By Tony Collins, CEO, OPAL
In today’s ultra-competitive financial services market, many firms are looking at the role that ‘closed books’ can play as part of a wider business strategy for selling insurance policies and pensions. Although closing a book reduces marketing costs (as no new customers need to be acquired), administration costs will normally increase as the size of the book declines.
In order to offset this expense, cross-selling additional products to existing members can be a great tactic. However, as consolidation continues to gather pace, insurers face a number of challenges (as well as opportunities) when it comes to selling ancillary products to members of closed books.
For example, although most financial services providers already allow their customers to increase their contributions if they choose to, this option tends to be buried in the small print somewhere. F irms that really want to sell this option need to make the opportunity to increase contributions much more visible, for example, and should also aim to increase the percentage of customers that index-link their benefits and regular contributions, as this is another straightforward way of generating revenue.
Offering follow-on products is another good way maximising the value of an existing book. For example, why not offer clients an annuity after retirement? Or suggest an income-bearing investment after a critical illness claim? Firms can also use this same approach to offer complementary products. Some firms have achieved great results by targeting people who have left their company pension scheme with the offer of health insurance, for example.
After all, an important part of maximising the value of an existing book is customer retention and, more specifically, customer engagement: it’s vital to build loyalty so that another provider doesn’t lure valuable customers away. The financial services sector often struggles in this area, however. For example, most customers will normally receive a policy statement once a year, and maybe (if they’re lucky) a marketing brochure or a flyer. In addition, they might receive a phone call during the course of the year, and/or receive a standard letter in the post.
None of these things are very effective when it comes to building loyalty and trust with valued customers, however. Instead, firms need to redesign their interactions with customers and look for useful, creative ways to reinforce their client relationships, whether that means helping clients to manage multiple accounts more effectively or placing the occasional phone call in the name of customer service.
Even so, customers will still cancel policies and change providers – that is a fact of life. However, it’s important firms for firms to find out the exact reasons why customers are going. Although it’s easy to see why this information would be extremely valuable, very few firms actually understand the reasons (and specific triggers) that prompt customers to switch providers.
Of course, there may also be some low-value policies that firms would be more than happy to get rid of. However, customers need to be treated fairly in this situation, and providers should always highlight the options and benefits to customers very clearly.
The mortgage market has traditionally been very good at this balancing act. Lenders understand which customers are most likely to redeem a policy, which they want to keep, and what offer they will have to make to retain them – all to a very high level of accuracy. Other providers should be aiming for this same goal, and should therefore focus on recording this type of information so that they can improve their own analysis and approach.
All of these different activities will need to be combined into a single joined-up strategy – encompassing now only the marketing, sales, and customer service departments, but also actuarial, finance and risk – in order to build an overall business strategy that promotes ‘intelligent’ customer retention. This approach is essential, as retention needs to be embedded at the very heart of the business: in management objectives, performance targets, reward schemes, core processes, management information and more.
In practice, all of this means that providers will need to review and alter their policy administration systems – or outsource to achieve the same effect. Legacy administration systems will struggle to adapt to the new world of product lifecycles. In most cases, product engines in existing (and especially legacy) policy administration systems take too long to be easily modified to sell into closed book situations. We’ve met with some clients who take 3 years to get a product ready! Can you imagine what would happen to Apple’s share price if every new iPhone iteration took 3 years to launch? Furthermore, even if the product engine can be adapted, making the necessary changes requires the IT department's involvement as well as bringing in actuarial expertise to test the products before production, and business users to manage the products once they have been developed. With all of these different parties requiring involvement, product-to-market times clearly are considerably lengthened. Solving this challenge – or outsourcing it to a specialist provider such as OPAL - is the key to getting cross-selling right, first time, every time.
Engaging with customers in this way will help to boost retention and protect revenues, and will therefore maximise the value of an existing book. Some firms may be lucky enough to have a business model that allows them to manufacture and distribute a steady supply of new products at a profit, but for others, the focus will need to need to turn to protecting existing revenues instead.
In most cases, trying to retain every single policy in a book will almost certainly be counterproductive: there are bound to be some policies that are unprofitable (or just breaking even) and which therefore can’t justify the cost of any dedicated retention activities. In any case, taking a scattergun approach to an entire policy database as part of a strategic retention initiative is not going to produce results, and may even alienate some customers.
Instead, a targeted approach should be used to increase the firm’s overall contributions and achieve the maximum value from its existing book. The ability to protect revenue in this way will require a renewed focus on customer retention, however, combined with the ability to sell additional policies or products to a loyal and well-established customer base.
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