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Death of segmentation in the insurance industry?

Death of segmentation in the insurance industry?

Stuart MacIntyre, Chief Underwriting Officer, talks to Insurance Business UK about ‘big data’ within the insurance industry. 

The noise around ‘big data’ peaked a while back, but its effects have left an indelible mark on many industries, not least the insurance sector. Big data may have removed the concept of ‘niche’ insurance but this doesn’t equate to weaker or less tailored insurance deals. On the contrary, this large volume of data, that now inundates businesses on a day-to-day basis, represents an opportunity for insurers to set themselves apart from competitors. Competition in the insurance market has never been fiercer, with a range of innovative newcomers disrupting the market.

However, data, when used in the right way, can be used to set businesses apart. If data is handled in an intelligent and responsible manner, it can be harnessed to help insurers fully understand their customers as individuals, not just as categories. This process will ultimately benefit the policyholders and will engender trust between insurance providers and their customers. Consumer trust in the insurance market is low in comparison to other sectors such as retail, according to a recent report by REaD Group, meaning that insurers have everything to gain by using big data to their advantage.

The concept of insurance, in other words the transfer of risk from an individual to a pooled group of risks, has been around since trade began. Over the years, insurance providers have become increasingly sophisticated at tailoring deals to customers and providing a more personalised service.

Insurance in the digital age
The advent of the digital age has heralded a fundamental shift in the way that businesses, especially insurance providers, operate thanks in part to the large quantities of data available. Only 15 years ago, many insurers would have specialist segments. There would be an insurer who would specialise in young drivers, and another who was best known for underwriting for pensioners. Companies such as Sheila’s Wheels, providing insurance packages exclusively for women, flourished in the age of segmentation.

Too much data?
Nowadays, there is simply too much data for traditional data segmentation to be carried out in this way. Insurance businesses have lost their specialisms and therefore must underwrite insurance policies in a different manner.

Insurers’ spreadsheets would be miles long with all the different permutations. It is no longer an efficient or productive use of time to approach data in this way. There are currently very few insurance companies in the market who have chosen to remain specialised towards specific demographic segments, due in part to criticism around policies tailored and marketed in this way.

One particular challenge raised by high volumes of information is that big data has resulted in the depersonalisation of customers, creating additional barriers between the customer and the insurance provider. However, big data represents a valuable opportunity from which the insurance sector can benefit. Sophisticated data platforms and tools equipped car insurers with the ability to ensure that customers receive an insurance package that is accurately calculated and tailored to their individual risk profile.

Risk profiling then and now
Gone are the days of sweeping generalisations about consumer driving habits when it comes to calculating insurance policies. Insurers no longer categorise customers into simplistic risk profiles using only basic demographics such as age or gender. As insurers have gained access to more sophisticated tools and technology, we owe it to our customers to deliver better insurance policies. Insurers, and indeed all businesses, should no longer make sweeping generalisations about consumers based on general ‘life patterns’. Not all 17-year-old males will be irresponsible ‘boy racers’, and not everyone with 20 years’ driving experience will be the most reliable drivers. There are fewer set moulds which insurers can draw assumptions from.

Thanks to data and technology, we have far greater insight into our customers’ lives and behaviours than ever before. Insurers should be learning to look between the lines, underwriters can gather some subtle behavioural insights to consider when creating the individual’s insurance policy.

Customer first
We are witnessing a rise in customer expectations across all business sectors, most noticeably in retail, where customers have become used to personalised offers. As a result, customers expect to see the same in their insurance premiums. The insurance industry has historically struggled to build consumer trust. Customers view insurance as something they have no choice but to buy, and therefore it is often considered to be a ‘grudge’ purchase. The best way, therefore, for insurers to build trust is by being more open with customers about how their data is being used and using this data to tailor insurance packages to the individual customer, providing them with a competitively-priced premium that has been personalised to suit their needs.

Personalisation of insurance policies
Insurers need to draw on the wide range of customer data that is available to them; even behavioural insights or lifestyle choices will help to make informed underwriting decisions. Using different channels of information to gather information can help to build a bigger picture. It is always best to look beyond the simplistic demographics of the past, and of course one such factor, gender, is no longer used as a price differentiator at all.

Segmentation in its old form has become time-consuming and outdated. Underwriters now have the appropriate tech platforms and tools to assess each risk independently and create an insurance policy tailored to an individual, and not just a general demographic. While big data has removed the concept of ‘niche’ insurance, it has opened the door to more personalised premiums, which will benefit policyholders in the long run.

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