Regardless of how insurance carriers reach customers–whether it's as a direct writer or through the independent agent channel–the one thing all insurers have in common is a passion for customer retention.

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

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

Karen Pauli, research director in the insurance practice at TowerGroup, agrees. “Commercial lines shoppers are shopping because it pays to do that,” she says. “Companies are competing for a dwindling number of commercial lines accounts. Brokers are scrambling to keep customers around because everybody's after commercial lines customers.”

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

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

FAMILIARITY BREEDS CONTENT

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

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

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

Rates often don't take the blame, since carriers can disguise rating increases, she asserts. “[Insurers] have encouraged people to go on monthly pay [schedule], and the rate increases are kind of invisible to some degree because [customers] are paying in smaller increments,” she says. “But poor claims service will make people leave pretty quickly.

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

DIFFERENTIATING CUSTOMERS

AEGON Direct Marketing Services (ADMS) Inc. studies how predictive analytics can be used to retain customers. “One of the first questions we asked [when beginning to use analytics] was: Are there customer characteristics that can be used to identify whom we are going to be able to retain and whom we are not?” recalls Angela Williams, director of marketing science for ADMS. “Based on our findings, we began developing the models and now are testing strategies on how to deploy them.”

One possible strategy could be to route customer calls based on the models, continues Williams. Calls from customers predicted to be harder to retain would be answered by more-seasoned call-center representatives. Calls from customers predicted to be easier to retain could be answered by less-experienced representatives. This would allow the less-experienced reps to develop more confidence in their abilities.

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

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

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

However, the carrier currently uses analytics in a number of other areas of the company. “We've been using it for pricing segmentation for several years now,” she says. “We do financial modeling and cat modeling, and we use predictive analytics to help price the risk appropriately based on historical data. So, this is just another area we think we can benefit from.”

Analytics not only educates insurers on customers they want to retain, but it also helps carriers make decisions about customers they don't want to keep. “Let's keep the right customers,” says Carney of insurers choosing to use such analytics. “Let's make sure we are pricing policies appropriately based on [customer] behavior and characteristics. There's a huge amount of interest from an underwriting perspective along with having an offer that is compelling for the customer,” she says. “What insurers need to be doing is using predictive analytics to make the appropriate underwriting decisions so a particular policy is rated appropriately and the risk and pricing are done the right way. It makes no sense to be doing loss-leader business in this industry.”

OLDIES AND GOODIES

Differentiating between customers who can be retained and those who can't often comes down to the customer's tenure as a policyholder, indicates Williams. “How long a policy has been in force is one of the key drivers,” she says. “If [policyholders] have had the policy for a year or more, they are more likely to be retained, but if they have had the policy for two-to-six months, retention is less likely because they have not established a relationship 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 the policy, and whether the customer owns other policies with the insurance company. “We have models in place that score people off those types of criteria and are integrated into the customer-service screen,” says Williams.

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

ADMS is using software provider SAS to help develop models for determining someone who is going to be retained vs. someone who is not, explains Williams. ADMS also has the SAS Enterprise Miner tool in place. “Some statisticians like to do the SAS coding themselves,” she says. “Some of them like the ability of the GUI to help them build the model. Once the model is developed, we utilize the SAS [software] to apply the algorithm to the population.”

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

LIFE EXPERIENCE

The economy has been a big factor in life-side customer behavior, according to Pauli. “From the second half of 2008 through the first half of 2009 people were flipping out of their life coverages like crazy,” she says. “[Policyholders] were going from variable annuity products to simple life insurance, so the call centers were just overwhelmed.”

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

THE ANALYTICS MARKET

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

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

Pauli believes carriers need the ability to look at their customers, figure out who is the most profitable, and make certain those customers are rated in the most effective way so they don't have 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 have hundreds of thousands of customers, and if you don't have analytics, you could be rating a very good customer into a high rating mechanism just because you don't understand your customers well enough.”

The push for analytics started off with pricing analytics and decisioning analytics to drive straight-through processing, she notes. Once that was in place, carriers could start building their data to provide more sophisticated pricing, which enabled carriers to reward their best customers.

“From the upper midmarket to the jumbos, [analytics] is pretty much standard operating procedure for personal auto, and it is migrating to homeowners in many cases,” says Pauli. “For the midmarket 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 with self-service and channel conflicts, for example, customer movement between agents and the direct channel.

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

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

Penn National has a customer contact center available 24/7 to accept claims information, and the carrier wants it to be a hub for other forms of customer service, as well. “It's available during business hours for billing information, and [representatives] can take payments,” says Schatz. “Another area we consider important from a customer service perspective is operating a wide range of billing and payment options. We just recently began accepting credit card payments.”

KNOW YOUR CUSTOMERS

Penn National works solely through an independent agent distribution channel, and Schatz maintains the carrier has close ties with its agents through regular meetings and technology councils where agents give advice on the carrier's systems and offerings needed to keep Penn National competitive.

From this interaction, the carrier has learned “agents are concerned with speed,” says Schatz. In that regard, Penn National recently implemented a personal lines portal so the agents can get quotes immediately online as well as make policy changes.

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

Carriers obviously want their customers to be satisfied with the level of service offered, but Pauli believes the reality is carriers can't divvy out the same amount of attention for every customer.

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

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

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