The 21st century insurer: Beyond price - Successful responses to shrinking opportunities

Posted by Guest Blogger and Decisions Podcast Host, Ian Turvill.

Fair Isaac has just published an article by me about the challenges faced by insurers when individual consumers face difficult economic conditions, such as higher interest rates and gasoline prices.  (See The 21st century insurer: Beyond price - Successful responses to shrinking opportunities.)

In it, I argue that many consumers will seek to lower their cost of auto insurance, because of the increased costs that they are facing on credit card debt, home payments, and, of course, filling their cars' gas tanks.

I recommend three EDM-based strategies that insurers can use to counter this effect.  These include:

1. Differentiating between those consumers who are truly price sensitive, and those who are not.  Insurers should reach out proactively to those consumers who want a better deal so that they are not poached away by other carriers.  I suggest insurers can make this distinction by relying on predictive analytics, including advanced behavioral and transaction analytics, applied to the existing portfolio of customers.
2. Capturing more premiums and fees from consumers by offering a broader range of value-added services.  Such services might include broader coverages, such as rental car replacement for a vehicle that is undergoing repair, or optional services, such as roadside assistance.  I propose the use of online pre-market offer testing of different policy choices, based on principles of Experimental Design, as a way of determining to whom which offer should be made.
3. Adopting alternative underwriting methods, such as "Pay-As-You-Drive" (PAYD) insurance.  I've blogged about this previously.  In essence, PAYD is about only charging insurance for the risk involved in actually driving.  As such, it puts insurance costs directly in the control of drivers, allowing them to choose what they spend on insurance, just as they can influence how much they spend on gas, maintenance, et cetera.  PAYD is an excellent application of rules management technology.

This piece is intended to be the first of three articles that I will be publishing through Fair Isaac's ViewPoints online and e-mail magazine about the trends that are creating a challenging environment for insurers in the early part of the 21st century.

The two articles that follow will focus on the environmental, demographic, and competitive trends that we expect to present significant threats to the industry, and how insurers can prepare now to be on top in the future.