Customer Value Management: Advantages and Disadvantages

Customer Value Management Advantages and DisadvantagesExecutive SummaryWhat is this report about?This report aims to identify the importance and long term benefits from adopting a client economic repute management (CVM) scheme for a bearing damages company (underwriter) in Singapore. It amplylights the reasons why insurers need to adopt a CVM dodging and showcases the assorted means by which the strategies facilitate client satisfaction which in turn endpoints in profitability for the insurer. By follo gain groundg a well aforethought(ip) CVM Framework, an insurer will be able to analyze node entropy, calculate profitability per node, identify disclose customer drivers, and fragment customers, thus targeting the right customer with the right harvest at the right condemnation use the right channel of statistical distribution.The report will benefit an insurer already found in Singapore as it highlights best practices and case studies of existing players in Asia a nd what they ar doing to acquire and retain new customers in this region. The insurer undersurface in any case digest on the light upon drivers and specific needs of the redress customer in Singapore and position itself accordingly.Along with the CVM Framework, the analysis and recommendations from our research will benefit a life insurer in find whether or not it is aptly positioned to penetrate the life insurance industry in Singapore and to a full-grown extent the Asia Pacific market.Research MethodologyFor the purpose of this report we performed both primary and secondary research which assisted us in refining our objectives as described in Figure 1Customer Value Management (CVM) FrameworkBased on our secondary research we described the process prevail for a CVM framework for a life insurance company. The achieverful implementation of a CVM based strategy involved understanding and performing the spare-time activity key processesBest Practices of CVM in the behav ior Insurance IndustryHighlights of the best practices followed by insurers, brokers and advisors in the Asia Pacific region ar depicted.Introduction What is CVM?In industries where products, merchandise promotions and carry are transitory, transcriptions are increasingly recognizing the importance of customer relationships. Today customer relationships play a very important role in increasing the bread of any make-up. There are reports which suggest that customer retention of 5% may increase the profits of a company by 25% or more1.An organization experiences increase in profits primarily when the customer makes more purchases thereby offsetting the acquisition cost. Efficient customers over a period of season die hard to be more cost effective to service as they are well versed to dealing with the organization.Loyal customers are a source of care for for an organization but are scarce in nature and managers must maximize customer value and formulate strategies to successf ully measure and align it with the organizations goals. As we evolve from product centrical to customer centric marketing, a set of best practices are emerging to measure and increase the lifetime of the customer. These practices are specify as Customer Value Management2.CVM in the Life Insurance IndustryThe life insurance industry, long considered a pillar of stability, is now facing study challenges stemming from various internal and external factorsWith increase competition as a result of globalization and the de-regulation of markets worldwide, several new entrants have entered the playing field devising customer acquisition and retention all the more challenging. These new entrants include pecuniary institutions such as banks and security firms.Advent of new technologies is challenging the long suit of previously established product distribution channels and has feastn the customer access to shop for life insurance products from dual blade based platforms such as www .policybazaar.com in India and www.compuquotes.com in the United States, with each offering different quotes for the analogous product offered by various organizations (life insurance companies)3.Rising cost as a result of high number of fraudulent activities is declining the life insurance industrys profitability.The strategies deployed by organizations to tackle these challenges will have a profound effect on both short and long term profitability. One such strategy that evict make a positive impact on the profitability of an organization is Customer Value Management.Customer Value Management (CVM) from a life insurers perspective revolves around the identification of each bankable customer. Upon identifying this customer, CVM techniques can be apply to measure the return on investment made by the organization in acquisition, growth and retention of the profitable customer. If the return on investment from the profitable customer is positive and then the insurer should furthe r implement strategies to maximize the lifetime value of its relationship. At the same time CVM solutions also facilitate an organization inSegmenting customers by similar risk profilesImproving cross selling and up-selling programsImproving the effectiveness of the marketing campaignMaximizing profitabilityThe successful implementation of a CVM strategy also involves the identification of the followingRight CustomerObjectiveIdentifying profitable customers and reducing customer acquisition costs.Traditional Practice prepare competitors customers irrespective of profitability from each customer. menses PracticeAcquisition of only profitable customers likely to generate repeat business.ExampleConsider two life insurance companies, one that focuses on providing life insurance products to safe customers and the early(a) serves customers that fall in the high risk category individuals engaged in venture sports and activities such as mountaineering, cliff diving, cave exploration etc. The safe customer company would be acquiring the wrong customers by advertising in adventure sports magazines.AdvantagesLower customer acquisition costsHigher profitability per customerRight ProductObjectiveProviding the right customer with the right product thereby increasing customer retention and reducing costs.Traditional PracticeProviding an array of life products irrespective of the customers preference and need resulting in customer dissatisfaction and attrition.Current PracticeProviding only those products as desired by the right customer by segregating them on the primer coat of demographics, purchasing habits, lifestyle and risk factors.ExampleIn Europe, life and health insurance companies determined that majority of their customers wanted to be fit and live a healthier lifestyle. Insurers provided their customers with a product which include incentives such as discounts on health club memberships and seminars on nutrition and healthy eating.AdvantagesIncrease in customer retentionIncrease in cross and up selling opportunitiesDecrease in the number of claims filedRight ChannelObjectiveHaving identified the right customer and the right product for that customer, approaching the customer using a preferred channel of distribution.Traditional PracticeDirect-response4 marketing such as direct-mail and telemarketing targeted towards all customer segments including those that preferred a face-to-face meeting. forrader the advent of Web 2.0 organizations relied on marketing intermediaries such as agents and brokers.Current PracticeBesides using traditional direct-response marketing media and intermediaries, organizations have also launched web portals, comparison websites, and formed distribution alliances with financial institutions to sell products.ExamplesA study conducted by a British firm, Datamonitor in 2007, revealed that aggregators and comparison websites account for instigating 22% of individuals desire motor insurance5. Likewise websites such as www.policybazar.com in India target price conscious customers seeking better deals online. Another study by Datamonitor revealed that in 2007, 37% of those individuals that purchased insurance online changed their provider upon renewal as compared to 17% that purchased through call centers6.The recent bank assurance alliance between Prudential Corporation Asia and UOB Life Insurance Limited will give Prudential the opportunity to sell its products to UOB customers in Singapore, Thailand and Inthroughsia.AdvantagesOffer more comprehensive life insurance products through direct-response marketing methods.High response rates from personalized direct-response methodsWell informed customers and higher(prenominal)(prenominal) customer retentionRight TimingObjectiveTo make the sale and to win a customer for life by marketing the right product at the right time.Traditional PracticeOrganizations either marketed the right product at the wrong time or were unable to identify the right time to promote a product. In either case the customer was not acquired and/or retained.Current PracticeWith the use of sophisticated selective information analytic tools, organizations are able to predict customers future purchasing habits with the passing of each life stage. They then target the customer whose life insurance needs change due toMarriageBirth of childSchooling of childMarriage of child lonelinessExampleCustomer A bought a life insurance policy a couple of years ago and declined coverage for her immediate family citing lack of available income. However, Customer As preferences may have changed now and assuming her experience with the product, customer service, and the insurer has been satisfactory thus far and she has a higher available income than she did earlier, she can be contacted again for buying life insurance for her family.Advantagesincrease cross and up selling opportunitiesIncreased customer retentionDecreased customer defectionCustomer Perception of the Life I nsurance IndustryLife insurance products are considered by many as complex yet ofttimes needed to minimize risk. Organizations have come up with products that meet the needs of the individual customer, however because the insurance contracts are fraught with complex legal terms, the customer ends up perceiving the life insurance industry as one that is not transparent and user-friendly. Furthermore, customers consider insurers as organizations that are only interested in ensuring that their customers pay their policy premiums on time however when its time for the insurer to resolve a claim or a dispute the backsliding time is slow resulting in frustration and anxiety for the customer. To cite an example of customer perception towards the insurance industry, an insurance survey by IBM and University of St. Gallen in Switzerland revealed that roughly 60% of the participants7 did not completely trust their insurance company.Because of such negative perceptions the insurer faces a hig h rate of customer defection. As the cost of acquiring a new customer are much more than the cost involved in retaining an existing one, insurers are coming up with innovative methods to build and nourish a long term relationship with their valuable customersCreating trust and reliability More than 80% of the participants in the IBM and University of St. Gallen insurance survey placed a high value to honesty and trustworthiness and building a solid reputation in the market has become ever so more important for an insurer. Organizations are taking actions to build trust and credibility byModifying the legal jargon in insurance contracts to simple, brief and layman terms.Remodeling the direct selling agents compensation portion to include billings based on parameters such as repeat sales and customer retention, thereby encouraging them to act more customer oriented.Establishing social communities such as interactive web portals, blogs and chat forums, thereby fostering communicatio n with the customer. This strategy has also given insurers with invaluable nurture about the customers evolving needs.Creating an ensemble of touch-points This strategy involves personalizing the approach to customers and making meaningful touch points available to generate a positive and rewarding experience for customers and the organization. For instance, price sensitive customers rely on the mesh when shopping for a life insurance policy, whereas relationship oriented customers seek advice from insurance agents / brokers and banks. Various touch-points available for customers of a life insurer can be bucketed as depicted in Figure 6.Therefore, it is essential for an organization to plan carefully before deploying or cutting back on any of the higher up touch points.For instance, in the first quarter of 2009 tied dominance channels contributed to 59%8 of total new business generated in Singapore. If an insurer were to downsize its tied agency channel it could result in a high rate of customer defection for a customer segment that seeks a personal relationship based on reliability, sound advice, and competence.Being flexible to the customers needs The insurer should make room to tailor the offerings to the specific requirement of the profitable customer. Furthermore, in the life insurance industry, multiple insurers offer similar products but the ones that offer flexibility are the ones that are able to hold their market position as well as attract the competitors customers.In North America and Europe, customers have identified various aspects of flexibility from their insurance providers. These aspects are covered in Figure 7.As customers in the Asia Pacific region become more and more sophisticated for their life insurance needs they will require similar levels of flexibility (as noted above). require for CVM in the Life Insurance IndustryBased on the challenges faced by players in the global life insurance industry, we have identified the Strengths, W eaknesses, Opportunities and Threats (SWOT) normal to the industry and the impact of such on the insurer as well as the customer. The objective of the exercise is three-foldFirstly, identify the key strengths, weaknesses, opportunities, and threats in the life insurance industry.Secondly, identify the impact of the strengths, weaknesses, opportunities, and threats on the insurers and their customers.Thirdly, to justify how an insurer can implement strategies and solutions to mitigate the weaknesses and threats and capitalize on strengths and opportunities.STRENGTHKEY STRENGTHSIMPACT ON insurance brokerIMPACT ON CUSTOMERSTRATEGYConsolidated customer and marketing informationbases.More accurate prediction of ever-changing customer needsFaster turnaround time in resolving claims and disputes.Customer has products that meet insurance/investment needs.The systems and customer data should be shared across the organization to promote trigger in business solutions.Multiple products off eringsTargeting and acquiring various customer segmentsIncreases customer retention by cross selling and up sellingCustomers have multiple products to meet their changing needs and circumstances.Identify the most profitable customer segment and retain them by offering innovative products and eccentric service.Multiple distribution channels.Increased profitability.Multiple distribution channels have given access to a wider customer base.Customers obtain product knowledge from their preferred touch points.Increases imperfection perception and product knowledge.Target specific customer segments through cost effective and customer preferred distribution channels.Flexible payment options (ex. payment in installments, cash, cheques, and credit/debit cards).Increases revenue generation, customer acquisition, and retention.Customer values flexibility and convenience and remains loyal.Marketing strategy to showcase the differentiating factors not provided by competitors. weaknessKEY WEAKNE SSESIMPACT ON INSURERIMPACT ON CUSTOMERSTRATEGYImportant customer data resides in silos resulting in poorly delimit customer segments.Customer information resides with different departments preventing a holistic view of the customer.Wrong products sold to the wrong customers resulting in customer dissatisfaction.Consolidate and analyze customer data residing in various systems to identify profitable customer segments likely to do repeat purchases.Lack of information sharing across departments marked with territoriality and impetuous internal competition.Results in weak product orientation and ineffective cross selling and up selling opportunities.Results in defection to competitor as insurance needs are not satisfied. wear out a common repository of customer data to provide various departments with the ability to develop products and provide lively response to changing needs.Lack of trust and reliability on the insurer.Negative reputation leads to mass customer defection.Un-satis fied customers pass on the poor experience to prospective customersPromote social computing communities such as blogs, chat forums. Also provides value add information about the customer.Snail paced claims and dispute resolution.Higher costs and time to serve the customer as multiple follow ups are required.Increased customer frustration due to lengthy dispute resolution period. lend oneself analytical models to predict and quantify the likelihood of claims.Measure and reward employees on time taken to resolve customer disputes.Insurance contracts are loaded with perplex insurance jargon.Increases in cost per customerCustomer dissatisfaction and defectionSimplify insurance contractsRecruit knowledgeable agents to assist customers.Insurance agents are primarily commission driven and are not customer oriented.Results in tarnishing the insurers reputation.Customer perceives a negative image of the insurer when faced with agents that are solely motivated by profits.Remodel agent compen sation to include commissions based on parameters such as repeat sales and customer satisfaction surveys.Make customer centric training programs mandatory for all agents.OPPORTUNITYKEY OPPORTUNITIESIMPACT ON INSURERIMPACT ON CUSTOMERSTRATEGYTie-ups with banks and other FIs will give access to a wider customer base.Lower cost of acquisition of new clients.Lower operational costs.fiscal and protection needs are met by a single channel.Develop bancassurance agreements to target a banks customer base.Un-tapped markets such as HNWI and Takaful (Islamic insurance).Access to a wider client base resulting in increase in profitability. positivistic brand building exercise. Ability to provide protection for themselves and family. Diversification of investment strategy for HNWI. Launch products to non-mass market segments. Organize brand awareness campaigns in locations that are frequented by such segments.Deregulation has opened new markets.Insurers have access to a wider customer base.Compet itive premium to the customers.Market entry strategy for de-regulated countries.Since the tertiary quarter of 2009, new business premiums in Singapore have been consistently increasing9.Opportunity to re-acquire customers.Multiple product and service offerings at competitive prices.Acquire customers that defaulted during the financial crisis by providing coverage at the same premium or payment in installments.Increased competition from the Internet.High costs involved in changing and/or updating technology platforms.Customers have a clearer idea of product offering and higher bargaining power over insurers.Provide high quality service to convert a one-time online sale by cross selling and up selling.THREATKEY THREATSIMPACT ON INSURERIMPACT ON CUSTOMERSTRATEGYDeregulation of the insurance industry has increased competition from new entrants.Lower profit margins and increased customer acquisition and retention costs.Financial and protection needs are met by a single channel.Joint ven ture, merger or acquisition with/of a bank and other financial institutions.Increased competition from the Internet.High costs involved in changing and/or updating technology platforms.Customers have a clearer idea of product offering and higher bargaining power over insurers.Provide high quality service to convert a one-time online sale by cross selling and up selling.Develop a powerful and customer friendly web platform.Rising costs due to increase in fraudulent activities.Lower profit margin and increased operational cost.Customer dissatisfaction with high turnaround time for claim resolution.Implement CDI tools to reduce duplication of records and redundant customer data.New government regulations may result in lowering profit margins for the insurer.Inability to serve customer segments resulting in declining profit margins.Customer has limited option of products to choose from or has to pay higher premiums.Develop products that abide by government regulations but at the same ti me are able to meet customer needs.Implementing a CVM Framework for a Life InsurerCustomer Value Management (CVM) provides a systematic methodology of modeling the value proposition relative to competition by putting process usefulnesss into operation and communicating these purifyments back to the customer in terms of better service and value add.From a life insurance organizations point of view, customer value management can be structured into the following three components10AnalysisPlanningContinuous ImprovementThe three components interact with each other to drive the value proposition of the customer. The components align business operations with the value proposition and create specific action plans to help realize the customer value over a lifetime.CVM components can be further broken down in to a structured process as shown in Figure 8. This is done to deliver the specified objective of implementing a customer value management strategy for a life insurance company (insure r)The phases explained in Figure 8 are summarized in the below section.AnalysisThe Analysis Phase consists of analyzing data and formulating strategies using data mining techniques to improve the customer profitability. The key processes which are included in this phase areData Quality and private Customer View11 To improve profitability from the customers, analysis of the customer data stored in various systems is performed. so life insurance companies need to integrate them to understand the customer trends and purchase patterns.Life-time Value Model Once the data is integrated, it is used to calculate the life time value of existing customers using various available methods. Discounted Cash Flows (DCF) method is one such model.Key Drivers Key value drivers for a life insurer are determined by analyzing the data from the single customer view and the life time value model. Identifying key drivers that affect the purchasing decisions of a customer and the method by which an organi zation delivers on those drivers forms an important part of the Analysis Phase.Segmentation Based on the customer values generated by lifetime value model, the customer segments are segregated into current and future low to high value customers. Further these customers are also segmented based on demographics, customer behavior etc. to capitalize on the current and future trends in the life insurance industryPlanningThe Planning phase ensures that the information hive away after analyzing the data is valid and relevant for improving the customer value. Strategies at product and market level are formulated and implemented in prep phase. The tasks associated with planning phase arePlanning at the Business and Product/Market Level Campaign planning based on customer segment is associated with planning at product and market level to implement the overall strategy of the organization. Campaign planning may include marketing plans, product development, cross-selling or up-selling of pro ducts to existing customers. After the completion of campaign planning, campaigns actions are implemented with intend to improve the customer profitability. 12Key performance indicators Based on the overall strategy, key performance indicators are identified based on financials, marketing performance, customer satisfaction, customer retention. These indicators allow insurers to measure the outcome of various actions on a hourly basis.Continuous ImprovementContinuous improvement phase includes updating of action plans and strategies to make it more efficient and effective to achieve the organizational objectives. Objectives of continuous improvement are achieved byContinuous performance measurement The performance indicators established in the planning phase should be reviewed on a periodic basis to avoid any deviations from the stated objectives of each business unit.Process Improvement Based on the outputs generated from the actions plans and performance indicators implemented in the planning phase, associated processes and action plans are updated to make it more efficient in achieving the stated objectives.Each phase will be dealt separately and in more detail in the following sections of the report.AnalysisThe Analysis Phase consists of analyzing data to identify the key drivers which affect the value of a customer and segment customers to improve the profitability of the insurer. The analysis of data establishes a relationship and a trend between the internal information and the market value of customers. This phase includes an analysis of the following processes Data Quality and Single Customer ViewOver the past decade, insurance companies have gradually started shifting their focus from policy sales, pricing, and claims to understand the needs of the customers and the possibility of repeat purchases of supernumerary products from these customers. Insurance companies have now started servicing and understanding the customers needs from a holistic persp ective and further the insurers efficiency to service their customers is dependent on the information provided by the customers on the use of specific products and function. The information solicited from customers is used by insurance companies in developing new and re-modeling old products, by call customer representatives in providing quality service, and by marketing departments in selling new products to segmented customers.To achieve the above, insurance companies have started stressing on the need for customer data integration (CDI). A typical data integration solution (Figure 9) should encompass the following subsystem in the life insurance organization.An insurer needs to integrate various components of an insurance policy management solution into one and use data mining techniques to recognize the current customer trends, purchase patterns and fraudulent activities.Customer data integration in the insurance industry creates growth in the companys top line byImproving the design of insurance products and pricingIncreasing the success rate of marketing campaigns andImproving the overall customer experience resulting in maximization of the customers life time valueSimilarly, customer data integration also makes a positive impact on the bottom line of a life insurance company byStreamlining the service centers and leading to shorter call times, resulting in increased customer profitability andSavings in several operational areas such as claimsFigure 10 displays the benefits of customer data integration as it applied to the organization. To further elaborate on how insurers can leverage from customer data integration let us demonstrate its effect on the following areas of the companyProduct and Service Offerings A typical product development process at an insurer is described in Figure 11. The figure highlights the data required from various sub-systems for product development. Data integration reduces the time required for product development using impr oved analytics. In short the insurer can have the first mover advantage by reducing the product development lifecycle.Insurers also spend a significant amount of time in customizing enrolment materials, benefit summaries, and claim submission forms and reports for a major customer. These activities have a high cost as they require the services of sales, underwriting, compliance, and legal and can wipe out the entire cash flows and profit expectations of the insurer.Here, data integration plays a significant role in formally defining, marketing and tracking these services and developing them. Data integration allows the insurer to integrate information about its target customers and their use of high cost services and bundles these services with the product to improve the pricing model. This enables an insurer to recover its costs incurred in designing the product and services while providing high end customers with value added services at the same time.For example, Eurovida15, a Por tuguese life insurer and part of Grupo Banco Popular faced a challenge of providing its customers with the right products in the most cost effective shipway while driving growth, profitability and shareholder value. It was only after they deployed an activity-based management system were they able to consolidate customer and product data thereby determining the profitability of products and the costs incurred in delivering the product and service to the target customers.Marketing and Sales An immediate advantage of customer data integration in the life insurance industry is the ability to detect and consol