Microtargeting for Insurance on the Way

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Financial services companies in general, and insurance companies in particular, have always been in the vanguard of direct marketing. The nature of the products is essentially that there is no such concept as "one size fits all," and, thus, broadcast media are of limited usefulness from a product promotion viewpoint (though, of course, there is value from a branding viewpoint).


This makes the industry ideal for the interactive environment and particularly for the Internet, which makes possible true one-to-one marketing - though current Internet models have yet to optimize those possibilities.


Insurance products are highly differentiated, based on the characteristics of each situation. With auto insurance, for example, a quote depends on a host of variables, from car model to mileage to age of driver. As a result, insurance companies are particularly enthusiastic practitioners of direct mail as a marketing channel because of the higher degree of targeting or audience segmentation that can be carried out. And they have been early adopters of Internet marketing.


Yet microtargeting remains elusive at this stage for two main reasons. First, because of the personal nature of the data required to do effective targeting, it is difficult to get consumers to share that information. Second, even if the necessary depth of data could be captured and shared, managing it and making it available as a segmentation marketing tool is difficult from a technological viewpoint.


Getting the consumer to provide the information can only be addressed by giving the consumer a compelling reason to do so. This could have two components: a financial reward for providing that data and, thus, facilitating a more efficient marketing process; and a more efficient way for the consumer to find the best deal.


Few companies offer businesses the ability to do this sort of targeting on an open-loop system. (In a closed-loop environment, companies can use their own databases and customer relationship management software to do enhanced targeting of existing clients.) The development of open-loop microtargeting abilities to attract new customers (as opposed to up-selling existing customers) will transform the nature of insurance marketing.


Instead of the current, relatively blunt insurance quotation models, specialized pricing is likely to become the norm during the next decade. Instead of having a standardized theft premium for a given ZIP code and type of car, auto insurance companies could implement a specific pricing for a specific model of car located on a specific street within that ZIP code.


Insurance companies can already do this type of pricing, but they have not been able to carry out segmentation marketing on that basis. In other words, if a customer calls an insurance company seeking a quote, the company can price differentially, but proactively seeking a specific potential customer for a specific offer is not cost-effective. The power to market specifically to, say, owners of BMW 3 series living on Boston's Commonwealth Avenue between Arlington and Berkeley would be immense if you could reach those individuals cost-effectively with that marketing message.


What if you could reach only individuals who met those exact criteria and who were renewing their current policy within the next 20 days? And what if you knew the name of their current insurer and what premium they were paying?


If insurers had that sort of information, they could target customized offers to specific individual profiles, and, ultimately, the price to the consumer would drop dramatically. Insurance companies would not suffer - the profitability per policy would be improved through the elimination of waste in the marketing process. Insurance companies spend a vast amount of money on marketing, much of which is wasted - even if an offer is attractive, statistically, the vast majority of the audience would not be approaching renewal data for an existing policy, and so the communication would not lead to any transaction.


In essence, this sort of micropersonalization means that differential or customized pricing can occur at the point of contact (the marketing front line) rather than the point of sale, where the current model operates. The benefits to consumers and insurance companies are immense.


Unrealized Dream


True consumer-centric marketing has been something of an unrealized dream until now. But the ubiquity of digital media in general, and the Internet in particular, has changed that, and the marketing landscape will never be the same. That will have implications for the insurance industry.


The difficulty in carrying out cost-effective marketing has been a primary reason for the concentrated nature of ownership within the insurance business. The costs involved in marketing and the current inability to microtarget effectively make it inordinately difficult for small businesses to start aiming at particular niches. Instead, entrepreneurs attracted to the industry frequently operate as salespeople for the large composite insurers.


The advent of micropersonalization in insurance marketing may lead to increased fragmentation in the insurance industry. Through turning every consumer into his own self-contained, microeconomic environment, the economies of scale from a marketing perspective, which have driven the concentration of ownership, become much less important. What may happen is that specialized insurance firms will emerge, focused around niches.


Instead of monolithic life insurance companies addressing life insurance for all individuals with only point-of-sale price differentiation for diabetics, specialist companies with a particular understanding of the specific risks involved will be able to market specifically to diabetics on a cost-effective basis. Of course, they will prosper only if their specialist knowledge of the risks can lower the price to the end consumer. That will depend on whether specific risk knowledge is economically more efficient than the generalized statistical distribution of risk across a huge consumer base. And it may turn out that in the case of diabetics, the advantages of specialized knowledge do not outweigh the advantages of spreading risk across a much wider user group.


Only time will tell which sectors will support specialization. But whichever sectors it happens in, the changes will be felt throughout the industry. Instead of general auto insurers, companies specializing in insuring only, say, BMW 3 series across the United States could become the norm. So, we could see horizontal fragmentation emerging, with generalized or regionally based models declining. Given that micropersonalization of marketing is becoming a reality, the only determinant of the extent to which specialization will replace generalized models will be the availability of data around which to base economically viable risk assessments.


The speed with which the process occurs depends on the development of a viable database of open-loop consumer data that is readily accessible to all vendors and fully engages consumers in the process. Consumer engagement involves recognizing that the consumer's position is at the center of the marketing process and that the consumer is an economic participant rather than a passive "victim." Accordingly, by making the marketing process more efficient through the consumer proactively providing data to enable cost-efficient segmentation, that consumer should share in the financial benefits realized.


Consumer in-volvement is critical to making online advertising effective for any industry. And it is particularly important for the insurance industry that the consumer be a voluntary, engaged participant because of the sensitivity of some of the data those companies need. The dangers of collecting data or tracking consumer behavior without the consumer's permission or active involvement were illustrated all too clearly with the DoubleClick/Abacus Direct fiasco, and insurance companies could not afford that sort of publicity damage.


The next 24 months will see rapid change in the notion of interactive consumer marketing, whether through the Net or mobile phones. And amid great change, there is one certainty: The insurance industry will have to change enormously to reflect the new environment.
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