KEY TAKEAWAYS:
--Insurers often don't fully load their costs, so they miscalculate the "I" (investment) in ROI.
--Companies also need to take a sophisticated look at all their potential returns: on the loss ratio, on retention, on sales and marketing, on the expense ratio, on ratings and on any costs that a new initiative will replace.
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I’m fortunate to be constantly engaging with established insurance carriers that are seeking to incorporate technology into their product offerings. Rightly, most carriers seek to understand the potential return on investment (ROI), or the cost-benefit, of new technologies such as our platform, prior to signing contracts and implementing. This is where conversations can get really exciting. However, as a former investment banker and CFO, I can confidently say that the industry’s traditional assessments of “returns” are not suited to the insurance company of the future.
We need to redefine ROI for insurance companies.
Historically, the entire ROI discussion has revolved around reduction of loss – i.e., frequency or severity. This makes sense because insurance companies are broadly run by actuaries, and this is their foundation. I am not here to poke holes in actuarial analytics, nor am I suggesting these concepts get pushed aside. What I am saying, however, is that this is far too narrow -- and there is much more to it.
When GE considered the ROI of a new jet engine factory, they didn’t try to justify the ROI of the loading dock out back. They understood that a loading dock (with a certain throughput) is needed to accept delivery of all the components of the engines that are to be built inside and sold to airlines for a profit. Similarly, the ROI for front-end data gathering or customer engagement tools that enable an improved customer relationship and increased interactions with insureds are necessary to deliver preventative devices, or provide advice, or drive awareness, etc. So, carriers must ask whether this is a stand-alone capability to be evaluated separately or an enabler of the larger prevention program that is better analyzed holistically.
If I were CFO of an insurance carrier today, I would be looking at the following:
First off: I would fully load my costs. I need to completely understand my denominator for my ROI (“I” = Investment). There is the obvious contracted cost of the solution, device or service. Then there might be technology implementation and integration costs. (Our upfront integration is de minimis, so that one is easy for us.) Next, the new service or solution needs to be deployed -- properly and effectively. This requires marketing and communication with insureds and prospects.
There are challenges:
- carriers often have email addresses for only 15% to 30% of their customers!
- carriers historically stink at communicating with insureds,
- communications often require a level of coordination with their agent network, and
- rigid, legacy or third-party platforms can pose challenges when a carrier tries to implement changes.
Add in any regulatory or filing requirements, or any incentives -- shared or otherwise -- needed to drive adoption, and you will be looking at a fully loaded cost to implement a new program.
Now the fun part! Creating a clear view on reasonable, expected “returns” can (in our case) compel a finance team to consider six key areas:
- Loss Ratio Impact - Data & Analytics Value
- Retention Rate Impact - Net Promoter Score Improvement
- Sales & Marketing Impact - Selling & Ecosystem Monetization
- Expense Ratio Impact - Efficiency Improvement
- Overall Rating Impact - Innovation, Improvement in Reinsurance Costs
- Any Replacement or Offsetting of an Existing Cost
See also: The Promise of Predictive Models
First: Loss ratio
A large part of ROI analysis revolves around the impact on loss ratio – reduction in frequency and severity of claims – over time. I won’t spend too much time here because this is the core competence of insurance carriers.
A corollary to this is: What are new sources of data and analytics worth that help improve the accuracy of rating and pricing of risk? Carriers love data, and new sources of data and analytics are immensely valuable. But how should carriers value new sources of data?
Our analytics, for example, provide insights into homeowner behaviors (e.g., who is most risky, who is safer, who is engaged with the home, etc.) and certain property conditions, features and attributes (who has braided metal hose, who has GFCI outlets installed, who has an emergency plan for their family, etc). This is new and differentiated information. Together, we work toward establishing actuarial evidence and quantifying/correlating to the impact on loss experience.
Second: Customer retention
The retention rate, typically 86% to 92% for homeowner carriers, is a critical metric for insurance companies. To assess retention rate impact, carriers must understand, “How much value does XYZ technology (or service, or solution) provide to our insureds?”
A “retained” customer is one less customer that needs to be “acquired.” However, do carriers really know their customer acquisition cost (CAC)? My suspicion is that most carriers do not, because they are not fully loading their expenses, and often these costs are shared with distribution partners. CAC for insurance companies has been estimated at $750 to $1,000, and this number is likely increasing. Importantly, the impact of this understatement of CAC is that carriers would undervalue new tools that enable customer acquisition.
In the same way, do carriers really know their customer lifetime value (CLV)? In a world where customers are arguably becoming less “sticky,” insurance companies must reassess the value of retaining a certain customer (or type of customer) or the cost or impact of losing one.
How about brand impact from the new initiative? What is the ROI of an NPS point? Of increased brand awareness in a target market? Of brand loyalty? What is the value of a happy or satisfied customer? To begin to assess this, carriers will need to first think more about their brand in the marketplace, potential threats and opportunities. Many carriers are also grappling with their own role in representing and protecting their brand in the eyes and minds of consumers, versus turning again to their agent network to represent their brand publicly and letting the brand speak through service and claims experience.
Third: What is the value of facilitating cross-sell/up-sell opportunities?
This one is particularly tricky for carriers because few have assessed the value of new (direct) digital distribution channels.
Fourth: Expense ratio and efficiency
What is the impact on efficiency? Carriers have many different work streams and processes: quantifying impact and cost savings by improving cycle times, increasing processing accuracy, reducing cycles (such as absolute number/frequency of claims) and more. Improving the claims experience has a dual impact of improving the overall customer experience and likely drives NPS, while also shortening/streamlining the internal processes for the claims handling department. Win-Win.
Fifth: Providing a rating lift
What is the longer-term AM Best ratings impact of a new technology, service or initiative? Will a new technology be expected to improve the underlying business fundamentals, reduce risk profile and loss ratio over time, strengthen customer acquisition growth or drive retention rates?
AM Best began awarding rating points for innovation initiatives three years ago. What is the ROI on innovation? Or of being a learning organization? AM Best’s initiative was invaluable to the industry (my opinion) because it so strongly acknowledged -- and put a microscope on -- the critical importance of innovation and continuing evolution of the traditional insurance business model. The industry seems to have pushed back rather aggressively, unfortunately, at the ratings methodology. However, industry transformation is now clearly underway.
What is the reinsurance impact of improved rating? To enable this, we (and carrier partners) need to also educate the reinsurance industry (and brokers) on the benefits and effectiveness of insurtech solutions. We are doing this gradually, and the appreciation is growing. This will be a longer game.
See also: How to Deliver the ROI From AI
Sixth: Does the new technology or solution replace an existing cost already being incurred?
In our case, we provide top-tier digital content from nationally recognized experts – supplanting the need for our partners to source or create content to share with insureds to drive their own engagement, demonstrate a level of care and professionalism toward their insureds, run email campaigns/social outreach and maintain their brand awareness in the market.
Lastly, what is the ROI of standing still?
Risk analysis is the fundamental, core competence of the insurance industry – above all else. So why are two-thirds of insurance carriers not able to acknowledge the risk of standing still in a world that is increasingly, and rapidly, digitally transforming?
