Ratemaking processes using legacy technology and methods are no longer adequate.
A recent McKinsey report, Insurance 2030—The impact of AI on the future of insurance, found that more technologically advanced market entrants have increased pressure on traditional insurance companies to innovate. Furthermore, the pandemic has increased the need for insurers to adopt solutions that enable them to meet consumer expectations for more affordable rates and for products that meet their needs, at the moment of need.
The answer is dynamic ratemaking, an advanced, AI-driven process that creates product offerings that respond to real-time market changes and align with consumers’ expectations as market conditions shift.
Delivering on Consumer Expectations With Agility
Traditionally, gathering data and building new insurance rate structures has taken several months, because traditional systems are slow to adapt and solutions that operate in a siloed manner rely on multiple approval processes.
Waiting six to 12 months to introduce new insurance products and rates is too long. Many insurers currently use real-time automated ratemaking and product deployment, and consumers are likely to go with those insurers that can provide the most personalized and competitive product offerings.
Personalization as a Competitive Advantage
Consider usage-based insurance (UBI). Some insurance customers now prefer to pay a rate based on their driving habits, as opposed to a one-size-fits-all rate, and dynamic solutions can calculate millions of rates and product options each day – in a personalized way.
A dynamic solution enables insurers to provide both traditional and UBI options by managing and automating the entire ratemaking process. Agile and sophisticated solutions propel data through the enterprise-wide ratemaking machine to deploy new rates quickly. Once filed and deployed, real-time quotes are provided to the right customer touchpoint.
A single, end-to-end solution that combines personalization, ratemaking and deployment capabilities doesn’t necessarily require a complex implementation. Capabilities can be implemented iteratively, enabling insurers to realize ROI faster and safeguard operations.
With increased technology adoption in the insurance industry, the market will become more competitive, and consumers’ expectations heightened. Alternatives to traditional ratemaking methods can improve consumer retention and enable insurers to offer competitive options regardless of market conditions. With a dynamic rating solution that combines advanced and traditional statistical methods, insurers can create and deploy new rating structures attuned to market conditions and consumer needs.
Insurers have spent the last 20 years exploring the potential of telematics with alternating curiosity, commitment and disillusionment. Last year, 8.2 million U.S. auto policyholders shared their driving data with an insurer, according to the IoT Insurance Observatory, a global think tank.
Insurer participation in the telematics space has been consistent for the past several years, according to annual surveys of insurer CIO members of the Novarica Research Council. Insurers that have deployed telematics generally indicate positive experiences; this includes a majority of larger insurers (more than $1 billion in annual written premium), 63% of which have measured positive ROI from their telematics programs. This is fairly rare for emerging technologies, where insurers are more likely to generally recognize value than formally measure it; the ROI places telematics alongside technologies like machine learning and robotic process automation in terms of the value created for insurers that have deployed it.
Given this activity, it’s useful to example the past, present and future of insurers’ use of telematics in personal auto lines, contextualizing current activity in light of insurers’ past approaches and speculating on future developments based on insurers’ present actions. As the article profiles the stages of telematics adoption, the focus will be on what is changing and why.
The Past (1998-2016)
Insurers in this phase were exploring telematics and the insights it could provide. Progressive’s Snapshot program has been the pioneer in OBD/dongle telematics-backed programs. The company’s journey has motivated other tier-1 insurers to engage with usage-based insurance (UBI). Several other top-10 insurers had introduced similar programs by the end of 2012, at least in some states.
These programs went out of their way to avoid scaring off initial adopters. They offered discounts to opt in and monitored driving behavior only temporarily, and many even didn’t impose surcharges on poor drivers. The value for insurers largely came from self-selection: only good drivers were interested in enrolling. However, insurers that were better able to effectively manage the usage of telematics data for pricing not only obtained better economic results thanks to surcharging the worst risks but were also able to keep an average retention rate above 94%.
The number of policyholders sharing data with an insurer grew to 3 million in 2014 but then leveled off. Insurers’ commitment subsequently vanished, and market sentiment about UBI became pessimistic. After almost 20 years and relevant investments, only about 1.5% of U.S. drivers were sharing telematics data with their insurers.
Number of policies sending data to an insurer by year in the U.S.
The Present (2017-2021)
While many market analysts with a little literacy about telematics data were speculating whether UBI would die before its potential was realized, in 2016 forward-looking insurer Allstate created Arity, a company dedicated to telematics and focused on the usage of the smartphone as a sensor.
Mobile-based data collection has vastly increased the reach of telematics programs by simplifying sign-up. The market has grown at 30% per year in 2019 and 2020. The COVID-19 pandemic has further increased awareness of UBI among the media, agents and customers – especially about pay-per-mile mechanisms – and is likely to support even more robust growth in 2021, as presaged by new mileage-based programs like that from American Family Insurance (MilesMyWay).
At first, it wasn’t clear mobile was a suitable source for telematics data: A leading telematics conference in 2016 included a session titled “Royal Rumble: Dongle vs. Mobile vs. Embedded Data Collection.” But mobile-based solutions have been the growth engine for telematics over the last few years, and quality of OEM data hasn’t yet met expectations. All the new successful approaches rely instead on the sensors present in the phone – sometimes paired with a tag positioned in the vehicle – and monitor the policyholder for the full duration of the coverage, rather than using a dongle for a single initial monitoring period.
Continual monitoring has allowed many of the top insurers to expand the way they use telematics data. In recent years, U.S. insurers have:
Introduced mechanisms for structured behavioral change– such as cash back earned on each trip – to promote less risky behavior;
Leveraged telematics data in claim processes to improve customer experience and increase both efficiency and effectiveness of claims management;
Introduced “try before you buy” apps for more accurate pricing at first quote, to attract better risks in each pricing cluster and reduce the premium leakage from bad risks.
Additional use cases like these allow insurers to build more robust UBI business cases, creating value on insurance profit and loss. This, in turn, allows insurers to create more attractive value propositions for customers: The more value created, the more there is to share with policyholders in the form of discounts, rewards and cash back. These incentives in turn attract new customers, driving further adoption.
Forward-looking insurers investing in these innovations today are progressively building the set of competencies necessary for mastering the usage of telematics data in the insurance business. This will not only create faster-growing and more profitable UBI portfolios but also address the transition to future mobility, as suggested by the story of Avail, the car-sharing service created by Allstate.
A large portion of the market hasn’t reached this level of maturity, however. Underwriting is still the most common area where insurers use telematics, although a few are beginning to explore other areas.
Many insurers are still watching the space, especially midsize insurers, which have engaged with telematics at roughly a third the rate of their larger counterparts. The percent of insurers deploying or piloting telematics has been roughly unchanged since 2018. (Insurers that are already participating, many of which have measured positive ROI, are continuing to innovate.)
Insurers whose internal technology environments are still mid-transformation may have a harder time supporting value-added telematics features; for these insurers, the value proposition for telematics as a whole is less clear. In particular, insurers need substantial data capabilities to manage UBI data at scale and innovation capabilities to transform the way business has been done for decades. As insurers continue to improve their data capabilities, and as more and more consumers adopt telematics, insurers that aren’t yet in the space may have more ability and more reasons to enter it.
The Future (2022-2030)
An insightful postcard from the future has been delivered by Tom Wilson, Allstate CEO, in a recent Bank of America Securities virtual conference: “If you’re not leaning into telematics, you’re not going to be in business for very long, at least on a profitable basis.”
We believe that in 10 years it will be the norm in the U.S. personal auto market:
For customers to download their insurer’s app on their phone to be insured. This app will continuously use the smartphone’s sensors to deliver a superior customer experience regardless of what product a customer chooses: pay-per-use, telematics-based renewal pricing or a policy with a traditional rating based only on traditional variables such as age, credit score, etc. This telematics app will have more than 40% daily active users, as some international insurers have already demonstrated. These interaction frequencies are not far from social media.
Telematics will prevent risks, both by real-time warnings in risky situations and by driver improvement via rewards for safe driving. Some international insurers have already put these into practice and created a reduction of their expected losses. Insurers will create an overall benefit to society by making drivers safer.
Claims touchpoints will be enhanced by the usage of telematics data and a virtuous collaboration between humans and AI. Policyholders will enjoy more accurate and efficient processes, from FNOL when accidents are detected, to claim triage, to adjudication and repair and payment. Customers are already demanding this, as shown by a 2019 customer survey conducted jointly by Cambridge Mobile Telematics and the IoT Insurance Observatory.
Customers will use their insurers’ apps to select among personalized offers of telematics-based services and additional contextualized risk-transfer solutions.
Forward-looking insurers are already preparing for this kind of scenario. This will in turn require transforming processes to most effectively use telematics data. It may not be enough to simply have a UBI product: The technology itself has a cost, and value-sharing (e.g., through discounts), can start at 10%. Insurers will need to use telematics data effectively to generate a return on this investment.
Insurers will have to educate both externally and internally: Not only will they need to communicate the benefits of telematics to potential customers, they’ll need each internal functional area to have a basic literacy about telematics. We expect that the next 10 years will see a tremendous degree of innovation and adoption, so telematics and the value-sharing it enables will be necessary to compete at the leading edge. This in turn should create a sense of urgency: Although simple telematics products can be replicated quickly, effectively leveraging telematics data to generate profitability can take years of iteration and concerted effort across organizations, and capability gaps will require years to be closed. After 20 years of experimentation in the U.S. personal auto market, telematics is ready to take flight.
It’s 2028. The world’s population stands at more than 8 billion. In the past decade, we’ve added a billion people, and we’re living in a hyper-connected world.
Our smart tools are diagnosing a growing number of conditions—taking your pulse and counting steps was just the beginning; the smart tools of 2028 detect all kinds of vitals to accurately diagnose a number of ailments and diseases.
Even our roads have changed. Today’s glass-topped highways are beautiful stretches of solar roadways embedded with a multitude of sensors aligned with the self-driving cars traveling on them, preventing accidents.
Insurers have figured out ways to underwrite and insure all that autonomy in all of its different modes. The same is true for transportation-as-a-service. And, we’re already discussing how to regulate and insure the next generation of vehicles – custom, 3D-printed, flying cars.
The pace at which all of this has happened is amazing. But the big question is, how did we get here?
In a word, telematics.
Telematics – aka the Internet of Things – changed everything since it started interacting with all of our lives years ago. For insurance, it started with underwriting and data monetization. And, although there were a lot of interesting early results, there wasn’t a lot of uptake or market success.
That all started to change in 2018.
Data exchanges started to come out. Telematics data (from OEMs, mobile devices or OBDII devices) started to funnel into one place, normalized and ready for insurance companies to use to make attractive offers to subscribers. Insurers could also use the data to innovate.
At the time, CCC was already working with its data exchange, CCC X. Our systems had already processed more than 50 billion driver miles. In retrospect, that time really was the turning point for telematics. As an industry, we saw the checkerboard get filled up—slowly at first—by forward-thinking companies that were making investments in telematics technology. 2018 was a turning point for the auto insurance industry.
The real tipping point started to come when we looked at other use cases for telematics data. Those cases vastly increased the adoption of the technology and made it much more mainstream. On top of that, telematics was combined with other technologies and innovations of that time, and that was what really sent us on a rocket ride.
When early use cases evolve, things get exciting
In 2006, cell phones were mainly used by people making phone calls. Remember how fast it all changed when the first smartphone came out? What really made cellular technology take off was when the smartphone became your calendar, your music collection, your newspaper. It became how you bought products. It was everything, and everyone had to have one. And remember the companies that were slow to adopt? They had a tough time.
In 2018, it was exactly the same with telematics. New use cases opened up the future and enabled innovation.
In April of that year in Cypress, Texas, CCC began working with State Auto to ingest telematics that would enable connected claims. With a flip of a switch, a 100-year-old accident triage process was changed. Suddenly, State Auto knew about a crash seconds after it happened. And what did they do? They picked up the phone, called their customer and said, “We see you’ve been in a crash. How can we help?”
One hundred years of process was flipped on its head overnight. Customers were amazed. That was the beginning of when people started to ask themselves about how things were done.
The moment when change happens
Up until this point, the three fundamentals of the insurance process were set in stone: I own my car, I drive my car, I call my insurance company when I get into an accident. After telematics, people started to think differently.
I own my car. Do I? Remember, new modes for transportation as a service and driving subscriptions, among other innovations, started to become a more widespread conversation. People started to consider that maybe they didn’t need to own a car.
I drive my car? Do I? 2018 was also right around the time when self-driving cars and taxis started hitting the streets of Singapore, Tokyo and Las Vegas. Maybe I don’t have to drive my car?
I call my insurance company when I get into an accident. Should I? As mentioned, on April 26, 2018, we found that maybe that was no longer necessary or always true.
Another flashback. In 2018, we also introduced the capability to determine injuries from telematics-powered crash dynamics. We used the data to understand the principles of force and delta V and used that to detect what kinds of injuries the people in the car may have, the potential severity of those injuries and what the range of medical treatments would likely be. That came together to allow our customers to treat people with the same efficiency and process as we were able to repair the car.
Finally, around this time telematics was applied to the repair. Cars were getting a lot more complicated, and there were a lot more sensors, more diagnostic trouble codes (DTCs), etc. Cars were capable of sending data right from their computers straight to the repair shop to make repair faster and more accurate, helping to ensure those increasingly complex cars were getting fully repaired and safely returned to the road. The change greatly expanded the use of telematics.
But what really lit the match was when those telematics use cases started being combined with other innovations of that period.
Photo analytics in estimating? Check. Insurers were already using AI to instantly detect from one photograph the likelihood a car was repairable or a total loss. AI was used to build the estimates themselves, using photographs and the help of telematics data.
From there, mobile and smart technologies enabled the detection of an accident all the way through to the disposition of the vehicle. The experience was self-guided and highly efficient. The person in the car accident was interacting with shops and insurance companies to get the job done in a streamlined way.
All of these new possibilities were suddenly at our fingertips. That crash in Cypress, Texas, if it was serious enough, would have the tow truck quickly dispatched to pick the car up. Or, if the injuries were serious, an ambulance could get there more quickly, saving the customer’s life.
After 2018, the acceleration of technology innovation went through the roof. That’s how we got to the world we live in today. We were struck with this awareness of exactly how telematics and photo analytics are going to lead to a new world order. The future became clear.
Those that got in early with those data exchanges and started using telematics for UBI purposes started to gain an understanding of data and chip away at the learning curve. They improved their book of business. They added use cases, detected crashes and delivered better injury disposition for customers and better repairs.
Those experiences and that knowledge base got them to a point that, when the autonomous vehicles started coming in all different modes and configurations, they were ready to price the risk. When the transportation as a service option started coming up, they were ready to go.
Innovation is always the same. It doesn’t matter if it’s 2018 or 2028 or 2058. The timeless advice about innovation is this: You need to adopt as early as possible. You need to give yourself permission to fail, the opportunity to learn and the time to get it right. When that match gets lit, you are ready to take the rocket ride to the future. Stay brave and power forward.
Usage-based pricing is a fascinating topic for insurers. A technology that allows persistent monitoring of risk exposure during the coverage period could potentially enable insurers to price each risk at the best rate.
The potential, however, is not the reality.
In 2017, 14 million policies sent telematics data to insurers around the world, of which 4.4 million were in the U.S market, based on an estimate by the IoT Insurance Observatory, an insurance think tank that has aggregated almost 50 insurers, reinsurers and tech players between North America and Europe. (In the U.S., there were a further 3.6 million policies that are still active and commonly defined as telematics but that in the past had a dongle only and didn’t send any data to insurers last year.)
However, less than 9% of the global insurance telematics policies were characterized by usage-based pricing, which is a mechanism that charges the policyholders for the current period of coverage based on how they behave (mileage or driving behavior) during this period.
Instead, the vast majority of the telematics policies bought by customers around the world today have a defined up-front price for the current policy term. Moreover, the telematics data registered during the policy period does not affect this price in any way, and is used only for proposing a renewal price at the end of the policy. So, these policies are not usage-based because at the beginning of each policy term the customers are sure about the amount they are going to pay for the policy, regardless of their behavior during the months of coverage.
These existing implementations of telematics-based pricing are somewhat validated from consumer perceptions toward insurance. In a survey of 1,046 U.S. consumers, the Casualty Actuarial Society Insurance On-Demand Working Party has addressed and demystified some of the behavioral economics assumptions on the insurance products. The research showed that only 32% of consumers reviewed their personal lines (auto and home) coverage more than once per year. Furthermore, 89% of consumers said they would rather pay a single, stable price per year compared with paying per usage without a certainty of total price. Usage-based auto insurance, across the entire on-demand category studied by the working group, is attractive to people penalized by traditional insurance products, that is, consumers with low usage who would otherwise have to pay for more coverage than they need.
Potential and Success Stories
The usage-based approach persistently monitors the policyholders and charges (potentially) each customer a rate commensurate with actual exposure, minimizing the premium leakage in each coverage period. The resulting minimized earning volatility from usage-based pricing allows insurers to increase the leverage and through this to improve investment return and the return on equity of the company. This approach also allows for increased retention of good risks, at any pricing level, which are penalized by competitors with less accurate pricing mechanisms. The quality of the portfolio is improved (with more profitable customers) at each renewal.
The resulting lower volatility from usage-based pricing and better quality of the portfolio over time would also enable insurers to negotiate lower reinsurance costs.
But while usage-based insurance could theoretically be a profitable option for insurers, the problem seems to be the lack of customer demand for an insurance product where there isn’t a defined up-front price for all the entire coverage period..
Newcomers to the insurance market are bringing a different perspective to the problem, recognizing that small clusters of drivers who have been heavily penalized by the current insurance rates—such as extremely low-mileage drivers, or extremely safe drivers without a credit score—could be enough to start a niche business. There are a few success stories of insurtech startups, such as Insure The Box and Metromile, which have been able to build portfolios around 100,000 policies and relevant company evaluations within six to seven years.
Driving Scores at the Underwriting Stage
One way to combat the lack of market fit that has affected the usage-based adoption could be to use a driving score at the underwriting stage. This way, insurers will make an up-front quotation by using—together with traditional data—the driving data.
The value created through this approach is clear and similar to experiences the sector has had integrating new risk factors (e.g. credit scoring) in pre-existing risk models. This telematics-enhanced risk model enables more accurate pricing. This, in turn, allows insurers to generate favorable selection by attracting the best risks for each pricing level (leaving the worst to the competitors). Through the creation of smaller and more homogeneous clusters of clients, this approach even reduces premium leakage, reducing the volatility. And, if the driving score is used at each renewal, there is a chance of improving portfolio quality over time (at any pricing level), with insurers using driving scores for underwriting, benefiting from retention of the most profitable customers–those who are penalized by competitors with less accurate pricing mechanisms.
The ROI of this approach is extremely positive, but the current scenario for obtaining the customer driving score seems very different from the scenario we have known for the credit score. The credit score (or the granular data necessary to calculate it) is available on the entire customer base and certified by reliable third parties, so each insurer can gather this data any time a customer requests a quotation via an agent, a broker, a call center or even online. Moreover, anyone who doesn’t have a credit score is considered a nonstandard risk. So, the concretization of the driving score dream requires the availability and reliability of third-party data for the insurers and, most importantly, the creation of frictionless purchasing processes for the clients.
Data exchanges, which bring OEM data to insurers, have been present in the U.S. customer market for a few years, but because there are many points of friction throughout OEM funnels, they still represent only 2% of the U.S. telematics insurance portfolio. This customer fatigue is due to the need to opt in to request a quotation. Eligibility for the opt-in comes in a moment when he is not shopping around for insurance coverage (a few months after the purchase of the new car). The quotations, which are done with anonymized data, are only indicative, so the customer needs to add data later to receive the real proposal.
Try Before You Buy
A different way to concretize the wish to access a driving score any time an insurance price quotation is calculated is by using a try-before-you-buy app. Given the current level of smartphone penetration, such an app likely provides an easier way to address a large part of the market than with the data exchanges and may also reduce customer frictions. As insurtech carrier Root is currently doing, an insurer can ask a prospect to download an app on his smartphone, calculate the driving score through collected data and, after a while, calculate the quotation incorporating the customer’s driving score. Using this approach, this less-than-two-year-old auto carrier startup wrote 1.5 times more premium than the more-talked-about carrier Lemonade. (Both are insurtech carriers, although Lemonade is writing renters insurance, and Root is writing auto). Root even entered in the insurtech unicorn club in August, thanks to a $100 million round of funding raising the valuation to $1 billion.
Tailored renewal price
As mentioned, 90% of the current global telematics policies only use the driving data for tailoring the renewal price to the customers after having monitored them for a few months (rollover approach) or for the entire coverage period (leave-in approach).
Are insurers achieving any economic value through this pricing approach?
They can increase the retention of the most profitable risks at each pricing level by providing a discount at renewal. However, this additional discount reduces the profitability of these policyholders. So the chance to create some value through this “discounted retention” is linked to the presence of a high-level churn rate. If surcharges to the worst risks at each pricing level are added, insurers will have the opportunity at renewal to partially reduce the premium leakage they have identified on these risks, or push some of them toward competitors.
The accompanying chart (right side) summarizes these pricing thoughts: The expected ROI of the “discount at renewal” is definitely lower than the driving score scenario—it structurally misses the ability to have a positive up-front selection by attracting the better risks at each pricing level—but it is positive if surcharges are added.
The IoT Insurance Observatory has found that a large portion of the policies using driving data for tailoring renewal prices have not resulted in any bad driver penalties.
So, are these telematics portfolios destroying value instead of creating it?
The reality is that there is value created on these portfolios, but the value is not tied to pricing. And some of the pricing approaches are even reducing that value.
First, there are many examples of the risk self-selection impact of all the telematics-based products around the world. Even if two customers seem to be equal based on their characteristics, the one who accepts the telematics product has a lower probability of generating a loss. The stronger the monitoring message on the product storytelling, the higher the self-selection effect. The most statistically robust study is on the Italian auto insurance market, where this risk self-selection effect has accounted for 20% of the claim frequency. In this market, telematics products currently represent more than one-fifth of the personal lines auto insurance business, and the storytelling of the product is hugely focused on monitoring and customer support at the moment of a crash.
Other than risk self-selection, three other telematics-based use cases have been exploited by insurers.
Some international insurers have reinvented their claims processes through telematics data: Their new paradigm is fact-based, digital and real-time. Insurers such as UnipolSai have introduced tools for their claim handlers that allow a quicker and more precise crash responsibility identification and have been providing precious insights to support the activity of all the actors involved in the claim supply chain (both loss adjusters and doctors).
A second well-demonstrated telematics use case is the change of driver behavior. VitalityDrive introduced by the South African insurance company Discovery Insure is the first insurance telematics product entirely focused on promoting safer behavior. All the product features—from gas cash-back (up to 50% of fuel spending per month) to active rewards through the app (including coffee, smoothies and car wash vouchers)—are contributing to the risk reduction of the book of business and to increased retention of the best risks.
Both the Italian and South African experiences have even been characterized by the insurers’ ability of enhancing the insurance value proposition by adding telematics-based services bundled to the auto insurance coverage. The fees paid by customers for these services almost offset all the costs of the telematics services on the insurers’ income statements
Based on the experience of the IoT Insurance Observatory, global insurance telematics best practices have generated more value through these four use cases than through pricing as of today. So, the sum of the self-selection effect, the claim cost reduction and the economic impact of changes of behavior allows an insurer to provide an important up-front discount at the same level for all the new telematics-based policyholders.
This relevant level of up-front discount — 20% or more — has been able to drive the adoption (overcoming any eventual customer privacy skepticism) because it fits with the customer desire to save money, contrasting the low adoption rates generated for more than a decade in the U.S. where up-front discount offers are typically only 5%.
The discount should be maintained, on average, at the same level at the renewal stage. Moreover, an additional economic value can be generated—at each pricing level—by providing additional discounts to the best policyholders and reducing the discount to the worst ones.
This is what the international best practices are doing today.
In a rapidly changing industry, some P&C insurers are pulling ahead of their competitors by focusing on customer satisfaction and retention.
“The insurance industry as we know it is at the edge of a new business environment,” says Michael Costonis , head of Accenture’s global insurance practice. “Breaking away from the pack and capturing new revenue opportunities requires a shift in business mindset – a shift from product-focused to customer-focused.”
Customers want extra benefits, and one way to provide them is to offer value-added services. Travel companies and other insurance branches are already exploring the benefits of value-added services for retaining customers, as Jamie Biesiada at Travel Weekly points out. Because P&C insurers have been slower to adopt this strategy, however, many opportunities for capitalizing on this strategy remain.
Here, we look at some of the most popular value-added services in P&C insurance, which of these services focus on building loyalty and how to create the right service offerings or packages to encourage your customers to stay with your company in the long term.
Value-Added Services: The State of the Industry
For many years, P&C insurers have struggled with the challenge of selling a product that is substantially similar to their competitors’ products. “Because customers don’t discern much difference between insurers, companies end up competing largely on price,” write Bain & Co. partners Henrik Naujoks, Harshveer Singh and Darci Darnell . A downward spiral occurs, in which costs and profits are cut and customers jump ship the moment they see the same coverage for a few dollars less.
When insurers compete on price, customers do what Brandon Carter at Access calls the services shuffle: quitting or threatening to quit their insurance providers to access the same price-lean deals that new customers receive. “My goal is to pay less in a system that actually punishes people for being loyal customers,” Carter explains. Focusing on cost decimates loyalty. Focusing on value can boost it.
Yet insurance companies aren’t making value-added services their first choice when it comes to customer retention Tom Super, director of the P&C insurance practice at J.D. Power, adds that many P&C insurers are turning to digital tools to court customers, particularly in the auto insurance business.
But digital technology is only a tool. The insurers that will stay ahead of their competitors in the race for customer retention and loyalty are the ones that best leverage that tool to provide the value customers want, says Mikaela Parrick at Brown & Joseph.
Which Value-Added Services Boost Customer Loyalty?
Value-added services provide an extra benefit that enhances the core product or service. This additional service may be offered at little or no cost for the customer, yet it may make both the customer’s and the insurer’s work easier.
Connecting experience-based services to the product and brand can be a powerful way to encourage loyalty, adds Roman Martynenko , the founder and global executive vice president at Astound Commerce. While this approach is most commonly seen in retail, P&C insurers can adapt it to their needs. A top-of-the-line mobile app or a personalized starter kit featuring smart tools for each customer’s home can make customers feel like they’re part of a family.
Unique, innovative or specially tailored value-added services can also help encourage loyalty and boost customer interest by becoming a cornerstone of an insurance company’s brand.
Value-added services don’t have to be expensive or complex, suggests Mike McGee of Investment Insurance Consultants. For instance, a disaster preparation email sent at the start of tornado or hurricane season can help customers take loss-prevention steps, address safety and feel supported by their insurer, at very little cost to the insurance company.
Partnering with other companies can boost loyalty for both organizations while providing value-added services that attract customers, digital transformation executive Fuad Butt says on the IBM insurance industry blog. For instance, working with telecommunications providers to offer reduced-rate packages can help both companies succeed.
A highly specific partnership that uses existing technology to add value for both customers and companies is the recently announced alliance between Hyundai Motor America and data analytics firm Verisk.
“Hyundai customers will have access to their portable Verisk driving score, which can lead to discount offers on UBI programs and support driver feedback that helps improve their driving,” says Manish Mehrotra , director of digital business planning and connected operations for Hyundai Motor America. A similar arrangement through an auto insurer can help both insurers and drivers have access to more information to improve safety and make better choices.
Choosing and Implementing Value-Added Services in P&C Insurance
The changing landscape of insurance offers one significant advantage to companies seeking to improve their value-added services: access to data about why customers remain loyal.
“The connections that enable excellent customer experiences aren’t always easy to make,” says Chris Hall of Pitney-Bowes. Siloing fragments customer information, leaving staff without a complete picture of each customer. This fragmentation makes it difficult to determine which value-added services will actually pique customers’ interest.
If data access is an issue, start by de-siloing information to get a better sense of each customer. Then, find the services that best support your organization’s key differences from your competitors.
Kirk Ford , compliance and T&C manager at RWA Business, suggests first considering how you’d like your clients and customers to perceive your brand in relation to competitors. Balance your differences against your similarities so that customers see they’ll receive all the services they need, but with the value-added extras that make their relationship with this particular insurance company meaningful.
However your insurance organization chooses to add value, resist the urge to announce it to customers merely as being higher-quality. “It doesn’t matter whether or not a company can pull off quality or exceptional service because quality and customer service rarely are differentiating strategies,” adds Mac McIntire , president of the Innovative Management Group.
Instead, Ryan Hanley formerly of Agency Nation, now at Bold Penguin, recommends finding ways your value-added services can improve customer lives. When customers feel a sense of shared values, they’re more likely to stick with their insurance company, rather than risk their luck with a company that may not share those values—even if the prices are lower.
One way to connect with customer values is to change your company’s language surrounding insurance. “If you can sell insurance and not talk about insurance, it’s a win-win,” says Rusty Sproat , founder of Figo Pet Insurance. He notes that many customers find insurance language obscure and frustrating. That’s why Sproat’s company focuses on providing quality information on pet care and health, switching the conversation to insurance only when necessary to complete a transaction.
Finally, don’t shy away from technology—but use it as a tool rather than a cure-all. Smart home sensors, telemetrics for vehicles and other tech tools are increasingly common in U.S. households, plus they can greatly improve the customer experience, says Ramaswamy Tanjore at Mindtree. Consider the best ways to manage telemetric or other data, as well as how to position these tools to best showcase their value to loyal customers.