IBM Global Business Services Financial ServicesWhite Paper

Using business intelligence and optimization to secure the future in the global Insurance market

As the gates of recovery inch open, the race to capture market share and mitigate risk continues to intensify – only the most agile Insurers will pull ahead of the competition. Post-crisis, belts are tighter, regulations are stiffer and customers are shrewder.

Customer expectations are newly galvanized around trust, transparency and value. In fact, 80 percent of consumers rate trust and transparency as critical to their choice of an Insurer, yet 60 percent of consumers state that they do not currently have that trust.1 New market entrants and new delivery channels are threatening to edge out legacy offerings, as younger investors are considering alternative products such as annuities. Regulatory controls have become exceedingly more rigorous and demanding – quickly climbing to top the list of Insurers (and shareholders) greatest concerns.

To secure the future, Insurers must close these gaps. They will need to effectively leverage information and technology to create customer trust and transparency – speeding competitively priced new product offerings to market in a multi-channel environment, and successfully mitigating fraud risks. Most Insurers already have much of the information they need to accomplish this, but not yet the analytics and processes to unlock its power.

Winners in the recovery insurance market will balance business intelligence and optimization efforts to focus on customers and distributors, financials, risk and regulatory requirements, and core processes to create growth and savings opportunities, and differentiate from the competition. In our work with leading Insurers around the globe, we have implemented winning business analytics optimization strategies that prepare Insurers for long-term success in a changing marketplace.

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ProfitabilityMargin

Market Impact/Growth

Agile InsurerAgile

Insurer

Societal Predictive

Insurer

Optimized Insurer

Optimized Insurer

Aligned InsurerAligned Insurer

P&C: 7 pts better combined ratioLife: 1.5 times higher profit

Best in-class agile insurers leverage information for:

- better focus on the customer- transforming processes- leveraging new business models

Aligned Insurer

Consistent market approaches by multiple business lines with modest level of integration. Business / IT alignment is a desired state to capture more corporate efficiencies

Optimized Insurer

Ability to embrace and implement holistic strategies leveraging synergies that will increase operational efficiency while minimizing losses and maximizing profits.

Agile insurer

Capability to enter new markets successfully, build new distribution channels and launch new products quickly. Ability to monitor and adapt quickly based on market responses to retain and grow market share.

Societal Predictive insurer

Creation of new business models based on statistical and analytical techniques that predict future events or behaviorsacross the broader society.

The new agility – Information, analytics and optimizationPressured by industry drivers, Insurers are seeking new models to capture revenue growth and increased profits. While most are at the beginning of their journey, the trajectory from current state to future “best in class” position is clear – it is inextricably linked to how Insurers are organized and equipped to leverage timely, accurate information to ensure informed business decisions and actions.

We believe insurers can make progress in terms of market share and profitability by moving in line with the maturity path we have defined (see Figure 1). However, executives responding to a recent IBM survey acknowledged that when it comes to data, they have significant blind spots – one in three

Fig.1. Insurance Industry Maturity Path

said they frequently lack information necessary to make critical decisions. One half said they did not have access to the information required to do their jobs, or close information gaps to reach business objectives.2

According to a recent study, many Insurers have planned investments in business intelligence and/or analytics over the next 12 months. Why are Insurers undertaking these investments, even in a time of uncertain economic stability? They understand the need for faster, more informed decision-making, and the need to ensure and track alignment to corporate goals. Further, Insurers need to meet tighter regulatory compliance requirements and manage information better in a real-time, increasingly self-service environment.

4 Using business intelligence and optimization to secure the future in the global Insurance market

We believe winning Insurers will focus investments specifically on putting the customer first, enabling agents to sell and serve, increasing transparency and risk control and finally, building IT-enabled organizations where automation creates efficiency and feeds predictive analytics for the future.

Putting the customer firstDue to direct services and new industry entrants with slick business models and lower price points, insurance customers have more choice than ever before. They want transparency and are becoming more demanding in how they interact with their Insurers, the products they want and the premiums they are willing to pay.3 This reality rings even more true in emerging markets – where widespread need and customers’ sophisticated use of online and mobile technology are creating significant competition and opportunity.

Pricing strategies are still predominant, but are not sufficient to create long-term value – they may maintain market share,

but at the expense of margins. Industry winners are focusing on consumer segmentation, building trusted brands and offering convenient multi-channel customer access to win new business. The fact is that insurance will one day be viewed as one of many choices – instead of as a must-have product.

At the same time competition is increasing, consumer trust is at an all time low. So is the ability to predict customer behavior to identify new revenue, reduce servicing costs, and reduce risk – which will make ensuring customer satisfaction to build much needed relationships – near to impossible?

The reality is that most customers may seek interaction and information across several channels, based on their household demographic. Seamlessness, responsiveness, transparency and convenience – in addition to safety and fair price for value delivered – translate into customer trust. Post-crisis, trust and transparency are table stakes for Insurers. Insurers that work to close the trust gap will tap into new opportunities to create value.

Fig.2. Drivers for Business Intelligence (BI) Investments among Insurers

0 10 20 30 40 50 60 70 80

10.7

50.0

35.7

71.4

39.3

39.3

7.1

25.0

14.3

To better manage a specific operationalprocess in a more timely fashion

To better align with and track againstcorporate strategies and objectives

To ensure regulatory compliance

To speed up and improve the organization’s decision-making ability

To respond to user needs for dataon a timely basis

To move users toward a self-servicemodel of information delivery

To share information with customers,suppliers and partners

To decrease business costs andimprove operational efficiency

To increase the organization’s revenue

Percentage of Respondents

Question “What were the three most significant reasons in your organization to invest, if planning to use BI or to consider? Source: Gartner (February 2009)

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Applying business analytics and optimization can help Insurers acquire a deeper understanding of customer requirements, to rapidly identify and adjust price as appropriate, target market their products to specific demographic segments, and ultimately increase cross selling. Even with limited historical data, Insurers can use business intelligence to simulate risk profiles and optimize price-driven demand. All of this contributes to potentially higher product and service penetration and a higher retention rate.

Case in point, one of our US Insurance partners was operating day-to-day on gut-instinct, rather than data-driven decision making. We helped them launch a customer focused business intelligence program to transform the company’s ability to improve overall business performance, and ensure a stronger customer service experience in order to drive revenue growth. They now have a roadmap to help them focus on achieving value. In addition, they have operationalized business intelligence through a center of competency and data governance program responsible for creating and maintaining consistent, contextual and accurate business data. By linking the program to the overall improved performance of the company, the Insurer drove a measurable cultural change focused on the availability and improvement of both corporate information and BI skills and now has formed mature BI solution development capabilities to the point of self-sustainability.

Empowering agents to sell and serveThere is a growing need to empower agents to sell and serve customers more effectively. But the inability to identify, recruit, equip, and provide incentives to retain the best agents, as well as integrate and optimize agent information into Insurer operations makes the customer relationship focus all the more difficult to sustain.

Business intelligence and optimization efforts can help Insurers strengthen distributor relationships through modeling and optimizing agent profiles for recruiting, retention, and compensation of “A Players.” In addition, Insurers can employ business intelligence efforts to enable success with customers by automatically identifying potential new segments and

adjusting sales tools, pricing, products, and other attributes to target the best opportunities to acquire, retain and grow customer relationships.

We partnered with a U.S. based P&C Insurer experiencing a dynamic shift in their business – while selling insurance products through agency owners and independent exclusive agents was once seen as one of its biggest strengths, changes in consumer buying habits required the company to enhance its channel strategy. It became critical for the company to present a single face to the customer, regardless of their choice of channel.

Working across enterprise silos, we helped the Insurer develop a clear multi-channel distribution strategy. By aligning the culture, technology, metrics, processes and incentives, the Insurer successfully arranged a model that supports the way their customers want to be serviced. This type of multichannel approach reflects the thinking that 79% of consumers will commit to a deeper product or service relationship with a brand after a satisfying experience.4 With this approach the Insurer exceeded sales targets in year one and customers started over 2.5M quotes 2009.

Increasing transparency, controlling riskDealing with a growing focus on regulatory compliance is the second largest concern of Insurers (52% of responders in a recent study).5 “Insurance regulation is being re-examined in the light of the bailout of prominent US insurers, with international risk management standards likely to emerge. Eighty-three percent of Insurers expect to increase spending on risk management activities by more than 10 percent annually, over the next five years. The Solvency II guidelines are already weighing on European Insurers, and the financial crisis has resulted in increased regulation across the globe.

Winning insurers are using these events as a burning platform in the drive to enhance enterprise control. Investments are required in underlying data management processes, infrastructures and capabilities to enable sustainable transparency. A focus on financial and regulatory analytics can help Insurers significantly improve risk aversion through

6 Using business intelligence and optimization to secure the future in the global Insurance market

understanding risk posed by new products, globalization and regulatory controls. In addition, Insurers can employ business intelligence to reduce surprises in financial results and proactively manage market changes.

External stakeholders demand transparent quantitative disclosure of all risks and reporting or accounting on fair value principles (IFRS, MCEV and Solvency II). We partnered with a leading European Insurer to improve the management and compliance to regulations through a holistic program focused on standardized, accurate, auditable and transparent data management. As a result, enterprise data will be extracted from 100+ systems, uniformed, enriched and stored to be used in calculations and accounting.

This proactive approach enabled more awareness and responsiveness to regulatory actions, better risk aversions through integrated enterprise risk management, improved efficiency and performance through shared systems and processes across financial services. Today this Insurer benefits from better knowledge sharing through internal and external transparency with external partners, and is able to better respond to market changes. No matter what the regulatory requirements end up becoming, they will now be prepared to meet them.

Predicting the futureToday, Insurers must make sense of the unwieldy amount and different types of information available in and outside of the organization. Now many companies are applying analytics and optimizing the bottom line focused on consolidated reporting, cost and expense management, performance management, and fraud management. But soon early movers will emerge from these exercises with strategies that focus on the top line - using advanced analytics to pro-actively manage the pipeline, offers and promotions, brand perception, customer care and effectively sense market twists and turns before their competitors.6

The end-goal for many insurers will be the ability to reduce lost costs and improve customer service with the use of advanced analytics. Predictive modeling can help Insurers improve organizational flexibility to react quickly to market conditions and scale to address customer needs (in the case of catastrophe or other significant market change), analyze claims risk to decrease cost from losses or improve customer service based on known indicators. We are starting to see insurers use predictive modeling to better serve their customers with “customized products” based on individual wants-and-needs analysis and to deliver improved medical care management targeted to “at-risk” groups.

Fig.3. Analytics and optimization areas of focus over the next 24 months

Pricing and offer strategies•Branding and reputation management•Product/services market selection•Lead generation and pipeline management•Promotion and offer management•Logistics and distribution management•

Customersegmentationandprofitability•Demand forecasting and management•Enterprise goal setting and alignment•Budgeting and resource allocation•

Reporting and performance measurement•Cost/expense management•Career path and succession management•Fraudandfinancialriskmanagement•Leadership development•Channel performance•

Next 24 months top 10

Current top 10

Project scope Tactic

Increase focus

Maintain focus

Re-assess focus

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Healthcare Insurers are leading the way in analytics and risk management by creating medical management predictive models. IBM is helping US health insurers use advanced analytical tools to risk stratify their member population and ensure appropriate and preventative care is coordinated and designed to assure good outcomes. Predictive modeling is used to identify “at risk” groups and to risk stratify them. The insurer can then match interventional programs with the level of risk and deliver them consistently and cost-effectively. As an example, members at risk for coronary artery disease, can receive education and preventative care in an attempt to avoid a catastrophic event like a heart attack. These new approaches to promoting health and delivering care allow members to make better health and wellness choices and allow the Insurer to deliver significant value and avoid subsequent costly health care.

ConclusionFor many Insurers, the focus of the last few years has been to keep pace in a declining market. It now looks like things could be turning upward. But whether the benefits of the recovery are felt earlier or later than analysts predict, the financial crisis has set in motion a “lean years” perspective that global leaders and consumers won’t yield for some time. Trust has been threatened. The pressure to gain share in a sharpening market will not ebb. New regulations loom on the horizon. There will be no going back to business as usual.

Insurers must solve two key problems in order to secure their future: getting meaningful products to market fast and improving customer service. Their ability to leverage technology and information to drive business intelligence will be a defining factor in their success. Some insurers will pull away from the pack by focusing on the customer, through employing a business analytics and optimization lens to drive value and aligning business with IT to turn out meaningful products, achieve more transparency, and improve service efficiently.

However, competitive business analytics and optimization capabilities require deep skills in business intelligence and information management – which most Insurers lack today. Strong business intelligence capabilities must also be backed by streamlined data governance processes that pervade the organization. In addition, Insurers must continue their focus on smart streamlining, integration and consolidation across the organization – and well considered cost take out measures – to fund differentiating analytics and optimization efforts.

Though the customer must be the ultimate focus of business analytics efforts, many insurers are finding that it is increasing regulatory issues which provide the perfect entry for driving buy-in for a focused business intelligence effort. These efforts must top the chief executives’ (CEO, CFO and CIO) agendas to achieve full benefits. By starting small, generating short-term proof of concept successes and scaling fast, leaders can be successful in linking these efforts to their organization’s strategic business agenda, and catapulting their Insurers to front-runner status. For more information on pursuing a more proactive approach to securing your company’s future, please contact Lee-Han Tjioe, tjioelee@cn.ibm.com.

“The pressure to gain share in a sharpening market will not ebb. New regulations loom on the horizon. There will be no going back to business as usual.”

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Produced in the United States of America June 2010 All Rights Reserved

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About the AuthorLee-Han Tjioe is the worldwide Leader of IBM Global Business Services’ insurance group, currently responsible for the strategy, solutions and service development for Insurance industry, as well as client relationships and delivery -- from a headquarters in Shanghai, China. He and his team have developed a number of successful insurance specific solutions and services.

He has worked for more than 18 years in consulting for financial institutions, including as an Asia Pacific practice leader for PricewaterhouseCoopers in Hong Kong. His consulting work includes strategic and business process transformation projects for clients like ING, Aetna, AXA, Fortis, Aegon, and Achmea. He is a specialist on insurance companies challenged with the design and successful launch of online and multi-channel distribution of Insurance products. Mr. Tjioe graduated with an MBA at the Fuqua School of Business, Duke University in the United States.

For more information

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_____________________________________1 Bieck, Christian. “Growing trust, transparency and technology: Insurance customers’ perspectives in a global context.” IBM Global Business Services, in association with the University of St. Gallen Institute of Insurance. http://www-935.ibm.com/services/us/index.wss/ibvstudy/gbs/a1030834?cntxt=a1000058

2 LaValle, Steve. “Breaking away with business analytics and optimization.” IBM Institute for Business Value.

3 Ibid

4 LaValle, Steve and Brian Scheld. “CRM Done Right: Executive handbook for realizing the value of CRM.” IBM Global Business Services.

5 IBM Global CIP Study 2009; Full sample n = 2598, Insurance n = 212

6 Gartner (February 2009)