An environment of high uncertainty and a recession on the horizon: many insurance firms are at an inflection point. Insurers are forced by intensifying cost pressure to review tariffs and increase prices for new and existing customers. At the same time, new business volumes are expected to decline as households and businesses reduce spending and investments e.g., leading to fewer new cars and homes being purchased.
The consequence? This is an industry that generally fairs well during a crisis. But the current macro and micro trends are solidifying the need for transformation and commercial counteractions. Insurers need to look careful at their costs for serving existing customers and adjust marketing and sales costs to the expected lower new business volumes.
Aiming to maintain and grow your premiums and margin throughout the economic downturn? Check out these six topics for the top of your CCO agenda, including:
- Tactical measures to invest in and implement over the coming year (1-4)
- Strategic measures that are too important to put on hold, even in a downturn (5-6)
Master these and you’ll belong to the winners, i.e., you will continue to grow despite a crisis.
Six growth topics for the CCO agenda in 2023
Tactical topics for this year: How you can protect and grow your existing base
An economic downturn is the time to double down on the existing, attractive customers in your portfolio. Rather than chasing new customers, take measures to ensure attractive customers stay, making efforts to get more value from them. Likewise, review your strategic priorities and trim commercial spend where possible. Here, driving efficiency in sales and marketing can yield significant potential.
1. Smart price increases: How to protect margins in an inflationary environment
Many insurance firms have already made a first round of price increases. In 2023, costs will continue to rise as salary, raw material, and energy price increases move through the value chain, hitting claims costs and other operating expenses. The initial price increases executed by many insurers for new and existing books at the end of 2022 will unlikely compensate for cost increases, leading to margin losses. Unless insurers take action.
At the same time, inflation makes households and businesses scrutinize insurance costs meaning that churn is a real risk. A second or even third round of price increases will be needed to protect margins. But gaining customer acceptance will be difficult. Incorrect measures can jeopardize both existing and new business.
Balancing volume and margin protection will be key, calling for smarter and more selective price increases. A flat increase across the board won’t work.
2. Existing customer portfolio: How to protect the valuable core
Insurance is a subscription business. And there’s one major risk with subscription models — unsubscription. In times of uncertainty, you need to double down on protecting the current customer base, especially your most valuable customers. A tailored customer retention strategy is key.
Safeguarding customers means developing initiatives that ensure higher satisfaction and/or stickiness – and remember, retention initiatives go beyond higher discount allowances. Here, quantitative data analyses can help you to prioritize measures effort and impact of implementation.
In our experience, a well-executed churn strategy can reduce churn by 10-20 percent. However, you must be targeted with your measures. A “spray and pray” approach could result in giving benefits to already loyal customers.
3. Up- and cross-selling: How to get more from the existing base
Getting more from existing business is a strong bet compared to winning over new customers, especially in times of increasing cost pressure. Typically, the cost of winning a policy with a new customer is three to five times higher (and growing) than selling to an existing one. The challenge is that insurance firms aren’t necessarily good at cross- and upselling to the existing base. They tend to “get and forget.” Eight out of ten customers never buy another product after the initial sale.
Intensifying up- and cross-selling efforts is needed to extract additional value from existing customers. This can be achieved by different means, some more passive and others more proactive. Developing a clear up- and cross-selling path is now more important than ever. Accelerators for up- and cross-selling include personalized triggers and digital sales tools that enable sales to be in the right place at the right time with effective advisory services.
4. Optimize sales and marketing: How to adjust activities to reduced demand
In an economic downturn, households and businesses reduce their spending and investments, which leads to reduced demand for e.g., insurance of a new car or home. This also means fewer opportunities to win customers over as change of insurance provider is often linked to major purchases or “life events”. At the same time, return on marketing and sales has decreased due to rising marketing costs and an ever-increasingly complex channel landscape. So, insurers need to rethink their sales and marketing spend and channel mix. Those that continue as usual will hit a growth wall and face increasing cost of sales per policy.
Traditional marketing targets a wide range of customers with broad marketing channels such as mailings and cold calls. By optimizing the spend and taking a data-driven approach to the marketing mix, insurers can identify the most effective channels to reach the target audience.
In our experience, insurers can reduce marketing spend by up to 20 percent without compromising volumes. Similarly, we see opportunities to redefine the distribution channel mix and make sales conversion more effective, reducing sales costs by four to six percent.
Strategic topics: Too important to postpone
It’s also important to invest in larger transformations that will be key to future success. Despite a downturn, a long-term view on omni-channel and partnership efforts is still essential for insurance companies to prepare for the 2030 agenda.
5. Sales transformation: How to sell in an omni-channel environment
During the pandemic, many companies were forced to accelerate their digital sales transformation. Now, the hybrid way of buying and selling is here to stay, and customers will be increasingly invested in digital behavior in the future.
Nevertheless, the insurance industry cannot work without real salespeople. Customers still want to be advised and insurance remains a low-interest product that needs to be pushed. So, what does the future of distribution look like?
Ideally, sales are supported by digital tools across all channels – even traditionally analogue ones. Omnichannel sales process are seamless, with interchanging online and offline touchpoints. And, they’re supported by fit-for-digital products and prices.
The operating model also needs to be adapted to remove all barriers for omni-channel sales. This includes reviewing the channel mix, customer journeys, internal processes, compensation models, etc. You need to adapt your commercial efforts to digital if you want to remain competitive in the market.
Those that start now will sell more.
6. Getting value from your VAS partners: How to win in the ecosystem
Many insurance companies worldwide have started offering (preventive) services to their existing customers and/or potential new customers. The idea behind this "service wave" is to create value beyond pure insurance coverage by helping customers to prevent damage.
The goals of this approach are usually either (1) reduce claims costs or (2) increase stickiness/reduce churn – or both. But most of these initiatives fail to make an impact.
While it’s difficult to determine a root cause, there are several common mistakes. i.e., in determining the relation to the core product, in determining the customer segments and value offered, logistical issues to provide/install the service, and lack of motivation/skills in the sales force, etc. Another core error is a false perception of what it takes to build successful partnerships. But the key reason why services fail to make an impact: services are sold to too few customers.
Don’t make these mistakes. Review your options carefully against your strategic objectives and identify not only the best offering but also the most effective commercial model and set-up.
Insurers, start your growth plan today!
These were our six most important measures for insurers in 2023!
If you’re planning to add any of the above to your own CCO agenda, then stay tuned for our next articles in this series. Throughout the year we will be tackling each topic individually in detail, discussing how to use these measures as commercial catalysts for growth during a crisis.
Can’t wait to get the discussion started? Then reach out to Morten Kaae Sorensen or Frank Gehrig today!