Growth in the property and casualty insurance (P&C) industry has been tracking below the overall US GDP growth since the start of the COVID-19 pandemic in 2020. The industry had been experiencing challenges in terms of profitability even before the pandemic struck, and the sudden spike in inflation has only added to their woes. As a result, the industry experienced a $27 billion net underwriting loss in 2022, 6x more than the underwriting loss in 2021.
The pandemic affected personal lines insurance mainly because of supply chain disruptions. Delays in claim settlements also resulted in bad customer experience. To tackle the rising inflation and slower growth, P&C insurers are raising the premiums (insurance premiums are expected to grow 7.5% and 5.5% in 2023 and 2024, respectively, to keep up with inflation) and cutting back on marketing budgets. As an example, GEICO reduced its advertising spending by 38% YoY in 2022, representing the highest drop among the top 4 auto insurers in the US.
The marketing team is now under increasing pressure to show continuous improvement and deliver measurable value to both organization and customers. Marketing budget cuts are happening when customer acquisition and retention costs are growing, which adds to the margin pressure on insurance companies. Marketing teams need help effectively utilizing their limited budget to acquire the correct set of customers and retain high-value customers. This blog focuses on the need for insurance companies to reduce acquisition costs and retain existing customers.
Rising Customer Acquisition Costs
Customer acquisition cost (CAC) is the highest in the insurance sector across all B2C industries, with an average CAC of $900 per customer. There is limited new customer entry in the insurance industry, as every year, 5–10% of the existing customer base shop around for new insurance plans. Simultaneously, approximately 5% of new customers enter the market. In essence, every major insurance company is targeting the same limited customer base.
Assuming the accessible P&C insurance market for new and churning customers is $250 billion, the available market for new customers is less than $40 billion, and insurance companies effectively end up spending more than $15 billion (overall advertising spend from P&C insurance providers in 2023) and are not getting the desired result. Relying on outdated acquisition models is further hurting them. So, insurance companies need to identify the target customers effectively and have an effective retargeting strategy to target churned customers.
Auto insurance shopping and switching are rising. In Q42022, the shopping and switching rates were 12.1% and 4.1%, respectively. It now costs 7–9 times more for an insurance company to acquire a new customer than retain an existing one. Whenever customers choose to stay with their insurance provider and renew their plan, their premiums will increase marginally. However, if they tend to shop around, they will get a cheaper premium from a new insurance provider.
This phenomenon, coupled with inflation, is driving more customers to shop around, and hence churn rates are increasing, increasing customer retention costs. Thus, insurance companies need to identify at-risk customers first; among those, they need to find high-value customers who should be retained. They also need to choose the right retention strategy for different sets of customers.
Target, Acquire, and Retain Customers
Insurance companies should focus on acquiring and retaining customers with better risk if they need to maximize the value of their marketing investments. Insurance companies will classify a customer as a better risk for one or many reasons.
- If customers stick around for a longer time with the same insurance provider
- If customers purchase additional P&C products and bundle their policies with the same provider
- If they are high-value customers who are most likely to respond to upsell/cross-sell campaigns
- If the customers are not too sensitive to price/premium increases
Let us consider an example of different types of customers.
- Customer #1: Unmarried and looking for a standalone renters insurance
- Customer #2: Married and looking for homeowner insurance and having auto insurance with some other insurance provider
- Customer #3: Married, has two kids, and looking for homeowner insurance and ready to bundle that with an auto/pet insurance
From an insurance company standpoint, targeting and acquiring Customer #3 would fetch them a better value as the customer will have a better risk. Segmenting the customers based on risk will also help insurance companies identify high-value, at-risk customers they should target for retention.
Fostering Strong Relationships with Customers
Insurance companies have difficulty maintaining customer engagement outside a claim or a renewal. P&C insurance companies should contact customers early — probably when buying auto insurance. When an insurance company acquires customers and develops a relationship with them at this stage, they will choose the same insurance provider when looking for renter’s/homeowner’s insurance, engagement ring insurance, pet insurance, etc. Insurance companies that offer different lines of P&C insurance will have enough opportunities to cross-sell to the customers, generating more revenue if they focus on customer service and providing a seamless experience.
Organizations’ expectation from the marketing function is changing, and many marketing teams are prioritizing this change. CMOs should not limit themselves to customer acquisition but evolve into a customer experience/success officer role. They should influence speed, efficiency, effectiveness, and value in the customer journey to foster strong customer relationships. An analytics-enabled transition with a full-funnel strategy (from awareness to advocacy) will help navigate the challenges marketers face, enable CMO to evolve into a customer experience expert, and position marketing as a critical enabler for the organization’s success.
LatentView Analytics is uniquely positioned to help insurance companies maximize value from marketing investments by delivering critical analytical insights. Kindly connect with us at consultingservices@latentview.com.
