Insurer Profitability and Customer Satisfaction: Reaching the Right Balance

The difference between companies that deliver a great customer experience and those that deliver a below-average customer experience has always been clear regardless of the industry served.

Executive Summary

Understanding the relationship between a company’s customer satisfaction performance and its financial results allows executives to make better decisions on the investment of resources for the benefit of owners and members, argues J.D. Power’s Jessica McGregor. Here, she presents results of a J.D. Power analysis of the links between underwriting profit and customer satisfaction indices, along with a Watermark Consulting analysis of the relationship between customer satisfaction and stock price performance.

A great customer experience is just as important for insurance companies as it is for companies like Amazon and Google.

J.D. Power’s cross-industry research demonstrates that companies that deliver the best customer experience also end up with the greatest financial performance. Insurance executives must balance profitability, investments in operations and customer satisfaction improvement initiatives, as moving the level on one can significantly impact the others.

The Watermark findings were originally published by Carrier Management in July 2016 in an article by Jon Picoult titled “Investment Returns Reveal Payoff of Great Customer Experience for Insurers.” A white paper describing Watermark Consulting’s 2016 Customer Experience ROI Study (Insurance Industry Edition) is available for complimentary download at http://bit.ly/CX-ROI-INSURE.

Findings of the 2016 Customer Experience ROI Study by Watermark Consulting, a U.S.-based customer experience advisory firm, showed that publicly traded auto insurance companies with the highest customer experience performances in J.D. Power research significantly outperformed the industry when looking at cumulative stock performance over the last seven years (Figure 1, below). These same findings hold true for publicly traded home insurance companies. Personal lines companies with a focus on customer experience clearly deliver higher revenue and profits. (Editor’s Note: Watermark Consulting Principal Jon Picoult points to factors like better retention, reduced acquisition costs and fewer complaints to explain the results.)

Watermark defines Auto Insurance Customer Experience Leaders and Laggards as the Top 5 and Bottom 5 publicly traded insurers in J.D. Power’s 2010-2016 U.S. Auto Insurance Satisfaction Studies. Comparison is based on performance of equally weighted, annually readjusted stock portfolios of Customer Experience Leaders and Laggards.

Commercial Insurance Satisfaction and Profit

Rates across the U.S. commercial property/casualty insurance market continued to decline in 2016, according to MarketScout, the Council of Insurance Agents and Brokers and other sources. Lower rates in commercial property, general liability and workers compensation contribute to the overall decline. In these soft market conditions, insurers have focused on more disciplined underwriting and risk management to improve their loss ratios. In 2014 and 2015, total commercial lines loss ratios were at the lowest levels over the past six years, while the commercial lines expense ratio has remained relatively constant across the same time period, according to data compiled from J.D. Power’s Insurance Performance Portal.

In the accompanying charts for commercial insurance, direct loss ratios include loss adjustment expenses; expense ratios include commissions, general expenses, taxes and other non-claim expenses.

Comparing commercial insurance combined ratios and commercial insurance customer satisfaction suggests that the higher the customer satisfaction level achieved, the more profitable the book of business the insurer produces. The fact that insurers with higher customer satisfaction tend to have stronger combined ratios suggests that they have a competitive advantage in a highly competitive soft market in that their existing book is sufficiently profitable to support growth of their selected class of risk through reasonable relaxing of their underwriting standards.

In the “J.D. Power 2016 Large Commercial Insurance Study,” XL Catlin earned the highest customer satisfaction score and one of the best combined ratios of the carriers profiled. The biggest customer satisfaction distinguisher for XL Catlin was its ability to provide a flexible program design and implementation at a fair price to customers. XL Catlin achieved this customer satisfaction success while maintaining a profitable combined ratio.

Personal Lines Satisfaction and Profit

Related Carrier Management analysis: “Analyzing J.D. Power Ratings: How National, Regional Auto Insurers Stack Up.”

Examining the three-year average (2013-2015) of loss incurred ratios for private passenger auto vs. personal auto insurance customer satisfaction (CSI) across insurers by premium size below shows that for the largest automotive insurers the range of ratios and CSIs they experience are more tightly grouped than they are for smaller carriers. (Sources: J.D. Power 2016 U.S. Auto Insurance Study; J.D. Power Insurance Performance Portal)

This may be because they are a more homogenous group in terms of their mix of business than are smaller insurers. It appears that to gain great size, a carrier must accept a mix of business that mutes or limits specialized differentiation in both overall risk and customer type. The range of the loss incurred ratios from highest to lowest is only 11 percentage points among the larger insurers compared to 24 percentage points among the smaller insurers.

In the accompanying charts for personal auto insurance, direct loss incurred loss ratios are pure loss ratios, excluding loss adjustment expenses. Data for the “Personal Automotive (State)” aggregated line of business from SNL based on Statutory Filings.

The highest customer satisfaction levels are achieved by smaller carriers, perhaps as a result of their more focused business approach with respect to product or customer segment orientation. Their more specialized books of business allow for more customized underwriting and servicing that caters to the unique features of its customer or product set. However, as the market softens, these smaller insurers have more difficult decisions to make, as they have fewer degrees of freedom in which to shift their mix of business with respect to both products and customers. Therefore, it is critical for management at all carriers to be thinking about how to keep their best customers satisfied while maintaining profitability, particularly in current market conditions.

The Right Balance

Looking across J.D. Power P/C insurance satisfaction studies shows that insurer profitability and customer satisfaction are linked. Insurers have many levers to choose from when balancing investments in operational day-to-day activities, operation upgrades, technology, staffing and customer satisfaction priorities. The fact that P/C insurers with the highest levels of customer satisfaction also have the highest levels of profitability and revenue suggests that this connection should be capitalized upon. However, executives must determine how moving a lever on customer satisfaction could impact profitability and vice versa.

Executives need to determine the incremental value created by customer satisfaction initiatives relative to other uses of their company’s resources. The starting point would be to get a clear picture of where the company stands on both customer satisfaction and financial results over time and relative to peers. Knowing where their firm currently stands on these measures provides a foundation for determining if it would be in the best interest of their company’s profitability and stock performance to push for higher customer satisfaction levels, or if their current levels are sufficient.

Many executives think of customer satisfaction as a “soft” measure of performance. The reality is that there is a strong relationship between customer satisfaction and “hard” financial performance measures. Understanding the relationship between a company’s customer satisfaction performance and its financial results allows executives to make better decisions on the investment of resources in the operations that benefit owners/members. This understanding of customer satisfaction and financial performance will be all the more critical if the industry starts to shift to a firming or hard market pricing environment.