Actuaries and Marketeers – The Dream Team?
The application of new analytical techniques will require actuaries and marketing people to work together as never before, says Stephen Jones of EMB.
‘Chalk and cheese’ come to mind when you think of marketeers and actuaries. On the one hand, men and women with great flair and imagination but very limited interest in detailed mathematical calculations; on the other, people with prodigious analytical skills, not exactly known for their creative and visionary thinking.
Of course, many individuals defy these stereotypes, but it is fair to say that the marketing and actuarial departments of most insurance companies do not communicate terribly 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 is starting to happen thanks 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 and/or intuitive belief, and then to test, learn and refine. Customers have then been segmented on a broad-brush basis for campaign activity, using static classifiers such as lifestage 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 finely-targeted customer segments or individual factor scores. Behavioural models also help you to predict customer response and measure marketing performance against this.
Pioneered overseas, notably in Australia, actuarial marketing analytics can be applied to just about any consumer product. It is especially relevant to the insurance industry, where segmentation on risk is already well understood, where maintaining existing customer relationships can be a challenge and where margins are so tight that even the slightest competitive edge can make a big difference.
In no way do these techniques replace the marketing manager’s judgement, let alone his or her creativity, but they do provide a robust technical and financial grounding for creative and strategic decisions.
What are the business applications?
The discipline of actuarial marketing analytics is still growing in scope, but can already 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 isolate price and non-price factors in customer choices and advise on how best to service different customer groups.
The kind of conclusion you might reach is that recent claimants respond to a service message with their renewal invitation, whilst another customer group is receptive to a price message. Or that some types of customer are alienated by frequent communication, whilst others will respond positively. It is also strong on identifying marketing “triggers” - events in the customer relationship, such as complaints or product upgrades that make them particularly amenable to a timely offering.
All these – and the many other applications of marketing analytics – have obvious implications for marketing strategies, their target groups, their medium of delivery, their messages and timing.
Why does this matter to marketeers? What’s changed for them?
In common with many other industries, insurers have invested heavily in customer relationship management (CRM) 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, and many lack the analysis skills necessary to identify the key factors affecting customer behaviour, to build the models to marshall that intelligence and apply it in guiding marketing activities. In short, there is a gap between the analysis capabilities of many marketing functions and those necessary to leverage maximum value from costly yet powerful CRM engines.
The environment in which insurance marketeers must deliver against 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.
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 more creative and strategic aspects of their roles.
The bigger win comes, however, 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 type of intelligence is another matter, but you need the skills to acquire it in the first place. They say “opposites attract”. It has not happened yet to actuaries and marketeers, but this is now an idea whose time has come.
This article appeared in Post Magazine in April 2006