Regardless of how insurance carriers reach customers–whetherit's as a direct writer or through the independent agentchannel–the one thing all insurers have in common is a passion forcustomer retention.

The reason for its importance can be explained in part by thestaggering cost of acquiring new customers. According to softwareprovider SAS, it costs 10 times the amount of money to write newbusiness than to retain customers.

Attention to retention is drivenby “the cost to acquire new customers,” says Ellen Carney, a senioranalyst with Forrester. “It's the shop-and-switch behavior [ofconsumers], especially in this economy right now. Everything hasbecome so transparent. There's a huge incentive [for policyholders]to keep checking on their automobile premiums. Now, you are seeingthat kind of interest with homeowners' policies, as well.”

Karen Pauli, research director in the insurance practice atTowerGroup, agrees. “Commercial lines shoppers are shopping becauseit pays to do that,” she says. “Companies are competing for adwindling number of commercial lines accounts. Brokers arescrambling to keep customers around because everybody's aftercommercial lines customers.”

As for the expense of new customers, Pauli points out, even arelatively simple line of insurance, such as personal automobile,has commissions and processing fees to deal with, and it gets moreexpensive with commercial lines.

(For a look at what Grinnell Mutual Reinsurance is doing tocontrol its content management, click on the Business Solutions article or this article on customerservice.)

FAMILIARITY BREEDS CONTENT

Customer intimacy is a major focus at Penn National Insurance,indicates Britta Schatz, director of application development andsupport for the insurer. “Customer intimacy is our driver tounderstand customers and make sure we're satisfying their needs,and our plan is to stay close to them and understand what they wantand need,” she says. “Whenever we can, we want to put applicationsand processes in place to support that goal.”

Customer service is one of the driving forces behind customerretention at Penn National, according to Schatz. Claims service isone example of how seriously the carrier treats claimants. “Weperform claims surveys to make sure our claimants have good thingsto say about the service they receive from the claims department,”she explains. “Where they don't [have good things to say], we makeadjustments.”

Why do policyholders switch? Pauli believes, from a P&Cperspective, poor claims service is the number-one reason. “If youtake a look at department of insurance complaints from around theworld, bad claims experience is exponentially higher than rates [asa cause for leaving],” says Pauli.

Rates often don't take the blame, since carriers can disguiserating increases, she asserts. “[Insurers] have encouraged peopleto go on monthly pay [schedule], and the rate increases are kind ofinvisible to some degree because [customers] are paying in smallerincrements,” she says. “But poor claims service will make peopleleave pretty quickly.

“The analytics come into play in terms of being able to identifyand fast track claims that just need services vs. those where thecircumstances could blow up because the loss details aresignificant,” says Pauli.

DIFFERENTIATING CUSTOMERS

AEGON Direct Marketing Services (ADMS) Inc. studies howpredictive analytics can be used to retain customers. “One of thefirst questions we asked [when beginning to use analytics] was: Arethere customer characteristics that can be used to identify whom weare going to be able to retain and whom we are not?” recalls AngelaWilliams, director of marketing science for ADMS. “Based on ourfindings, we began developing the models and now are testingstrategies on how to deploy them.”

One possible strategy could be to route customer calls based onthe models, continues Williams. Calls from customers predicted tobe harder to retain would be answered by more-seasoned call-centerrepresentatives. Calls from customers predicted to be easier toretain could be answered by less-experienced representatives. Thiswould allow the less-experienced reps to develop more confidence intheir abilities.

Penn National has yet to move in the direction ofdifferentiating the qualities of good customers and not-so-goodcustomers, notes Schatz. “In fact, we believe we should beproviding the highest level of service to all our policyholders,”she says. “But we recognize there definitely can be informationgathered and analyzed based on customer segmentation, and that'ssomething we are researching right now. It is a direction we wouldlike to explore.”

The first step for Penn National is to undertake a study of thecarrier's master data management and customer data integration.“Part of our data strategy is to implement a master data managementprocess, and once we've collected and stored the customer data andhave a single view of the customer, we can use the analytics anddata-mining tools to look at the data and better segment ourcustomer population,” she says.

Penn National hopes to have the program up and running thisyear, according to Schatz.

However, the carrier currently uses analytics in a number ofother areas of the company. “We've been using it for pricingsegmentation for several years now,” she says. “We do financialmodeling and cat modeling, and we use predictive analytics to helpprice the risk appropriately based on historical data. So, this isjust another area we think we can benefit from.”

Analytics not only educates insurers on customers they want toretain, but it also helps carriers make decisions about customersthey don't want to keep. “Let's keep the right customers,” saysCarney of insurers choosing to use such analytics. “Let's make surewe are pricing policies appropriately based on [customer] behaviorand characteristics. There's a huge amount of interest from anunderwriting perspective along with having an offer that iscompelling for the customer,” she says. “What insurers need to bedoing is using predictive analytics to make the appropriateunderwriting decisions so a particular policy is ratedappropriately and the risk and pricing are done the right way. Itmakes no sense to be doing loss-leader business in thisindustry.”

OLDIES AND GOODIES

Differentiating between customers who can be retained and thosewho can't often comes down to the customer's tenure as apolicyholder, indicates Williams. “How long a policy has been inforce is one of the key drivers,” she says. “If [policyholders]have had the policy for a year or more, they are more likely to beretained, but if they have had the policy for two-to-six months,retention is less likely because they have not established arelationship with the company yet.”

Other factors in the models include the age of the customer,where the customer lives, the type of policy and the premium on thepolicy, and whether the customer owns other policies with theinsurance company. “We have models in place that score people offthose types of criteria and are integrated into thecustomer-service screen,” says Williams.

There are costs associated with retaining a customer as well aslosing one, continues Williams. “We have to weigh how much we arewilling to spend on retaining someone who may turn around andcancel a few days or weeks later,” she says. “Customers who have alow likelihood of being retained could be routed through anautomated system to cancel their coverage.”

ADMS is using software provider SAS to help develop models fordetermining someone who is going to be retained vs. someone who isnot, explains Williams. ADMS also has the SAS Enterprise Miner toolin place. “Some statisticians like to do the SAS codingthemselves,” she says. “Some of them like the ability of the GUI tohelp them build the model. Once the model is developed, we utilizethe SAS [software] to apply the algorithm to the population.”

The predictive models still are in the testing environment forADMS, but Williams expects good results. “We have a strong customerretention track record,” she says. “We expect implementing thistype of modeling will increase our retention experience.”

LIFE EXPERIENCE

The economy has been a big factor in life-side customerbehavior, according to Pauli. “From the second half of 2008 throughthe first half of 2009 people were flipping out of their lifecoverages like crazy,” she says. “[Policyholders] were going fromvariable annuity products to simple life insurance, so the callcenters were just overwhelmed.”

Many policyholders were not leaving their carrier, though.Instead they were switching their product mix, she adds. But thathas its price, too. “It does cost a lot to flip [a policy] over,”she says. “Plus it's a loss of income because [customers] weregoing from more expensive, elaborate, sophisticated products tobasic savings products. There was a big premium drop forlife/annuity carriers. A lot of it wasn't loss of customer; it wasloss of a complex product to a simple product.”

THE ANALYTICS MARKET

There wasn't a hotter horizontal technology in 2009 thanpredictive analytics, in Carney's view, and that is unlikely tochange in 2010. “It got even more interesting when IBM plunked downall that money for SPSS,” she says of the technology giant's 2009purchase of the analytics provider.

The vendor market still is rippling with deals involvingproviders that have analytics as part of their software package.“What I have been telling [vendor] clients is if you have anyelement of analytics in what you do,” Carney says, “make sure youhave that front and center in your messaging because it iscapturing a huge amount of interest among carriers and banks rightnow.”

Pauli believes carriers need the ability to look at theircustomers, figure out who is the most profitable, and make certainthose customers are rated in the most effective way so they don'thave an excuse to go elsewhere.

“You want to make sure your best customer gets the best price,”says Pauli. “Analytics is the only way to do that. Insurers havehundreds of thousands of customers, and if you don't haveanalytics, you could be rating a very good customer into a highrating mechanism just because you don't understand your customerswell enough.”

The push for analytics started off with pricing analytics anddecisioning analytics to drive straight-through processing, shenotes. Once that was in place, carriers could start building theirdata to provide more sophisticated pricing, which enabled carriersto reward their best customers.

“From the upper midmarket to the jumbos, [analytics] is prettymuch standard operating procedure for personal auto, and it ismigrating to homeowners in many cases,” says Pauli. “For themidmarket companies, when they bring in new policy admin systems,analytics frequently come with the system.”

SOURCES OF SATISFACTION

In the mix of retention issues, carriers are wrestling withself-service and channel conflicts, for example, customer movementbetween agents and the direct channel.

“Consumers are driving this for a lot of carriers becauseconsumers want self-service and multiple channels, so they can doit direct themselves for a simple automobile policy. But if theyhave more complex needs, they can hand it off to an advisor of somesort for that more focused attention,” says Pauli. “It's anevolutionary process because it involves huge technology issues: Isyour data in order? Do you have BPM tools, and can you lay theanalytics on top of them? That's when you become more efficient andyou can offer self-service, because you can manage astraight-through processing basis.”

Another factor in retention is the call center, contends Carney.“If the call center [representatives] can identify the profile ofclients who meet the particular criteria of valuable customers, youneed to be able to prioritize their handling in the call center,”she says. “Price is an important criterion in retention, butservice also is important, especially when someone has to file aclaim. That's usually the area where insurance companies falldown–satisfaction around the claim.”

Penn National has a customer contact center available 24/7 toaccept claims information, and the carrier wants it to be a hub forother forms of customer service, as well. “It's available duringbusiness hours for billing information, and [representatives] cantake payments,” says Schatz. “Another area we consider importantfrom a customer service perspective is operating a wide range ofbilling and payment options. We just recently began acceptingcredit card payments.”

KNOW YOUR CUSTOMERS

Penn National works solely through an independent agentdistribution channel, and Schatz maintains the carrier has closeties with its agents through regular meetings and technologycouncils where agents give advice on the carrier's systems andofferings needed to keep Penn National competitive.

From this interaction, the carrier has learned “agents areconcerned with speed,” says Schatz. In that regard, Penn Nationalrecently implemented a personal lines portal so the agents can getquotes immediately online as well as make policy changes.

“New business is turned around mostly within 24 hours,” shesays. “That's issuing the policy from the time we receive it.Online, real-time quotes and policy issuance within 24 hours iswhat we work for.”

Carriers obviously want their customers to be satisfied with thelevel of service offered, but Pauli believes the reality iscarriers can't divvy out the same amount of attention for everycustomer.

“If you are a customer with one low-level product and theanalytics says there is no propensity to buy here, then [callcenter representatives] meet those service needs and get off thephone,” she says. “But if analytics indicate this is a customerwith additional buying potential, the first notice of loss oradding a vehicle to a policy takes on a different perspective, andyou try to determine whether these customers have other insuranceneeds the advisor can fulfill. It's an expense issue as well as acustomer retention issue. And this service can't be done only atrenewal time.

“You have to be able to provide consistent experience across thechannels, which the analytics can help to drive, so if [customers]are in the Internet channel, they get an immediate response foradding a vehicle or whatever they are trying to accomplish,” saysPauli. But that's just half the story. “If the agent can't get thatsame response from the carrier, however, you have created adissatisfied customer and an angry distributor,” she concludes.