Teamwork is essential in analysing how customers respond to a product and, as Stephen Jones explains, actuaries and marketeers should stand up and listen to a new way of working together
'Chalk and cheese' comes to mind when marketeers and actuaries are compared. On the one hand, marketeers have flair and imagination but limited interest in detailed mathematical calculations; on the other, actuaries have prodigious analytical skills but are not exactly known for their creative and visionary thinking.
Many individuals defy these stereotypes but the marketing and actuarial departments of most insurance companies do not communicate well with each other, let alone work together productively. Yet their complementary skills and perspectives, properly harnessed, can be a powerful combination.
This is not as unlikely as it might seem. In fact, it has started to happen due to the emergence of a discipline known as marketing analytics or, to be precise, actuarial marketing analytics. This involves the application of actuarial techniques and tools to ensure that marketing performance and strategy become more measurable and better aligned with profitability objectives.
The traditional marketing approach has been to start with a theory - maybe based on anecdotal experience or intuitive belief - and then test, learn and refine. Customers are then segmented on a broad-brush basis for campaign activity, using static classifiers, such as life-stage and affluence.
Actuaries, by contrast, seek to understand individual customer behaviour through detailed analysis of transactional data, identifying and isolating the relevant factors. In this way, they can predict behaviour and quantify the impact on financial value. This information can then be used to develop marketing strategies based on targeted customer segments or individual factor scores. Behavioural models also help to predict customer response, and can then help measure marketing performance against this.
Pioneered overseas, notably in Australia, actuarial marketing analytics can be applied to most consumer products. It is especially relevant to the insurance industry, where segmentation on risk is well understood; where maintaining existing customer relationships can be a challenge; and where margins are tight so that the slightest competitive edge can make a big difference.
In no way do these techniques replace the marketing manager's judgement, let alone their creativity. They do, however, provide a technical and financial grounding for creative and strategic decisions. So what are the business applications of such techniques? The discipline of actuarial marketing analytics is still growing in scope but can be applied throughout the customer lifecycle, helping to improve financial return on acquisition, retention and cross-sales activities.
It can identify promising prospect segments with the greatest long-term profit potential, the best means to communicate with them and those most likely to respond positively. It can also isolate price and non-price factors in customer choices, and advise on how best to service customer groups.
The results might show, for example, that recent claimants respond to a service message with their renewal invitation, while another customer group is receptive to a price message. Equally, some customers may be alienated by frequent communication, while others respond positively.
It can also identify marketing triggers - events in the customer relationship, such as complaints or product upgrades, that make them particularly amenable to a timely offering.
These techniques, therefore, have obvious implications for marketing strategies with regard to target groups, the medium of delivery, the message and timing.
Changes for marketeers
In common with many industries, insurers have invested heavily in customer relationship management technology. CRM has restructured insurers' data around the customer, rather than the product, and has made this data available in vast quantities to the marketing department.Marketeers are now overwhelmed with information but many lack the analytical skills necessary to identify the factors affecting customer behaviour, to build models to marshall that intelligence and apply it in guiding marketing activities. There is a gap between the analysis capabilities of marketing functions and those necessary to leverage maximum value from costly yet powerful CRM engines.
The environment in which insurance marketeers must deliver on their performance targets has, meanwhile, become more challenging. Pressure on expense margins and renewed focus on sound corporate governance have placed a greater imperative on them to justify their budget and to measure and improve the financial performance of their function. In short, the marketing budget is increasingly seen as an investment that must deliver a predictable and acceptable return, rather than an unavoidable cost of doing business.
So how can marketeers work with actuaries? As a first step, actuaries can lift the burden of analysis from their marketing colleagues, freeing them to concentrate on the creative and strategic aspects of their roles.
The bigger win, however, comes from applying actuarial methodologies within a data-driven marketing approach, where data analysis underpins all marketing decisions, strategic and tactical. Actuarial techniques can be applied to large volumes of CRM-sourced data - rich in information about customers - to provide detailed insight, and to understand the drivers of customer behaviour and profitability.
How marketeers use this intelligence is another matter but they need the skills to acquire it in the first place. Opposites are said to attract, and while this is not yet the case for actuaries and marketeers, it is an idea with potential.
Stephen Jones is a senior consultant at specialist non-life actuarial consultancy EMB.
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