What’s a great, differentiated customer experience really worth to an insurance carrier?

It’s a vexing question for the insurance industry, where the idea of investing in a better customer experience is often met with skepticism. Carriers may publicly affirm the importance of customer-centricity, but many in the C-suite privately question the value of customer experience differentiation, unsure of the financial return it really delivers.

In an industry where actuaries are kings and numbers rule the day, the seemingly “soft” benefits of a great customer experience don’t carry much weight. As a result, carriers continue to subject their customers to complex purchase processes, unintelligible policy documents, cluttered websites, dizzying 800-line menus, disempowered service representatives, confusing claims communications and archaic business practices.

The irony is that the benefits of a better customer experience are far from soft—it’s just that companies aren’t well-versed in the cross-silo economic calculus needed to measure them. For example, the benefits of a plain-language policy summary from an underwriter may only manifest themselves downstream, by reducing customer confusion and preempting phone calls to a service center.

What many numbers-oriented insurance executives seem to crave is quantifiable evidence that, at least at a macro level, a great customer experience really does pay dividends.

And now they have that evidence.

Quantifying the Impact of Customer Experience

To help industry leaders understand the overarching influence of a great customer experience (as well as a poor one), my firm aimed to elevate the dialogue and avoid getting mired, at least for a moment, in the cost/benefit calculations of specific types of improvement projects. We sought to illustrate the macro impact of an effective customer experience strategy by describing it in a language that every insurance executive should understand: shareholder value.

So we sharpened our pencils and compiled years of data from what’s arguably the most well-regarded source of insurance carrier customer experience rankings: J.D. Power and Associates’ annual Insurance Satisfaction Studies.

Our approach was simple: We calculated the cumulative total stock returns for two model portfolios, comprised of the Top 5 (“Leaders”) and Bottom 5 (“Laggards”) publicly traded companies in J.D. Power’s annual study. (A white paper about the study, referenced at the end of this article, includes a more detailed description of how the analysis was conducted.)

We went through the exercise twice—once for auto insurers, where J.D. Power rankings were available from 2010-2016, and once for home insurers, where rankings were available from 2009-2015.

In both cases, our model portfolios tracked the stock performance of the carriers for the year-earlier period of their designation as a Leader or Laggard (for example, J.D. Power’s 2016 Leaders were used, retroactively, to build our 2015 stock portfolio).

This approach was consistent with our thesis that the market would already be rewarding/penalizing the Leaders/Laggards in the full-year period preceding the release of J.D. Power’s consumer survey (given the customer experience the carriers were already delivering). It also helped ensure that the model portfolios’ performance was not at all influenced by the publication of the J.D. Power study itself.

The results of our analysis were quite compelling.

As Figure 1 shows, over the seven-year period studied, the portfolio of Auto Insurance Customer Experience Leaders far outperformed the industry, generating a total return that was 129 points higher than the Dow Jones Property & Casualty Market Index.

Three carriers had the distinction of making it into the Leaders category for each of the seven years examined (in alphabetical order): Ameriprise, Erie Insurance and GEICO.

(Editor’s Note: For insurers that are not publicly traded but are owned by a publicly traded holding company, such as GEICO and Berkshire, the performance of the holding company is used in the Watermark Consulting analysis.)

The Customer Experience Laggard portfolio lived up to its name, posting a total return that was 75 points lower than that of the broader P/C market.

As with the Leaders, there was some year-to-year consistency in the Laggards list, with three firms showing up in that category every year of the study: MAPFRE-Commerce Insurance, The Hanover and 21st Century (in alphabetical order).

To underscore the disparity in performance between the Leader and Laggard portfolios, consider this: The Auto Insurance Customer Experience Leaders generated an average annual return that was nearly triple that of the Laggards.

Figure 2, which shows our analysis for home insurers, exhibits a similar pecking order as seen with the auto insurers.

The Home Insurance Customer Experience Leader portfolio outperformed the industry, generating a total return that was 42 points higher than the Dow Jones Property & Casualty Market Index.

While several home insurance carriers made it into the Leader category multiple times, only one achieved that distinction for every year of the study: Erie Insurance.

The industry’s Customer Experience Laggards again trailed behind, posting a total return that was 15 points lower than that of the broader P/C market.

The Laggard category, too, was generally consistent year-to-year, though only one company placed in those ranks every year of the study, and that was Travelers.

To again illustrate the wide gap in Leader/Laggard performance, consider this: The Home Insurance Customer Experience Leaders generated an average annual return that was double that of the Laggards.

Interpreting the Results

Let’s start with what the results don’t mean.

A great customer experience does not guarantee carrier success. There are a whole host of factors that influence insurer performance, such as underwriting discipline and regulatory compliance. Customer experience is a necessary but not sufficient ingredient for carrier success.

Despite that caveat, there’s no denying that this study’s results—reflecting over half a decade of carrier performance—are intriguing, to say the least.

The findings imply that the much theorized connection between customer experience and financial performance isn’t a purely academic concept and can actually be observed within the insurance industry.

The results point to the benefits enjoyed by carriers that invest in, and effectively execute on, a customer experience strategy: higher revenues (due to better retention, less price sensitivity, greater wallet share and positive word-of-mouth) and lower expenses (due to reduced acquisition costs, fewer complaints and the less intense service requirements of happy, loyal customers).

Conversely, the study also provides a sober reminder of how customer dissatisfaction saps business value by depressing revenues and inflating expenses.

The bottom-line implication is that the marketplace believes carriers that deliver a great customer experience over the long term are simply more valuable than those that do not—and that’s a finding that should be of interest to public and private insurers alike.

Takeaways for Insurance Carriers

Perhaps the most important takeaway from this study is that insurance firms shouldn’t resign themselves to delivering just a mediocre customer experience (at best).

The results suggest there is competitive advantage to be gained by differentiating along this axis, but it requires that carriers embrace some key realizations before setting a path forward:

• Retention is not a good proxy for loyalty.

Insurance providers often rely on retention to gauge the quality of their customer experience. While retention is a valuable metric, it can be a misleading indicator of customer perception (after all, a retained policyowner may not necessarily be a loyal one). As a result, many firms tend to overrate the quality of their customer experience.

• Insurance can be more than a “grudge” purchase.

Some question the viability of a customer-focused business strategy in insurance, given it’s an intangible product that people must buy, never knowing if they’ll get any benefit in return. Smart carriers overcome this perception by engaging customers with value-added services that transcend traditional insurance coverage.

• It’s essential to focus on more than just claims.

As the ultimate moment-of-truth in insurance, it’s critical that the customer claims experience be exceptional. However, the vast majority of insureds won’t experience a claim in any given year. For this reason, it’s essential that experience improvement programs go beyond claims—targeting other, more common customer touchpoints.

• The mundane things matter.

Insurance is a low-interaction business, which amplifies the impact of routine, recurring transactions on customer perceptions. Firms often treat these interactions (policy delivery, billing, renewal, etc.) as mundane administrative tasks—and it shows in the resulting experience. However, for many insureds, these mundane touchpoints are the entire experience, which is why these routine interactions deserve close attention from carriers.

Insurance companies are struggling to set themselves apart in a marketplace that increasingly views their products as commodities.

As the Insurance Leaders in this study demonstrate, the best way to break out of that “sea of sameness” is to deliver an end-to-end customer experience that turns everyday policyholders into true raving fans.

Note: 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.