Effective Bundling: Just Selling Another Product or Managing Risk Portfolio? whitepaper May 2014

Transcription

1 TM Effective Bundling: Just Selling Another Product or Managing Risk Portfolio? whitepaper May 2014

2 TABLE OF CONTENTS Executive Summary 3 Does Discount Reflect True Value of Product Bundling? 3 So Where Does the Potential Value Reside? 4 How is the Industry Responding? 5 How to Unlock True Potential of Product Bundling? 5 authors 6 About HCL , HCL Technologies. Reproduction Prohibited. This document is protected under Copyright by the Author, all rights reserved. 3

3 Executive Summary With customers holding multiple products sticking with the company longer than a single product customer, insurers have been bundling and cross-selling products, which also provide them an opportunity to earn additional revenue. While a number of these insurers position the value of these bundled up offering as saving money and lucrative discounts, there is an urgent need for a market differentiator. There is a need for effective customer risk portfolio management. The new, more aware customers are now looking for real savings after thorough research and price comparisons, and are selecting the right combination from the right insurer(s). Real value of bundling, for both customers and insurers, resides in the core building block of the product which is the individual coverage. It is becoming vital for the insurers to gather the customer s information, assess the risk for the customer, build the right coverage mix, and suggest customized products based on the customer s risk profile. Insurers need to now move towards delivering real value for both the customer and themselves. The approach is to introduce an industry-wise move from being a build-to-order to a customize-toadvice service provider. Does Discount Reflect True Value of Product Bundling? For long, insurers have been cross-selling products, as customers holding multiple products are known to be stickier than a single product customer. Cross-selling also provides insurers an opportunity to earn additional revenue. Even mono-line insurers specializing in auto, such as GEICO and Progressive, sell property insurance in partnership with complementing property insurers. Historically, multi-line insurers have been luring customers to buy multiple products through the so called bundling discount. Ease of cross-enterprise integration and web commerce has now enabled even the mono-line insurers to offer similar bundling discounts, intensifying the pricing war. Bundling discount, also known as cross-product discount, is offered as a percentage of premium reduction on the primary product. Many insurers position the value of bundling to the customer as saving money. With the marked success of the current model of selling two products together as bundling with discount as the differentiator: y Insurers have been historically selling two products together and witnessing customer retention benefits (Customer retention rates with their current insurer are higher among renters who bundle an auto policy (91%) compared to renters who do not bundle an auto policy (67%) - J.D. Power) y Customers buying multiple products from same insurer reflect a larger proportion of perceived value (77% of customers bundle auto policies with additional policies and 58% of customers bundle their auto and home insurance policies with their existing insurers - J.D. Power) On analyzing factors that go into premium and discount calculation, it is found that real savings depend on a number of rating factors that differ between insurers, states, customer situation, etc. and are between 5-20%. These factors work differently in a combination, and sometimes customers save by buying products from two different 2014, HCL Technologies. Reproduction Prohibited. This document is protected under Copyright by the Author, all rights reserved. 5

4 insurers. A customer will be able to see the real savings only after thorough research, price comparison (both product and bundle) and selecting the right combination from the right insurer(s). For insurers, incremental value equals higher customer retention. At the same time, there is no real incremental value realized from a product which is the core risk management. In such cases, there is no value realized either for the insurer who owns the product and ends up managing different commoditized risks, or for those who get referral income as they do not reap the benefits of risk management. So Where Does the Potential Value Reside? Real value of bundling, for both customers and insurers, resides in the core building block of the product -- its individual coverage. Coverage within every product uniquely includes specific risk, and is thus a miniature product by itself. Even premium rates are calculated for each cover to arrive at the overall product premium. However, due to multiple reasons, including simplification of product to be suited for direct distribution through web commerce, insurance products have remained close to a commoditized state. The commodity trap is locked with standard coverage selection and only a scope for selecting desired coverage amount and deductibles. Save Money and discount led marketing, drives customers from right coverage to affordable premium. This often leads to customers selecting the wrong coverage (only those that are mandated by law) and deductibles (high out of packet), which prove disastrous for them when calamity strikes. Hence, gathering the customer s information, assessing the risk for the customer, building right coverage mix, and suggesting customized products based on the customer s risk profile is the approach that can deliver real value for both the customer and the insurer. A typical example is when a customer s car is more than two years old. Suggesting the customer to add extended warranty and road-side assistance is the real value insurers can deliver as risk managers. This approach also helps the insurers to pre-select the right customers for the right risk portfolio and assess the moral hazard when the insured individual selects a different package or coverage combination. Once the coverage within products gets de-commoditized and modularized to deliver custom products based on the risk profile of the customers, it can be extended to multi-line product bundling. Advise-based product bundling will position insurers as trusted Risk Portfolio Managers. The branding will create a pull for multi-line product bundles, driven by the need to protect, rather than save money in a compulsive spend. Customers will slowly move from I am mandated to provide Home Insurance for Mortgage mindset to I need to cover my liabilities from associate risks for a financially-secured future. Retention, satisfaction, and revenue for the insurer will get improved with the right risk portfolio management ratio. 2014, HCL Technologies. Reproduction Prohibited. This document is protected under Copyright by the Author, all rights reserved. 6

5 How is the Industry Responding? Insurers have been tuned in to the emerging need of the customers for the right risk portfolio management, and continue to fine tune their bundling strategy. Some of the insurers address bundling as convenience of managing the risk portfolio with single insurer along with consolidated billing and payments. Though this is often termed rudimentary, it still provides ease of access to service for the customers and increase stickiness. A few examples of insurers who approach bundling as helping customers through advice-to-build the right risk portfolio are given below: y Allstate provides All-in-One product, which through its subsidiary Encompass, covers fixed and floating assets in a single policy. This is available for high net worth individual customers. For mass market customers, it provides Bumper to Bumper Basics, which has State-specific minimum requirements with guidance to the general coverage selection by customers in the State. y GEICO provides an advisory tool to build a custom policy based on individual situation, where a customer can customize individual coverage y Progressive provides a Name Your Price feature, which helps customers with prebuilt packages based on their risk profile and helps them customize coverage. It also provides Auto + Property option while starting the quote to make it an integrated shopping experience. y MetLife Auto & Home s GrandProtect program allows consumers who purchase multiple policies to pay only the highest deductible in the event that several of their insured assets are damaged by one event, such as a storm or hurricane While the examples above prove that the insurers are changing to advisory-led coverage bundling within a product, they are still tactical in their approach. Their approach is still limited to customizing coverage within a product and tactically bundling other products with data reuse. Though adoption to addressing product bundling at a strategic level of being an end-to-end risk portfolio manager is slow, insurers are actively pursuing the goal leveraging by cutting-edge technical capabilities. How to Unlock True Potential of Product Bundling? The art and science of achieving strategic bundling hinges on building advisory capabilities and providing functionality to customize the coverage and the product, based on the risk portfolio of the customer. This also means that the core building blocks of coverage and pricing will not change, whereas the structure built with these building blocks will change to chapel or cathedral. The approach to build these super structures will also change from a build-to-order to a customize-to-advice. Cutting-edge technical capabilities such as Mobility, Responsive web in digital channel, Analytics, and Big Data in information infrastructure helps in building customization and advisory capabilities. Extensive use of external data (such as credit score, medical, etc.) and internal data (such as delinquency, etc.) with analytics will help insurers predict a customer s risk portfolio with fair accuracy. Social media is 2014, HCL Technologies. Reproduction Prohibited. This document is protected under Copyright by the Author, all rights reserved. 7

6 another evolving (though is also a candidate of information risk) external data avenue to gather customer profile, and risk and behavior data, which can be directly used to offer customized product bundling. Strategic bundling from a risk portfolio management perspective also requires customers to share personal information upright. Customers, especially millennial, are willing to share their personal information if they are assured of receiving personal advice. This carries high propensity to accelerate strategic product bundling to evolve and become more mature. It is evident that the customer s need for advice-based risk portfolio management and underlying technology enablers are available to build capabilities to deliver what the customer wants. Insurers who show agility in building these capabilities rapidly and bringing it to use for the customers, succeed in achieving strategic bundling and are given the status of preferred Risk Portfolio Managers. author SATHYANARAYANAN SETHURAMAN s-sathyanarayanan@hcl.com Sathyanarayanan Sethuraman is principal, customer experience management (insurance) for HCL America. He is a trusted adviser in the insurance industry in defining a customer-centric target operating model for Insurers across geographies. He has built trust with leaders in the insurance industry by converting the advisory into meaningful, IT-leveraged business solutions that have delivered increased customer satisfaction and profitability. 2014, HCL Technologies. Reproduction Prohibited. This document is protected under Copyright by the Author, all rights reserved. 8

7 About HCL About HCL Technologies HCL Technologies is a leading global IT services company working with clients in the areas that impact and redefine the core of their businesses. Since its emergence on global landscape after its IPO in 1999, HCL has focused on transformational outsourcing, underlined by innovation and value creation, offering an integrated portfolio of services including software-led IT solutions, remote infrastructure management, engineering and R&D services and Business services. HCL leverages its extensive global offshore infrastructure and network of offices in 31 countries to provide holistic, multi-service delivery in key industry verticals including Financial Services, Manufacturing, Consumer Services, Public Services and Healthcare & Life Sciences. HCL takes pride in its philosophy of Employees First, Customers Second which empowers its 90,190 transformers to create real value for the customers. HCL Technologies, along with its subsidiaries, had consolidated revenues of US$ 5.2 billion, as on 31st March 2014 (on LTM basis). For more information, please visit About HCL Enterprise HCL is a $6.5 billion leading global technology and IT enterprise comprising two companies listed in India HCL Technologies and HCL Infosystems. Founded in 1976, HCL is one of India s original IT garage start-ups. A pioneer of modern computing, HCL is a global transformational enterprise today. Its range of offerings includes product engineering, custom & package applications, BPO, IT infrastructure services, IT hardware, systems integration, and distribution of information and communications technology (ICT) products across a wide range of focused industry verticals. The HCL team consists of over 95,000 professionals of diverse nationalities, who operate from 31 countries including over 505 points of presence in India. HCL has partnerships with several leading global 1000 firms, including leading IT and technology firms. For more information, please visit Hello there! I am an Ideapreneur. I believe that sustainable business outcomes are driven by relationships nurtured through values like trust, transparency and flexibility. I respect the contract, but believe in going beyond through collaboration, applied innovation and new generation partnership models that put your interest above everything else. Right now 95,000 Ideapreneurs are in a Relationship Beyond the Contract with 500 customers in 31 countries. How can I help you?