These days, many industries are spending millions of dollars in research to achieve their customer-centric goals. The insurance industry is no different. Insurers are continually raising the analytical bar to gain a better understanding of their customers. Being able to accurately predict consumer behavior is the key to being a step ahead of the competition.
Indeed, any insurer wanting to reach their customer-centric goals, should have demand modeling somewhere on its road map. Demand models aim to predict the probability that a customer will either buy or renew a policy at any given price. These models can provide extremely valuable information on customers and truly act as a differentiator in the market by having a way of peeking into the future. Instead of making decisions and hoping for the best, demand models can help you accurately anticipate the impact of the business decision you are making.
Demand modeling can also be used in creating new pricing strategies. Pricing is an important lever in the customer journey and using demand modeling in this process can make forecasting significantly more precise and provide a remarkable return on investment.
The four keys to success
When it comes to demand models, the secret to successful implementation is still a mystery for many professionals in the industry. Below are four quick tips that will help you enjoy the full benefit of demand models:
- Simplify: Unlike loss cost models, demand models don’t need to be complex to be effective. They also don’t require a huge number of observations; data already available is sufficient to get started.
- Do it often: Customer demand is highly influenced by changing market conditions and competitor actions. Models need to be monitored and adjusted based on observed recent results to ensure they are accurately reflecting the current state of the market.
- What-if: This is one of the main uses of demand models. They allow for the accurate forecasting of future scenarios. Demand models can be used to explore how different pricing strategies will impact business goals such as retention, policy growth, written premium, profit, and customer lifetime value.
- Policy-level modeling: Demand models should be built at the policy level vs. vehicle level to more closely reflect consumer behavior. Customers usually tend to have all their insured vehicles under the same policy. That is why most of the demand behavior is observed at the policy level.
Smart insurers already realize that demand models are becoming a staple in the industry. The ease at which these models can be built makes an appealing adoption for insurance companies because demand modeling is a low effort high reward opportunity. Yet, there is expertise in implementing these models that require the above measures to be considered and knowledgeable professionals to help implement them. So, don’t delay, make sure to get in on the demand modeling train today!
To learn more about the differences, similarities and opportunities for insurers in Loss-Cost vs. Demand Modeling; download the Loss Cost vs. Demand Modeling Whitepaper.