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Connecting Insurance Companies with Their Customers
A Global View Across Brokers, Data and Countries
Mr. Paul Ward
Vice President, Customer Experience, YourMusicOn
G-CEM International Partner (US)
www.Pkward.com
This article is exclusively written for GCCRM.
From curious to furious
A few months ago, my wife, who acts as our family chief financial officer, called to get a car insurance quote from American Automobile Association (AAA). Our provider at the time was Progressive, which is part of the $4 billion organization Progressive Direct Group of Insurance Companies. She suspected we were paying too much and was curious to see what the price difference might be.
Within just a few minutes on the phone, her mood switched from curious to furious. AAA was offering identical coverage to Progressive's for a third less. We became examples of what the insurance industry hates: churning customers.
Since then, I've watched Progressive's business carefully and figured out that their web site, which promises you insurance quotes from Progressive and its competitors, is really a CRM tool designed to "fire" low margin and/or high-risk customers.
And, as such, Progressive is doing state-of-the-art CRM. Unfortunately, the state of the art in CRM insurance is inconsistent at best. Only the most visionary of insurers will be able to thrive in the new global marketplace for insurance and other financial services.
It's not that insurance companies haven't been trying to jump on the CRM bandwagon. Though they were late starters, many of them are embracing solutions from Siebel, Onyx, Pivotal, and Pegasystems, among others. They've received help from data quality vendors such as Teradata and analytics firms like SAS. But many early CRM adopters ran into high costs and frequent failure. A 2002 study by Conning & Company of the Property & Casualty insurance market found the culprit: Most failures flowed from a poor corporate culture, inadequate knowledge of the customers' requirements, and sloppy organizational assessments.
Granted, not all insurance models are the same. Some insurance is sold directly, other types through brokers and agents. Increasingly, insurance will be offered as part of a suite of financial services.
With such variability, vertical CRM players who know the business have had the greatest success in executing successful CRM implementations.
Customer and the customer's customer
Many insurance companies have reached the point where they view the term CRM with skepticism. In fact, a good number of vendors have been selling pieces of CRM solutions with other names such as distribution-management and compensation-management systems, perhaps to overcome the stigma of recent CRM troubles at other companies. But enough CRM implementations, particularly in the mid-market, have been more successful in part because the early adopters blazed the trail for insurance CRM.
In the past, the majority of insurance has been sold through intermediaries. In fact, many insurance companies at first didn't think CRM was for them because they don't really interact much with the end consumer of insurance. Brokers and agents touch the customers far more often. Tom King, the insurance industry lead at SAP has said, "When you walk into an insurer and mention CRM... they think 'CRM doesn't apply to us...' They think it only means interfacing with the end-insured." (Weinberger, Ensuring the Success of Insurance Companies, destinationCRM, 2004)
As a result, many early insurance CRM initiatives focused on helping brokers and agents do their work more effectively. To some extent, this has been a defensive measure for insurance companies in the United States, since agent churn is on the rise (although it is still dramatically lower than in other regions of the world, especially mainland China where it approaches 50 percent among the top three insurers, four times higher than in Hong Kong, according to McKinsey [Binder 2004]).
And such broker- and agent-centric initiatives have begun to work, boosting productivity and profits. Travelers Personal Lines, part of St. Paul Travelers, features a web portal for its agents that lets them see the relative profitability of their customer segments (Appel, "An operating edge for insurers", McKinsey 2005). The portal is a CRM tool that manages broker relationships by allowing brokers to do their own CRM: Identifying customers by the value they represent and changing tactics based on that value.
But the point is being missed. Brokers and agents (called producers in the industry) are still only part of the value chain. The end-insured must be happy, or you get churn, and that's expensive.
A McKinsey study issued in November 2004 reports that "a churn rate of 10 percent, concentrated among the most valuable clients, could reduce profits by nearly 40 percent." And what contributes to churn? McKinsey identified several factors, two of which deserve more attention, which we'll get to later.
Customer centricity and the value exchange
The big issue lurking at the heart of all CRM initiatives is whether the organization is willing to commit to a customer-centric way of life. It's almost a cliché now to say that CRM is not an enterprise technology, it's an enterprise strategy, but my take on it is that CRM ought to be a response to a customer strategy.
I'm not talking about a strategy you might have about your customers, although that is critical. Instead, insurance companies need to understand the strategies that customers use to select insurance (and, over time, other financial services). Your customers do have a strategy, and if you don't know what it is and how it affects your operations, marketing and business model, you're too slow for an ecosystem that's eager to gulp down billions of dollars.
The key strategy used by your prospects and customers is to select insurance providers that give them what they perceive to be the greatest value. As simple as this sounds, most insurance companies don't appreciate this key component of the customer ecosystem. In part this is because insurance companies still generally view themselves as selling products. These aren't differentiated by customer preferences but by risk-based characteristics. While this makes sense for the insurance company, the fact is that insurance companies are ignoring a huge range of customer-driven differentiators that could make the insurance company more competitive.
Even more challenging, many insurance companies don't take responsibility for the process of selling products, because they rely on a front line of agents and brokers. While commissioned salespeople can keep overhead low, insurers should be asking another question: If I want longtime customers with good margins and low churn, won't I need to take advantage of what agents and brokers know about my customers? How can I capture that customer data?
The new mental model for insurance companies will be that they provide service in a seamless customer experience. The new business model is that they will take responsibility for customer data - not just to optimize revenue and risk, but to understand customers' needs.
Segment on Perceived Value
Perceived customer value is, in a nutshell, the weighted ordering of your customers' priorities. If you knew that, you could use analytics to chunk your customer base (using, say, factor analysis or K-means) into meaningful segments. The next step is to see which of these customer segments make sense for you to pursue. Some segments might be too expensive to capture and serve for the price they're willing to pay. Other customer segments might prefer a service mix that includes services you cannot or will not offer.
Once you've chosen your customer segments, organized by what they prefer from you, then you began managing customer value by identifying the total cost of owning that customer, organizing processes to make it cheaper to service low value customers and marketing heavily to higher value customers.
It's this intersection between what customers value (measured by PCV) and what you value about your customers (TLCV plus referrals) that is the core value exchange you have with the market.
Big changes afoot in the United States
As an aside, let me project a big sociological transformation I believe we're poised for in my country.
US citizens are taking more responsibility for their own financial services and health care, particularly as tax laws and Social Security (the US pension system) are transformed. Consumer choices in investments and insurance will become citizen choices. Instead of consumers buying based purely on value, you will see the citizen-consumer buying based on governance, reputation and civic consciousness of financial and insurance service companies.
The new formula for United States insurance companies will increasingly make connecting with the citizen-consumer more fundamental than ever. Some of this will happen by removing intermediaries such as employers, brokers and agents - increasing market efficiencies, and potentially marking a sea change for the way insurance and other financial services are sold.
McKinsey sees intimate partnership and mergers on the horizon: "One major [health insurance] payer even chartered a bank," they report. (Hanessian, Huber, Singhal, "The coming convergence of US health care and financial services," McKinsey 2005). "In the years to come, we think organic product development and merges and acquisitions will increase, as consumers demand a seamless, integrated experience - something that companies with simple partnerships will find hard to deliver." The citizen-consumer will want simpler and more ethical management of their investments and insurance.
Customer experience: A key loyalty driver
In the United States and around the world, it is the end-insureds experience with an insurance company that will drive brand equity. The customer ecosystem forces a company to prove to consumers what's in it for them. Traditional insurance brands - marketed top-down to drive demand to agents - are being rapidly eroded and replaced by the recommendations of the consuming public. And the public is talking, led by the micropundits of the blogosphere. (GoogleTM shows over 2 million hits for the keywords "blog auto insurance.")
If the micropundits in the customer ecosystem are dismantling big brands, what builds them?
More than ever, brands are built on interactions between a customer and a representative of a company, whether that interaction is in person, on the phone, by email, by mail or on a web site. Whatever the channel, these interactions must be positive, aligned with the value and values you want to project, and at a quality level that meets or exceeds the customer's expectations. These trust transactions must be carefully modeled in as serious a way as you might design IT systems or compliance processes.
The big difference between CRM systems that measure customer value in financial transactions and those that match up customer value in trust transactions is that the money exchange is not where customers get value from you. If you want to create customer value in genuine exchange, it will accrue to you when you provide a trustworthy interaction. Your revenue then becomes the reward for creating trust.
Trust transactions best modeled analytically
And since trust transactions are a higher level (abstracted) view of the customer relationship, you'll be able to build your brand, customer trust and customer value if you invest in analytics. Interamerican, a major Greek insurance player, used the Rate Market Solution and Rapid Results Service from SAS to drill down on how to best address customer needs while managing risk. George Mamoulakis of Interamerican said, "[Apart] from the speed which enables us to respond to changing marketing conditions in a proactive manner, we can now understand and thus better serve our different rate groups." (SAS, 2002)
RightNow, the increasingly popular Montana-based CRM player, has the same view of the value of analytics, but has gone further to create a system that analyzes customer interactions to create a knowledge base that can drive all customer-facing channels.
This step takes the customer experience logic inherent in the web site, email and phone interactions and pulls it out into its own manageable data warehouse. In fact, the real innovation for RightNow is that it can separate the business logic behind the customer experience from the way that experience will be expressed across various channels, says Joe Brown, who heads up RightNow Voice, an innovative marriage of automated telephone IVR and experience analytics.
Brown says, "To get the service levels you want, you need automated triage [of customer needs] using business rules". What's unique about our approach [to CRM and voice] the delivery model' It's a managed service. We sit in the background to see how it [voice interaction with callers] is used. We can record a period of interactions to test the grammar and accuracy. This is done in the background, with weekly meetings with the client to show improvements in recognition and accuracy. We also review the content with them." (Interview, 2005)
The business rules for creating efficient, effective customer interactions using RightNow Voice get smarter over time. And because they can be abstracted to a business rules engine, they can be leveraged and measured across phone, web and email. It becomes a kind of "customer experience layer" in the enterprise's n-tier architecture. And RightNow's approach may just be able to learn as it goes through the gentle proddings of RightNow's managed services.
A sure sign that customer experience management is worth investigating is, as usual, evidenced by how MicrosoftTM has named its new insurance-focused initiative: experience Insurance. (Microsoft has a knack for trademarking generic names for solution classes in an effort to convince the market it has what it takes to dominate it.)
The experience Insurance program, launched by Microsoft in May, aims to "reduce the complexity of the insurance industry and fundamentally change the customer experience," according to Kevin Kelly, managing director of the U.S. insurance industry for the Financial Services Group at Microsoft (Microsoft, 2005).
Why churn?
We mentioned earlier that churn is expensive for insurance companies. What contributes to churn and what can be done about it? The McKinsey report underscores the likely culprit: Poor customer (end-insured) experiences. (Giuliani, Moretti, Piancastelli, "Limiting churn in insurance," McKinsey 2004)
First worth mentioning is the correlation between churn and the recency of an insurance claim. "People who submitted claims in the past year switch more often, for instance, perhaps because of an unsatisfactory claim experience," says McKinsey. And who is acting to resolve a claim? It's not just the agent or broker - it's the insurance company. Resolution timeliness, compensation and paperwork are controlled by the insurance company, putting the agent and broker in a terrible position: They've worked hard to land the customer, but don't have ultimate control over the customer's experience and satisfaction.
So CRM in your insurance company should focus on the end-insured's customer experience - and if you ignore that experience, you might well being seeing churn the value chain from your brokers and agents, too.
Another key driver for churn is, surprisingly, the amount a customer spends on their policies. If the total policy cost is high, customers tend to bolt.
Does this mean that the CRM supposed holy grail of cross-selling and upselling may in fact so boost your revenue from a customer that s/he gets fed up and bolts to a competitor? (Several recent studies show that customers hate to be cross-sold and up-sold. See DeFelice, "A business imperative: Improve service now", destinationCRM, 2005.) This may wind up being a classic case of an enterprise-centric selling pathology that ought to be fixed with a customer-centric buying model. Chris Figee sums up the problem: "There is a saying that insurance is sold rather than bought." (Figee, Verkerk, "Financial Advice for Europeans", McKinsey, 2005)
Where operations meets customer experience
Agent churn is increasing and it creates a huge loss when they take their clients with them. In the past, this also meant they took customer data with them. McKinsey (2004) reports that agents, "as the sole keepers of [customer knowledge] - wield tremendous power over insurers and, as a result, can extract higher commission rates form them." (Appel, McKinsey 2005) But new CRM systems let the enterprise keep and manage that data, providing the agent with reports that help them do their business better. They also can process customer-critical paperwork faster.
Many payers also provide web-based self-service for customers. And insurers over time will be combining their offerings with complementary financial services. If the customer is in the business of managing her risk and planning for future well-being, it only makes sense to combine insurance with SEP-IRAs and 401Ks or other common retirement account programs.
Thus, operations and business models for insurance companies will continue to optimize the customer experience. Cost reductions in case management and faster customer analytics can allow an insurance company to offer lower rates when customers are price sensitive, or better service when they are not.
In China, insurance is dominated by just a few players led by China Life Insurance, Ping An Insurance and China Pacific Life Insurance (Binder, Bowers, Yung, 'Selling Life Insurance to China", McKinsey, 2004), all of whom have Chinese ownership, despite the regulatory ability for foreign interests to invest in or joint venture with domestic insurers. In key urban markets, foreign interests have more ownership and presence, but the market is still developing and is hardly mature.
But with Chinese consumers showing a high level of savings and a propensity to plan for their own retirements (Binder 2004), insurance and other financial services will find an eager market. The big question is, how fast will the market develop to maturity and who will dominate it?
It bodes well that some Chinese insurers such as Ping An are moving down the path of CRM, for any insurance company with a customer focused CRM system combined with lean operations and superior front line training will be able to compete well. Ping An's recent awards for its CRM initiatives may be a shot across the bow of its two main competitors in China. I predict that competition will be hotter than ever in China in 2006 among insurers, and that Chinese consumers will benefit.
The right path to CRM for insurers
Globally, insurance providers must overcome business and mental models that put a scrim between them and their customers. Brokers and agents are willing to share customer data with insurers when they get services that help them close business, choose profitable customers and keep them loyal. And with this data in hand, insurers must create customer experiences that build brand loyalty instead of focusing just on selling products. With these changes in place, an insurer will develop a return on their customer base (agents and brokers) and on the end-insured.
After all, it's the people they insure that create the buzz, cause the churn, and have corporate profits in their hands.
Which is why, when my wife switched from Progressive to AAA car insurance, I was happy to talk about it. Sure, Progressive effectively fired us as customers because they wouldn't match competing rates. But we fired them right back.
About the Author
Mr. Ward is a recognized authority on Customer Relationship Management (CRM) and Perceived Customer Value (PCV). He has been an invited speaker for a variety of organizations including The American Society of Association Executives, Cornell University, CLDP's recent Eastern European AmCham seminar and the Greater China CRM Conference in Shanghai where he delivered a keynote address. He has recently been appointed a guru and training partner to the Greater China CRM portal and consulting practice operating throughout Asia.
He serves as the Vice President for Sponsor Relations for the CRM Association of America and on the Editorial Board for CRM Today.
Mr. Ward is currently pursuing his global executive MBA with TRIUM, a joint degree program conferred by the London School of Economics, the HEC School of Management - Paris and New York University's Leonard Stern School of Business. He holds a Bachelor of Science degree in Mathematics from Davidson College (North Carolina).
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About the author
Paul is a strategist providing customer relationship management (CRM) and customer experience management (CEM) consulting for growth-focused enterprises. Currently VP of Customer Experience at a new high-tech consumer startup. He leads management strategy seminars in Asia, Europe and North America.
Paul is a graduate of the TRIUM Global Executive MBA program (ranked #3 globally by Financial Times) through London School of Economics, NYU-Stern, and Hautes Etudes Commerciales (HEC). His studies took place in Shanghai, Sao Paulo, Paris, New York, and London. As part of TRIUM he also studied with Hong Kong University of Science & Technology and in Sao Paulo with Funda??o Dom Cabral [FDC]. Currently head of the TRIUM alumni steering committee, Paul is organizing events in Shanghai, Florence, San Francisco and Paris. He lectured at Cornell University on Internet trends, social networks and the impact of the Web on economics and globalization. He also lectured at American University (Washington DC) and Robert H. Smith School of Business (University of Maryland, USA) on customer experience management, competitiveness and brand equity. Paul is also the editorial board member of CRM Today.
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