Effective Cycle Management

Wild price fluctuations, poor customer service and sudden retreat from unprofitable business were the industry norm just a few short years ago. As a result of this bumpy road, many customers were left with unmanageable insurance premiums and a sour opinion of insurance at large – a problem the industry will be battling into the foreseeable future.

THE CONSERVATIVE APPROACH

Beginning in the late 90s, the banking industry faced a succession of business obstacles including the dot-com bust, 9/11, the Afghanistan and Iraq wars and corporate governance scandals. Whereas other industries fumbled over these barriers, Janet L. Yellen, president and CEO of the Federal Reserve Bank of San Francisco, says the banking industry succeeded and has become far more resilient than in previous recessions; This is due to stronger capital positions, increased risk management and a move to more risk-focused supervision.

During this negative cycle, banks took a more conservative approach when potential risks were identified. For example, data shows that during the last cycle, traditional banks recognized the increased risk of syndicated loans and held fewer of them than non-banks. Banks also tightened credit standards and lowered their loan-to-value ratios.

Banks also focused on diverse lines of business to stabilize their operations throughout the cycle and are concentrating more and more on wealth management products which are sustainable throughout the cycle.

MAGNIFYING THE INSURANCE PERCEPTION

Insurers can learn from the banking example and face the new cycle with a renewed approach. However, the level of difficulty is much higher for insurers: while banks provide customers with products and services that have a perceived value, insurers only offer an intangible benefit.

When a customer places their money into a savings account, they receive security and interest. When people buy a mortgage, they see value in a new home and can rationalize the interest payments. Banks help people buy big-ticket items, as well as save for their children’s education and their own retirement, despite the costs associated with banking and borrowing.

Insurance, however, is a concept or idea of security that is not often tangible and insurance customers therefore can only equate their premiums to anticipated payouts when and if they file a claim. Insurance is considered to be a necessary evil.

Because of the indirect and delayed consumer benefits, the industry must work very hard at demonstrating the value of its product. Whereas banks help people acquire goods, insurers must show consumers that insurance is a benefit to the protection of those assets. Insurers can bolster their products by working alongside brokers to show policyholders the potential value offered through loss prevention tips, safe driving initiatives, risk management advice, safety campaigns and more.

CONTROLLING THE CYCLE

Maintaining control of the cycle and pricing will inevitably boost client relations, which is necessary for a company to fully deliver on its commitments. If experience dictates that insurers offer superior service, price will become less of a factor among clients.

Delivering on service commitments is a continuous task: opportunities frequently present themselves during disasters such as the flooding in Alberta. In order to respond when they must, insurers should increasingly begin to build additional value into their products and service offerings rather than merely compete on price. When an insurer takes the initiative to provide customers and brokers with insurance solutions that meet customers’ needs, price will become less of an issue as long as it is fair. Just like the banks, insurers need to consider tailoring their products to the target customer.

VALUE-PACKED POTENTIAL

By reassessing product potential and focusing on the enhancement of insurance, insurers can offer real value to their customers. Rather than being generalist insurers, companies can add value to their consumers by focusing on segments where they have a proven track record and can therefore provide specialized products for niche markets.

Technology is playing an increasingly large role in the industry, allowing companies to leverage a strong technical platform in both commercial and personal lines. In commercial lines, technology can be used to put knowledge, expertise and authority at the underwriters’ fingertips. In personal lines, it can be used to build a strong operating platform, resulting in cost efficiencies that will ultimately be passed on to customers. In claims, technology is being used to produce more effective and efficient file handling.

Cycle management can produce more stability in pricing for consumers and a more sustainable ROI for shareholders, but price isn’t the only benefit. Over the next few years, the industry will see more innovative and creative insurance solutions designed for more targeted customer segments.

Therefore, although competition has returned to the market, insurers can succeed by holding tight on pricing. Past lessons learned should make it clear that deviating too far from technical price will, even in lieu of the increased pressure on pricing, produce instability in the market. Through stable pricing and innovative products, insurers at large will likely see more than mere financial rewards, for the near and far off future.