To beat their competitors, carriers need an overarching view of their customer data to discover new marketing and cross-selling opportunities. Some insurers have started to use predictive modeling and other techniques to methodically assess customer behavior and target the right customer with the right products and services.

Insurers have been slow off the starting line to embrace customer segmentation tools and techniques. While customer profiles serve as the basis for reaping greater profits from existing clients, and for attracting new ones, only about one-third of life and P&C carriers in North America have created a single view of the customer to be used for cross-selling and service, according to a study in third-quarter 2008 by Gartner Inc., a Stamford, Conn., research firm. In fact, 14% fewer P&C firms had a comprehensive view of customers that quarter compared to the similar quarter of 2007.

By all accounts, the customer segmentation efforts of carriers have trailed those of other industries that harbor similarly rich amounts of customer data. Banks and telecommunications firms have made strides to ascertain their customers' preferences, tastes and habits, and establish progressive customer segmentation plans and strategies, according to Raquel Pinillos, manager of the insurance practice of Daemon Quest, a consulting firm based in Spain.

Meanwhile, carriers tend to either misuse or underuse the information they have about clients. "They do not have a global vision of their client; they just have a policy vision," says Pinillos. "And that is a block to managing the client, and to having useful segmentation. It is very difficult to have customer segmentation when all of your data is not integrated to give you a vision of your client."

Plaguing insurers' attempts to effectively segment customers is the siloed business approach they frequently adopt. An insurance firm's "marketing organizations go out and do their segmentation analysis, the underwriting area does their segmentation analysis, which is obviously pointed toward risk and, unfortunately, never the two shall meet," says Mike Tracy, the sales director for SPSS Inc., a predictive analytics technology provider based in Chicago. While P&C officials fail to share client information with their life and health colleagues (or vice versa), within business lines communication also is woefully inadequate.

"Unless you have a good management structure that says 'we just have to share data across the company,' people are very protective" at carriers, explains Kimberly Harris-Ferrante, a VP and analyst with the insurance industry advisory service of Gartner Inc.

At the same time, large insurers, in particular, are saddled with bulky legacy systems and may have gone through a merger or acquisition, leaving them struggling to extract data from their ubiquitous systems (many of which have been recoded) or to quickly compare information about a client in one system with information about that client in another system. This inability to compare apples to apples hampers insurers' drive for clean data about their customers across the enterprise, which serves as the foundation for segmenting customers.

RETENTION AND ACQUISITION

Still, partly driven by tougher-and more global-competition, some insurers have begun to recognize the primacy of a customer-centric focus, says Pinillos. "Five years ago they had no interest at all in customer segmentation or even in customers," she says. European carriers especially have recognized the importance of being customer-oriented, and middle-sized insurers have been more nimble than their larger peers in accessing and utilizing their customer data.

Carriers such as New York-based MetLife have combined in-house technology and vendor strategies and solutions to better segment their customers. Behind homegrown data mining solutions and business intelligence tools from IBM Cognos, Ottawa, the insurer has achieved savings in its auto and home lines through segmenting customers for its targeted mailings. "When you know who are the right people to mail, then you spend your dollars far more wisely," says Nancy Casbarro, VP of the IT Group at MetLife and part of a unit that supports the carrier's auto and home insurance. Casbarro's unit has developed a warehouse that crosses its products and pulls together all of the information about its customers.

"We want profitable customers, and we want long-term customers," says Casbarro. "From the customer's side of it, they want a company that they can trust, and one that offers products and services that meet their everyday needs."

Using technology from business analytics provider SAS Institute, Cary, N.C., and consulting services from Daemon Quest to carry out its customer segmentation and client orientation strategy, Genesis, the Spanish subsidiary for Liberty Mutual Group, has been "outperforming the market in terms of retention rate and growing significantly in terms of cross-selling," according to Enrique Huertas, Genesis' GM. The firm, which chiefly focuses on auto insurance, is segmenting clients by their value, total volume of premium, social demographics, age and loyalty.

Without a solid customer segmentation strategy, an insurer may suffer from a greater churn rate, as customers ditch the company to find providers more responsive to their needs-or that treat them fairly. For instance, an insurer may see that a policy a customer has with the company is not profitable, so it may try to shed the customer. However, the insurer may not recognize that the customer has five other policies with the company. "Maybe they were very profitable as a whole, but not in one product line," says Pinillos of Daemon Quest. SAS customers have seen cancellation rates drop by 30% for particular business lines they targeted for customer segmentation, according to Stuart Rose, global insurance marketing manager for the business analytics provider.

ECONOMIC CRUNCH

With the severe economic crisis afflicting countries worldwide, insurance customers will be more strapped for cash, think twice about renewal, and as a result, will shop for alternatives, says Gartner's Harris-Ferrante, who projects a higher rate of policy lapse if economies continue to tumble. "With the financial crisis, customer segmentation is playing a big role in preventing customer attrition and turnover," she says. Insurers are not only more proactively talking with customers who may be at risk of letting the policy lapse, but also are using customer segmentation "to identify new product categories you would need that you may not offer today for customers who had different types of financial or insurance needs," she says. Indeed, in today's environment carriers may well focus on customer retention because it can be far less costly than customer acquisition, adds SPSS's Tracy.

Neither Metlife nor Genesis plan to scale back their customer segmentation strategies due to today's new economic realities. Infinity Property and Casualty Corp. (IPACC), a Birmingham, Ala.-based nonstandard personal auto insurer, began designing its newest customer segmentation push in April 2008, after the board gave the claims department approval in the fall of 2007, says Bill Dibble, SVP of claims at the company. He isn't sure the board would have reacted favorably were he to have approached it with the idea in late 2008. But the company unabashedly is where it is, having bought the servers and built the infrastructure for its formal February 2009 implementation, which follows on the heels of its previous work with SPSS on subrogation claims.

"It has really put us in a much better competitive position as far as claims because we are keeping our costs pretty low," Dibble says.

Facing an economic crunch, insurers need to be able to segment the vast range of customers they have-not just the policyholders. If a carrier has 150,000 agents, and 50,000 of them are not profitable, it needs to be more efficient in managing such agents via segmentation, says Pinillos. IPACC subscribes to this liberal interpretation of customer segmentation.

"We feel that the customer is that individual - whether it be the insured who is making the claim or the body shop that is presenting a claim on behalf of an insured or a third party, or to that third party who has an accident," says Dibble.

In its new customer segmentation program, called Right Tracking, IPACC aims to direct claims to the proper specialist. The insurer is trying to maximize the experience for both claims specialists and policyholders by eliminating the touchpoints the latter has in having a claim settled. Rather than having policy holders get IPACC representatives who can't help them and who pass them elsewhere, IPACC, working with SPSS, is using predictive analytics to better ensure that the appropriate specialists process claims at the first inquiry.

"If we have a satisfied customer, we know that customer will be a repeat customer," Dibble says. And by creating specialists in certain areas IPACC can pay the experts for processing more complex claims differently from those processing less complex ones. "And when we have a better satisfied customer, there probably are fewer bogus claims that develop as time goes on," he adds.

THE ROAD AHEAD

Carriers have a long way to go before rivaling other financial services industries in customer segmentation. Much of the progress that carriers can make will come via an attitudinal change. Rather than traditional customer segmentation techniques in which they segment against old-fashioned demographics such as the age, race and customer place of residence, as well as the insurance product they purchased, insurers should look at individuals' stage of life, says Gartner's Harris-Ferrante.

Behavioral aspects need to be assessed, agrees Rose of SAS, such as: "What do I know about this customer already? What are their buying habits? Do they pay their premiums on time? And have they got a high claims ratio?" Thus, the carrier needs to cull more information from its agents.

Insurers also need customer profitability assessments to be more forward looking rather than historical. Instead of looking at the customer's current profitability and producing an accompanying score, insurers should gauge their future profitability, says Harris-Ferrante.

Further, carriers need to forge greater consistency in the way they house and format data - something they can do by creating data marts. With consistent data stored in systems across the enterprise and with different departments freely sharing data, the carrier will be well on its way to having a holistic view of its customers' demographics, behavior and relationships with the company, which can enable it to better retain and pursue new clients in trying economic times.

Daniel Joelson is a freelance business writer based in Alexandria, Va.

(c) 2009 Insurance Networking News and SourceMedia, Inc. All Rights Reserved.

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