested vast sums of money in operational systems and infrastructure to capture and store huge volumes of data-information about customer behavior, demographics, campaign results, even claims history.
However, as this data is often scattered throughout the enterprise, between geographies and lines of business, it is extremely difficult for companies to bring it all together and analyze it effectively to gain a truly comprehensive customer view.
Mining for gold
The true challenge for insurers is to find the "hidden" behavioral patterns, relationships and trends about their customers and markets from volumes of data they collect every day-and use that information to support strategic business decisions.
Advances in data mining technology are providing insurers the ability to derive intelligence from mountains of data. Insurers can now analyze trends, model future behavior of their customers and markets, and use that knowledge to improve customer relationships, enhance their marketing efforts, optimize pricing and manage risks.
Insurance companies are beginning to realize that pure transactional systems are not enough. To succeed in current market conditions, they need to be proactive, not just reactive.
Today, data mining is a growing field, particularly applications that support industry-specific business processes. However, the results from data mining applications will be substandard if the data quality is poor.
Therefore, insurers are increasingly investing in data management projects-to cleanse, collect, transform and load data from their various siloed operational systems into data warehouses-and then mining this data.
In the past, insurers struggled to analyze their customers' needs and then tailor their services accordingly. The idea of consolidating data residing in various systems haphazardly across the organization and employing it to support business objectives seemed impossible.
However, insurance companies now have the tools to meet the ever-changing demands of their customers.
As profitability increases and customer satisfaction soars, those responsible for the influx of data management, and, in particular, data mining technology will continue to be called upon to revolutionize the way insurance companies do business.
Ritu Jain is the global industry strategist for insurance at Cary, N.C.-based, SAS.
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