It is widely recognized that the right price is crucial in insurance. Insurance is what is known as a ‘grudge purchase’: customers know it is necessary, but they hope never to use it. This traditionally and theoretically means that they want to pay as little as possible for their insurance product. Insurers, by contrast, want customers to pay the highest possible price. Obviously, there has to be some overlap, but the aims of the two groups are fundamentally in conflict. This, in turn, means that it is hard for them to build the strong relationships that are considered essential for customer-centricity. However, does this really hold for all customers and all insurers? The answer to that is not always—and the reason is customer experience.
Segmenting customers
It turns out that in practice, customers do not always want to buy the cheapest and simplest product. They are often prepared to pay more for something that provides more value. We see this in the market for luxury goods, but it is also true of many other products. For example, with insurance, customers may perceive that they get better value out of paying slightly more for a product that they can tailor more closely to their needs, or alter within the insurance period without any extra charges. They may also value buying from a known insurer, rather than a new entrant to the market, or appreciate the availability of a dedicated claims line because of a past poor experience.
Customers also have different price tolerance or sensitivity. In other words, one customer’s ‘too expensive’ is another’s ‘very good value’. Previously, insurers had to price products to appeal to large segments, usually classified by risk. Increasingly, though, it is now possible to segment customers down to a very fine level. We can even create micro-segments of one customer, and this allows insurers to respond minutely to individual customers’ price sensitivity as well as the risk that they pose. This, in turn, can allow insurers to ensure that products remain profitable across the customer portfolio.
Products must, of course, also reflect customer risk. Using predictive analytics can make it easier to segment more finely on this basis, too. More information means more granular analysis and more precise answers. Better predictions mean that insurers are less likely to make costly mistakes, and therefore that prices can be held at a competitive level.
More than just the price
It is also important to recognize that customer experience is more than just the price. Insurers have had to change their approach to sales and service significantly over recent years. Customers now expect to do almost everything through digital channels. They can buy and amend policies online, but they also want to make claims, follow the progress of those claims, renew policies, and close policies and move on, via digital channels. It is crucial for insurers to be able to integrate channels for customers—the so-called ‘omnichannel approach’—so that customer experience is seamless across different channels.
Clients also expect to be recognized and to receive personalized communications, regardless of channel. This means that insurers need to take more information into account before communicating with any client, even simply through a banner on a webpage—and that, in turn, means that analytics is crucial.
Overall, these changes have made insurance much more complex. The number of processes required for each business transaction is increasing. Analytics is therefore being embedded across the whole process, as a way to automate decision-making, and make the process—and the customer experience—smoother. This, in turn, has brought the actuarial elements of the business much closer to clients. This is not a bad thing, because actuarial decisions have always been a crucial part of pricing and profitability. The integration of analytical models in both ‘back office’ and ‘customer-facing’ elements of insurance has simply brought them closer together and enabled pricing to change flexibly to reflect changes in customers or the environment.
A pay-off for customer-centricity
Overall, this has meant that insurers have become increasingly customer-centric. They know a lot more about each customer, and they can tailor prices, products, and communications accordingly. This has helped to build those stronger relationships with customers, and improve customer satisfaction. Satisfied customers are far more likely to remain with the business, and this has therefore reduced the churn rate among insurers. Customer-centricity does very much pay off in business, and it is possible to deliver both a good price and a good experience.
