The Analytical Life Insurer

Profitable Analytic Strategies for Life and Annuity Carriers

WHITE PAPER
SAS White Paper

Table of Contents
Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Distribution and Producer Analytics. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Producer Segmentation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Territory Definition and Route Optimization. . . . . . . . . . . . . . . . . . . . . . 3
Lead Generation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Maximize Wallet Share: Cross-Selling. . . . . . . . . . . . . . . . . . . . . . . . . . 3
Optimize Marketing Offers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Compliance and Suitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Profitability and Lifetime Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Customer Analytics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Social Media Analytics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Customer Interaction Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Product Lifecycle Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Product Underwriting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Product Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Product Profitability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Product Lifecycle Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Operational Analytics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Call Routing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Predictive Alerts and Triggering Events. . . . . . . . . . . . . . . . . . . . . . . . . 9
Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
 The Analytical Life Insurer

Executive Summary
In the insurance industry, the companies that focus on product lines typically under the
diversified insurance umbrella (such as group and individual life, annuities, retirement
plans, financial services and supplemental health products) have been slow to adopt
predictive analytics within their organizations. Other industries, including property
casualty insurers, continually demonstrate success in using analytics to grow their
businesses more profitably and increase revenue while managing risk. Life insurance
executives are beginning to recognize the need to evaluate analytics as a way to
innovate, differentiate and improve their organizations. This paper will uncover business
strategies enabled by analytics, and provide examples of analytic innovation that insurers
can introduce in their business processes.

Introduction
The business drivers for considering an analytic strategy within the industry are
compelling: Due to continuing low interest rates which lead to a decline in investment
yields, the uncertainty of the regulatory environment, the commoditization of products,
competitive industry pricing and a soft economy, insurers are feeling increased pressure
on profitability. In addition, insurers are aggressively competing for awareness and
wallet share among distributors, producers and customers. It’s critical to identify
ways to optimize their field organizations; find the most profitable agents, brokers and
customers; optimize workflow while decreasing costs; and balance risk and regulatory
demands.

The analytic strategies that life insurers can employ are divided into four representative
categories (figure 1):

Figure 1: Analytical Life Insurer

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• Distribution and Producer Analytics: Influencing distribution and producer behavior

through loyalty and lifetime value indicators.
• Customer Analytics: Finding and understanding the needs of your target
customers and providing them with the information they need when they want it,
the way they want it.
• Product Management: Supplementing traditional actuarial and underwriting
methodologies with predictive analytic capabilities in the product development life
cycle.
• Operations: Identifying ways to optimize the workforce while creating a better
customer experience.

Distribution and Producer Analytics

Many diversified insurers rely on negotiated selling agreements with broker-dealer
firms and banks to sell their product lineups. In fact, roughly 92 percent of life and
protection products are sold through third-party distribution arrangements. How are
the insurers making sure that they’re aligning their wholesaling field organizations to the
right opportunities? Many insurers still see the business of wholesaling as an art, not
a science, but a few innovators are introducing quantitative methods into qualitative
sales practices. Insurers can apply these analytic initiatives at all levels of the distribution
chain, from the external and internal wholesaling organizations to the producers. Analytic
strategies include:

• Reducing wholesaler turnover by providing wholesalers with more qualified leads

and sales.
• Defining sales territories based on the predicted opportunity within a geographic
area.
• Reducing product suitability risk by positioning the right product with the right
consumer.
• Bringing more profitable producers to the insurers.
• Ensuring the optimization of marketing dollars.
• Gaining producers’ loyalty by proactively helping them understand the
demographics and opportunities in their potential and existing customer base.

Producer Segmentation
In a representative scenario, while insurers have employed basic segmentation
techniques, these segments are not predictive. Some wholesaling organizations group
producers into simple classifications and align sales activities with “higher-value”
segments. The problem with this segmentation strategy is their rearview-mirror definition
of value.

One insurer had a campaign for producers that hadn’t sold any business in
the prior six months. Using predictive modeling, the organization was able
to create a model that would predict which producers would stop selling
before they did stop. It implemented a number of marketing campaigns
targeted to the at-risk group of producers, resulting in a multimillion-dollar

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lift in sales over the course of the campaign. By implementing different

campaigns, it also could determine the most effective combination of
contact points to keep producers on the books. Additionally, with a
segmented approach, marketing dollars are more effectively spent, so the
company moved from blast to focused marketing. The campaign generated
a significant lift in sales for the target group, not only increasing the bottom
line by millions over a three-month period, but saving and retaining formerly
“at-risk” top producers.

Territory Definition and Route Optimization

The field organization needs to be in the right place to take advantage of opportunity.
Throwing a representative into a territory based purely on population is ineffective. Using
demographic data and identifying target markets enables the organization to profile the
population, develop products to meet specific markets, and ensure that the sales force
aligns with those markets.

By combining geospatial capabilities with analytics, one insurance

wholesaling organization began to assist wholesalers by optimizing their
routes so they could increase face-to-face coverage with their producer
network. The routes could be defined by predictive segments, to ensure
that wholesalers were spending time with the producers that would bring
the most value to the insurer.

Lead Generation
The most common use of predictive analytics for captive distribution models is to
provide leads to the producers. Insurers with this capability are combining their internal
data with third-party database marketing solutions to mine their own books of business
for opportunities.

Mining Diamonds: AXA Equitable changed its business strategy from

offering primarily life insurance and annuities to concentrating on financial
advisory services and a broader array of products. Executives wanted to
make sure that the focus remained on the customers, as product offerings
and services expanded broadly. “One of the biggest challenges in the field is
having thousands of clients and achieving a level of data segmentation that
allows us to understand our customers better; that allows us to stand back
and analyze the decisions consumers in various demographics are making
and the trends that exist. SAS® allows us to do that type of analysis.”

Maximize Wallet Share: Cross-Selling

Most insurers sell more than one product line, and as the producers increase the breadth
of products they sell from a provider, they become “stickier”: They sell more, they have
higher account values, and they have a longer tenure with the provider. Analysis at one
insurer revealed that a producer’s sales double for each additional product line sold. Max
New York Life is finding success in customer cross-sales:

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“Sales cycles to existing customers are faster,” noted Nagaiyan Karthikeyan,

PhD, Head of Business Intelligence and Analytics at Max New York Life,
an Indian insurer, “and the average premium amount is often 30 percent
to 40 percent higher. Plus, we’ve found that the retention probability for a
customer goes up 300 percent to 400 percent once they make a second
purchase with us.

“We’re able to target our customer segments much more logically and
granularly. We’ve identified about 25 separate cells, and we see their
demographics and previous transaction behaviors. That lets us tailor
specific cross-sell offers and script different contact scenarios based
on their value, their propensity to buy, their propensity to pay, and their
propensity to lapse… In the first quarter after implementing SAS, sales to
existing customers jumped to more than 20 percent,” Karthikeyan said.

Optimize Marketing Offers

Although the direct-to-consumer distribution model represents only a small fraction of
industry sales, these insurers have the ability to fully realize the advantage of marketing
campaign optimization, as illustrated by Transamerica Life and Protection (TLP). TLP is
one of the largest direct response marketers of life, credit, supplemental health, specialty
insurance and fee-based products. Considered a leader in data-driven marketing and
strategic segmentation, the company uses diverse marketing methods, such as direct
mail, inserts, Internet, point of sale, print, television and telemarketing.

“In 2009, we had more than 95 million direct marketing solicitations

and 14.4 million telemarketing contacts,” said Angela Williams, Director
of Marketing Sciences. “So you can see we would need a large and
sophisticated solution to manage the offers we are making.

“With marketing optimization, we created a decision engine that had a

single decision point. We could take all of our programs and pull them
into a single campaign execution process to select names, apply contact
rules, manage models, and select the best product among an expanded
marketing universe. Marketing investment decisions are made in a holistic
context.”

According to Robbie Reynolds, Manager of Marketing Sciences, “You’re

always balancing revenue with the need for profit. Some marketing
organizations believe there should be no risk; everything should be
profitable. Other groups are willing to look at something that is not
apparently profitable and consider the potential. With optimization, our
marketing sciences team pulls all the pieces together and finds the best
possible, data-driven solution within all of those dynamics.”

Compliance and Suitability

Negative press continues to plague the insurance and financial services industry, and
several recent high-profile cases of unsuitable sales to customers have surfaced in the

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past five years. Regulatory agencies have aggressively moved to protect consumers
from poor or questionable sales practices at the distribution and insurer levels.

An insurer’s compliance department analyzes trends within the suitability guidelines

provided by the regulatory bodies, establishing the appropriate baseline and monitoring
activity relative to that benchmark. Predictive modeling and forecasting identify
trends. Producer behavior models anticipate certain types of activity and can uncover
suspicious activity. The resulting marketing and service campaigns are intended to
influence or reinforce positive behavior. Information is shared by the insurer, broker-
dealers, and regulators, making compliance pervasive as a business activity throughout
the distribution network.

Profitability and Lifetime Value

The foundation for broader analytic strategies supporting product development and
pricing, customer service, and risk management is customer lifetime value (CLV). Simply
put, CLV is a metric that represents the customer’s predicted future revenue minus
costs, and is used to estimate future profitability. CLV can be calculated on an aggregate
(segment) or individual basis and can include internal data sources like transaction
and interaction histories, acquisition and other activity-based costs, as well as external
marketing, econometric and psychometric data sources used to approximate the
behavior and preferences of a prospect.

One insurer using lifetime value scoring changed the evaluation criteria for
its direct mail marketing campaigns. Where it used to measure success
based on the number of responses and the close rates, it’s moved to a
model where it can differentiate based not only on the number of sales,
but the quality of those sales. Going even further, it expanded lifetime
value metrics to drive not only the placement of its captive agency sales
force, but how those agents were compensated. Compensation now takes
into account the quality of the customer relationships that the agents are
bringing to the insurer and rewarding them for it.

Customer lifetime value metrics help the insurer understand which producers and
customers are driving greater value than others. When it identifies the differences
between profitable segments, it can create programs to increase those success factors.
This particular insurer increased return on investment for marketing campaigns by 14
percent and saw significant enhancements in agent performance. Even in the absence
of a true CLV metric, even a simple profitability metric can drive results:

A regional Canadian insurer created a segmentation strategy for its broker

network that identified profitability metrics for each broker firm. By looking
at the acquisition costs and quality of the book of business that the brokers
were bringing to it, the insurer created treatment strategies for each
segment. The insurer made additional marketing investments in the best-
performing firms, and some low-performing firms were dropped from its
network. By focusing on top-performing brokers, it increased producer
loyalty and per-policy profitability.

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Customer Analytics
Insurance companies must meet the demands of consumers in tech-savvy younger
generations as well as manage the needs and requirements of the large global
population approaching retirement age. Demographic and ethnographic shifts affect
these organizations’ internal workforce as well as distribution partners and consumers,
pressuring insurers to effectively create and manage services that they can deliver at
multiple levels, through multiple channels. Pervasive consumer technologies are driving
change throughout the insurance industry.

Social Media Analytics

The insurance research consultancy firm Strategy Meets Action (SMA) performed
a study in 2011 on social media in insurance. It found that more than 80 percent of
insurers surveyed were studying and monitoring social media, and 40 percent had active
social media strategies. SMA identified four target areas of opportunity, including:

• Finding market opportunity through identifying new target audiences, or inputs into
product development.
• Executing on opportunity through campaign management to target new
prospects.
• Brand management.
• Using social media data in other non-marketing activities, such as underwriting,
customer service, risk management and fraud.

Customer Interaction Management

Pervasive consumer technologies change the way that people interact with each other.
The ability to communicate instantly and share information globally is forcing companies
to evolve the ways that they interact with and support their consumers and distribution
partners. Insurers must support multiple delivery channels and offer a consistent
experience across those channels. The challenge lies in creating the right balance
between channels, from high-touch to low-touch. Consumers expect the companies
they work with to understand their preferences and offer them relevant messages at the
right time, requiring a deep understanding of complex customer behaviors and market
segments.

The growth in customer interaction channels – mobile, Web, phone, mail, face-to-
face – necessitates a careful choreography of interaction points. Some insurer industry
innovators are using the mobile and Web channels to reach out to untapped market
segments.

AXA Equitable launched a life insurance game app for Apple’s iPad ® and
iPhone® mobile devices called “Pass It On!” The app is designed to educate
consumers on the benefits of their indexed universal life products at
different life stages through an interactive game (prospective customers are
offered a chance to win the “Pass It On!” sweepstakes). Mobile applications
are providing insurers with new interaction channels to engage with and
educate potential customers.

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Another insurer undertook a strategic initiative to better serve its financial advisor and
client networks, including service and channel segmentation to better find and grow
new investors that may not have been served in the past. In order to gain the capacity
needed to implement this strategy, it employed its call center to help achieve this goal.
Real-time customer profiling and interaction management at the time of contact became
a cornerstone of its strategy. Other initiatives included:

• Trigger-based outbound campaigns to producers: The insurer started with direct

mail/email campaigns and then added inbound calls to take certain actions based
on clients’ profiles. The logic was applied in the automated call system and call
center desktops to provide the best interaction for the customer.
• Offering a combination of sale or service contact points based on the client’s
needs: This allowed financial advisors to focus on high-net-worth customers while
allowing the call center to serve emerging investors.

Product Lifecycle Management

With the increased commoditization of life and protection product lines coupled with an
extremely competitive market, insurers are identifying innovative ways to use analytics
outside of the traditional actuarial pricing or underwriting methodologies in the product
development life cycle.

Product Underwriting
The average time from the start of the underwriting process to policy issuance for a
mid- to high-value life insurance policy is 72 days. The sales cycle is so long that many
advisors don’t want to deal with the complexity of the sale, and potential customers
don’t want the hassle of the medical reviews. With life insurance sales at a 50-year low,
insurers are rushing to find ways to make the products easier to buy and sell. One of the
most innovative ways that insurers are changing the underwriting process is by creating
models to predict whether further medical tests are needed. The underwriters use the
models as a guideline for ordering additional tests. If no tests are needed, the policy can
be quickly issued. The models are developed using third-party consumer data sources
to identify risky attributes.

Product Development
Insurers are increasingly recognizing the need to differentiate their product development
approach, particularly in group insurance products. One insurer just finished the design
of a new retirement product that incorporated more than 500 rating variables. In addition
to new product features and compensation structure, the granularity of the rating
structure allows for personalized individual plan pricing. This personalized approach
makes the product a more attractive offering for both producers and plan sponsors.

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Product Profitability
Other insurers are actively implementing analytic models to determine product
profitability that gives a signal in advance whether adjustments should be made to
product lines.

Canadian insurer The Standard Life Assurance Company opted for SAS
Activity-Based Management, an analytic application that models business
processes to determine cost, profitability and the drivers that help
organizations make informed decisions that streamline operations, deliver
revenue growth and reduce costs across the organization. “SAS Activity-
Based Management software gives us a sense of which products we should
focus on and which ones we should focus less on,” says Eric Campbell,
Manager of Financial Strategy and Planning, “Further, we can calculate a
product’s efficiency and improvement over time.” The solution gives insight
not only into which product is most or least profitable, but also where more
investment may be required over time, and is considered crucial to doing
business.

Product Lifecycle Management

Recognizing significant opportunities within their existing blocks of business, insurers
are tapping their current customers to generate incremental sales and increase their
retention. One life insurer with an older book of life insurance business created a new
product offering to move existing policyholders into newer, more profitable product lines.
It also mined the book to identify opportunities in its distribution, including identifying
attributes of top life insurance producers and influencing the behavior of emerging
producers.

Operational Analytics
Operational analytics covers a broad spectrum of initiatives within the diversified life
insurance industry, and can cover areas such as workforce and workload optimization,
call center analytics and fraud detection. The following are three real-world examples of
operational analytics in the life insurance industry.

Call Routing
The call center is the first line of defense in retention efforts. As a system for effectively
matching an incoming call with the appropriate CSR, skills- and trigger-based routing
have gained in popularity over the last decade. In one insurer’s customer retention
program, a predictive model was built to identify “at-risk” policyholders. If the
policyholder called the call center and was deemed to be at high risk, he or she would
be automatically routed to a retention specialist.

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Predictive Alerts and Triggering Events

Based on a predictive model developed for customer retention efforts, one insurer
identified Web-based customer transactions as a predictive triggering event, and used
the event to automatically generate a follow-up interaction with the client when the event
was triggered. This same insurer also allowed brokers to sign up for alerts that would let
them know when clients executed a particular transaction on their own behalf. A broker
who did not believe the transaction to be in the client’s best interest would have an
opportunity to influence the policyholder.

Conclusion
Insurance companies operating in their status quo business model will be at a
competitive disadvantage in the coming years. Increasingly, insurers must provide
unique products and services tailored to meet the diverse needs of their producer
and consumer communities. To do so, they need a deep understanding of complex
customer behaviors, market segments and product life cycles. The ability to capitalize
on these new market opportunities will depend on an insurer’s adeptness at identifying
new customers and producers and retaining profitable ones, providing the right
products at the right time, and giving customers top-level service through multiple
delivery channels. Analytics represents the next frontier for this industry, and even with
the challenges posed in shifting from a sales culture to an analytic culture, the industry is
well-positioned to start down this path.

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About SAS
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