Transforming Insurance. Lee-Han Tjioe Global Insurance Leader, Global Business Services 07/12/2011

Transforming Insurance Lee-Han Tjioe Global Insurance Leader, Global Business Services 07/12/2011

The case for change in Insurance is clear. 80% of consumers rate Trust and Transparency as critical to their choice of an insurer, whereas Customer Trust and Transparency levels 22% Model Business & IT 80% Integration The gap between the CEO s that expect high level of complexity in business over next five years (68%) and the ones that feel prepared for the expected complexity (53%). 5% Yearly cost increases in IT spend have been experienced by majority of insurers since 2003. Approximately 25% of the external IT spend is for Claims related projects. Technical... Run to Change 60% of consumers state that they do not have overall trust in their insurer, leaving a large gap between expected and perceived Trust Insurance CIO s claim they have some form of strategic alignment between Business and IT, however they are not satisfied with the outcomes yet. 78% Percent of insurance IT spend is locked to maintaining current systems. The spend on new development decreased from 32% to 22% in 4 years time. Source: 2010 IBM CEO Study, IBM T3 study, Towers, Industry reports

Insurers are seeking new models for more profitable growth. Insurance Industry Maturity Path Profitability Margin Aligned Insurer Optimized Insurer Agile Insurer Societal Predictive Insurer P&C: 7 pts better combined ratio Life: 1.5 times higher profit Best in-class agile insurers leverage information for : - better focus on the customer - transforming processes - leveraging new business models Market Impact / Growth Aligned Insurer: Optimized Insurer: Consistent market approaches Ability to embrace and by multiple business lines with implement holistic strategies modest level of integration. leveraging synergies that will Business / IT alignment is a increase operational efficiency desired state to capture more while minimizing losses and *)source: Global Insurance Best in-class study 2009 corporate efficiencies maximizing profits. Agile insurer: Capability to enter new markets successfully, build new distribution channels and launch new products quickly. Ability to monitor and adapt quickly based on market responses to retain and grow market share. Societal Predictive insurer: Creation of new business models based on statistical and analytical techniques that predict future events or behaviors across the broader society.

Best in Class Insurers (B-I-C) can be differentiated in the marketplace by the following: Customer Pressures Operational Pressures Financial/ regulatory Pressures Followers strategies around low price propositions are still predominant, thereby driving down margins at the expense of maintaining market share. B-I-C are focusing on consumer segmentation, building trusted brands and offering convenient multi-channel customer access to win new business. Many insurers limit to enhancing existing home grown back office systems to maintain performance and compliance. B-I-C are investing in IT facilitated service management around robust core systems to achieve high levels of process automation (up to 70%). Still much attention on cost cutting in all aspects of the business, down sizing staff and reactive compliance B-I-C are re-defining business lines based on customer segments and eliminating redundant management layers and are investing in new markets and products for capturing market share. B-I-C are using the regulatory drive to enhance enterprise control and related reporting. Investments are made to enable sustainable transparency and knowledge.

What does it mean for Australian based insurers? Putting the Customer First Capture the increasingly modern consumer through multiple forms of access Empowerment to Drive Bottom line and Service Simplify the business model and transform core processes Increasing Transparency, Controlling Risk Shift to increased transparency and risk control to drive the growth of the client base and insurance penetration. This requires leveraging analytics for capturing new customers, actively managing loyalty and maximizing customer profitability over the life each customer relationship. to increase corporate agility at a lower cost base. This requires consolidating IT and outsourcing to lower costs thereby enabling Insurers focus on flexible and consumer driven fulfillment processes in order to ensure high quality service. to protect the future and manage increased complexities This means pro-active focus on enterprise-wide risk and operational management with related reporting to support refocused decision making and improved investor confidence.

Powerful interaction points saying goodbye to the channel Christian Bieck Global Insurance Leader 07/12/2011

Agenda The growth challenge The multi-modular customer Building an interaction strategy

As the insurance industry continues to consolidate, CEO focus is turning the question how can we achieve sustainable growth? % CAGR 18 16 Real premium growth rates since 1980 (Inflation adjusted CAGR) You can not save your way to prosperity. - CIO of P&C Insurer, U.S. 14 12 10 8 6 4 2 0 Ultimately, you have to keep the revenue side of the business healthy. - CEO of all-lines Insurer, Europe -2-4 -6 Industrialised countries Emerging markets Source: Swiss Re, Economic Research & Consulting, sigma No. 2/2009; CEO study 2010 (unpublished interview quotes)

In the past, insurers have relied on their traditional strengths rather than superior customer insight to reach their markets. Mega-Trends Shaping the Insurance Industry in 2020 1 Consumer Expectations Megatrend Active and informed consumers across demographic groups reward non-traditional operators Our customers will not change until 2020. Insurance is a push business and will stay that way. - Sales Exec, large European all-lines insurer, July 2006 Source: IBM Institute for Business Value, "Insurance 2020" study 2005

For 90% of insurance CEOs, the answer to the growth challenge is to get closer to the customer Dimension to focus on over the next 5 years Getting closer to customer Getting closer to customer 90% Insight and intelligence 86% People skills 81% Risk management 70% Enterprise model changes 49% Industry model changes 49% Revenue model changes 40% 83% Others 95% Standouts Chinese consumers are very open to modern channels. CEO of Life Insurer, China Convenience for customers is new to the insurance industry, we are behind other industries here. CEO of P&C Insurer, the Netherlands Source: Global CEO Study 2010. Left side Insurance n=78, right side global n=1523, n=303; (unpublished interview quotes)

We surveyed 21,700 consumers globally on their interaction with their insurers to better understand the relevant patterns What interaction points are customers using now and future? How does this translate to a useful interaction strategy for insurers and customers? How do countries differ? IBM Institute for Business Value Scope Representative survey of insurance customers across 20 countries globally 800 respondents per country; 1,600 for selected large markets Conducted August 2010 Approach Online survey using a 25-question questionnaire Quotas for male/female; age; life/non-life In-depth statistical analysis Note: 1 Primary research was conducted August + September 2010

This was the largest insurance study ever conducted by the IBM Institute for Business Value Gender United States Western Europe 8 countries Poland Czech Republic Greater China Female Male Korea Income Very low Low Average High Very high Japan Age -24 years Brazil Mexico India Australia Singapore Malaysia 25-34 years 35-44 years 45-54 years 55+ years Source: IBM Institute for Business Value survey data 2010, n=21,740

Today, to get closer to the customer insurers have to understand the dimensions of interaction and build the right mix Summary of Findings and Agenda Trust in the insurance industry continues to be low and loyalty is declining The modern consumer does not follow traditional interaction patterns anymore To be successful, insurers have to understand customers and use the right interaction mix

Agenda The growth challenge The multi-modular customer The loyalty trap How customers search and purchase Mixing and matching interaction Building an interaction strategy

Findings Trust in the insurance industry continues to be low and loyalty is declining The modern consumer does not follow traditional interaction patterns anymore To be successful, insurers have to understand customers and use the right interaction mix

Keeping their customer base is becoming more difficult for insurers Customer loyalty number of insurers (Percentage of Survey Respondents) 3 or more 24% 29% Insurers 22% of insurance customers will switch carriers this year, and another 40% are considering switching. This is twice the rate experienced just two years ago. 2 insurers 34% 41% - Ann Wahlross-Jaakkola, Sales Director, Tapiola Group, Finland 1 insurer 42% 31% 2008 2010 Source: IBM Institute for Business Value survey data 2008;2010

Retention numbers are hard to get, but the industry does acknowledge that there have been issues Banking Median customer retention over three years 82% Banking - Europe 82% Industry group Banking - US and Canada Insurance Insurance - Europe 75% 80% 83% Insurance - US and Canada 51% 0% 20% 40% 60% 80% 100% Percentage of customers Source: IBM / IDC benchmarking study 2011; n=27+22 (banking), 30+8 (insurance)

For the past four years we have been surveying consumers on trust unfortunately, without seeing any improvements Trust in the Insurance Industry (Percentage of Survey Respondents*) 42 39 39 39 2007 2008 2009 2010 Source: IBM Institute for Business Value survey data 2007 to 2010 *note: the left chart only includes 13 countries for 2010 to remain comparable Trust in the Insurance Industry 2010 by country (Percentage of Survey Respondents) 53 51 50 47 45 45 44 44 43 43 43 42 42 41 41 39 35 35 Malaysia Brazil Singapur India Austria Czech Republic Mexico Sweden Netherlands China Korea Belgium France USA Spain UK Germany Australia Poland Japan 32 15

Trust is an important aspect of customer loyalty; not only in their insurer in specific but also in the industry in general Low trust consumers switch providers 19.5% more often (Percentage of survey respondents who switched providers 3 times of more in last 5 years) 4,1% +19,5% 4,9% Trust % Trust vs. loyalty developed vs. emerging markets (Percentage of survey respondents who trust insurance vs. who never switched) 55 50 45 China Malaysia Belgium developed markets emerging markets 40 35 UK Australia High trust Low trust Source: IBM Institute for Business Value survey data 2010, n=21,740 30 30 35 40 45 50 55 60 65 70 75 Loyalty %

Findings Trust in the insurance industry continues to be low and loyalty is declining The modern consumer does not follow traditional interaction patterns anymore To be successful, insurers have to understand customers and use the right interaction mix

The single mode of interaction is past consumers have become truly multi-modal Number of interaction points consumers used for searching (Percentage of survey respondents) 18,1 Interaction points used for searching (Percentage of survey respondents) Website insurer 49.4 Personal contact tied agent 47.9 People I know personally 46.4 Personal contact independent agent Website aggregator 35.5 39.3 12,3 Personal contact bank advisor 22.4 31,7 78,8 Advertisements (print, TV) 14.4 Social media 13.2 Website other 12.6 21.2 16,8 Conventional mail Journals 10.4 7.7 Smartphone apps 1.0 1 2 3 4 5 or more Source: IBM Institute for Business Value survey data 2010, n=21,740 0 5 10 15 20 25 30 35 40 45 50 %

In searching, Australian consumers are using online interaction more than the average expect for Social Media Website insurer Personal contact tied agent People I know personally Aggregator ersonal contact independent agent or broker Advertisements Website other Personal contact bank advisor Conventional mail Journals Forum, discussion group or Social Media Smartphone apps Source: IBM Institute for Business Value survey data 2010, n= 21,740, n=801, country = Australia Interaction point use for searching (Percentage of survey respondents) 14.4 12.6 13.6 9.6 7.7 7.4 10.4 6.4 13.2 21.3 22.4 25.2 30.3 35.5 40.3 39.3 49.4 45.8 47.9 42.3 46.4 56.7 1.0 1.0 % 0 5 10 15 20 25 30 35 40 45 50 55 60 current search Australia current search global Australian search interaction is similar to US consumers

Differentiating by age shows some interesting trends for the future Selected interaction point use for searching (Percentage of survey respondents) Website insurer Personal contact tied agent People I know personally by any mode Aggregators Personal contact independent agent or broker Personal contact with a bank advisor Forum, discussion group or Social Media Conventional mail 1% 4% 8% 7% 10% 8% 7% 8% 9% 12% 15% 15% 17% 12% 13% 20% 23% 32% 35% 33% 34% 37% 36% 40% 39% 46% 43% 44% 47% 45% 43% 47% 46% 0% 10% 20% 30% 40% 50% 60% 47% 47% 55% 57% 59% 64% Less than 24 years 25-34 years 35-44 years 45-54 years 55+ years Source: IBM Institute for Business Value survey data 2010, n=801, country = Australia

Life obviously has more personal interaction than non-life but no as much as many believe Interaction point use for searching (Percentage of survey respondents) 52.2 Website insurer 61.3 43.1 Personal contact tied agent 48.6 People I know personally 43.1 41.5 Aggregator 39.4 Personal contact independent agent or broker 23.9 36.5 Advertisements 24.2 life 19.6 Website other 23.2 P&C Personal contact bank advisor 12.0 15.2 7.8 Conventional mail 11.5 Forum, discussion group or Social Media 7.4 5.3 6.1 Journals 8.7 Smartphone apps 0.5 % 0 5 10 15 20 25 30 35 40 45 50 55 60 65 Source: IBM Institute for Business Value survey data 2010, n=801, country = Australia

For purchase, consumers are just as multi-modal, personal contact being central for the real-life purchasing decision Interaction points actually used for buying insurance (Percentage of survey respondents) Interaction points consumers would like to use to buy insurance (Percentage of survey respondents) Personal contact tied agent 31.5 Website insurer 45.2 Personal contact independent agent 20.0 Personal contact tied agent 42.5 Website insurer 16.8 Personal contact independent agent 35.1 Personal contact bank advisor 9.9 Website aggregator 28.8 Website aggregator 7.6 Telephone 25.9 Telephone 7.1 Personal contact bank advisor 21.8 Website other 2.5 Website other 14.6 Retailer 2.4 Retailer 10.6 Conventional mail 1.6 Conventional mail 6.8 Smartphone apps 0.5 Smartphone apps 2.8 0 5 10 15 20 25 30 35 0 5 10 15 20 25 30 35 40 45 50 Source: IBM Institute for Business Value survey data 2010, n=21,740

Again, Australian consumers show a tendency toward less face-to-face purchasing interaction Personal contact tied agent Website insurer Telephone at an insurance company Personal contact independent agent or broker Personal contact bank advisor Aggregator Interaction point use for purchasing (Percentage of survey respondents) 5.1 7.1 5.0 7.6 9.9 14.7 16.8 16.5 20.0 25.2 24.6 31.5 current purchase Australia current purchase global Website other Retailer Conventional mail Smartphone apps 3.0 2.5 3.0 2.4 2.5 1.6 0.4 0.5 0 5 10 15 20 25 30 35 % Source: IBM Institute for Business Value survey data 2010, n=801, country = Australia

Age is not a good predictor of interaction behavior Top 5 interaction point use for purchasing (Percentage of survey respondents) Personal contact tied agent 22% 24% 25% 28% 32% Less than 24 years Website insurer 21% 21% 20% 26% 30% 25-34 years Telephone insurance company Personal contact independent agent or broker 9% 10% 12% 13% 15% 18% 19% 18% 19% 25% 35-44 years 45-54 years 55+ years Aggregator 2% 4% 4% 6% 7% Source: IBM Institute for Business Value survey data 2010, n=801 0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Insurers will get customers to stick if they manage to engage them through personal interaction in the search phase Actual interaction usage for searching (Percentage of survey respondents) Consumers who bought via the search channel (Percentage of survey respondents) Personal dependent 70.3 79.5 Personal independent 39.3 60.8 Online dependent 49.4 49.4 Online independent 48.0 % 0 10 20 30 40 50 60 70 80 33.2 % 0 10 20 30 40 50 60 70 80 The key is to integrate the channels so that no information is lost Source: IBM Institute for Business Value survey data 2010, n=21,740

To determine the factors of stickiness, we conducted a laboratory experiments with 320 test subjects 1. Which interaction dimensions determine interaction point use? 2. Which dimensions determine interaction point switch or non-switch? QUALITY How well is How information well is information presented? presented? How relevant is it to my international How relevant needs? is it to my international needs? How professional / clear / concise is information presented? RELIABILITY Is all information openly communicated? Is information hard to find or hidden behind confusing or technical language? Is information consistent and clear? Is information contradictory or open to misinterpretation?

The experimental approach was kept fairly simple, with one online setting (website) and one offline (agent) being simulated Search interaction Offline (personal contact) Online (Computer interaction) High Reliability Low Treatment 4 Treatment 2 Treatment 3 Treatment 4 Treatment 1 Experiment setup n= 40 per group total n=317 Low Quality High Low Relevance High High Treatment 3 Reliability Treatment 2 Treatment 1 Low Four different prepared video screenings Four different prepared Websites Purchase interaction

The experiment showed quite clearly that the search phase determines how consumer interact when buying Same interaction point for buying (percent of respondents, personal interaction) 80.0 High quality and reliability 54.4 Low quality, high reliability -75% 52.5 High quality, low reliability 20.0 Low quality and reliability % 80 70 60 50 40 30 20 10 0 Same interaction point for buying (percent of respondents, online interaction) 29.0 High quality and reliability 19.5 Low quality, high reliability -57% 14.6 High quality, low reliability 12.5 Low quality and reliability Low relevance and reliability are not as bad in online interaction as in offline: expectations are lower % 80 70 60 50 40 30 20 10 0 Source: IBM Institute for Business Value 2011, experiment data, n=317 31

Companies need to react: relevance and reliability of information largely influence the choice of the company Same company used for buying (percent of respondents, personal interaction) 72.5 High quality and reliability 45.5 Low quality, high reliability -86% 22.5 High quality, low reliability 10.0 Low quality and reliability % 80 70 60 50 40 30 20 10 0 Same company used for buying (percent of respondents, online interaction) 61.3 High quality and reliability 29.3 Low quality, high reliability -71% 26.8 High quality, low reliability 17.5 Low quality and reliability The key to make customers stick to the company is to deliver quality within the search phase % 80 70 60 50 40 30 20 10 0 Source: IBM Institute for Business Value 2011, experiment data, n=317 32

Investing in interaction quality is the best way to raise satisfaction, advocacy and reuse of the desired interaction point 20 15 10 5 0 15.4 9.7 8.7 1.1 I am satisfied with the interaction point Improvement through a 1 % dimension increase (percent behavior increase) 12.7 10.3 5.2 1.4 I would use this interaction again quality = adequate product selection good advice fits to needs permeability = ability to work between and across multiple interaction points risk = information can be misunderstood wrong product/information ease of use = little effort easy to compare options / price Source: IBM Institute for Business Value survey data 2010, n=21,740 Note: Linear regression analysis, p<0.001

Findings Trust in the insurance industry continues to be low and loyalty is declining The modern consumer does not follow traditional interaction patterns anymore To be successful, insurers have to understand customers and use the right interaction mix

When thinking about their customers, the insurance industry today as quite a bit of road to go The Evolution of Customer Segmentation "The Only Product You'll Ever Need." "What's the Bottom Line?" Product- Centric Organisation- Centric Customer- Centric "Tell Me What You Need." Persona- Centric "Let's Explore What Your Persona Really Wants." Product-Based Segmentation Value-Based Segmentation Needs-Based Segmentation Wants-Based Segmentation Owned/nonowned products Demographics Current value Future Value Lifetime Value Life cycle Life stage Lifestyle Persona mgmt Implicit behavior Sandbox scenarios Insurers are here (at best) Source: Gartner (December 2007)

Customers are a diverse set of types with distinct preferences regarding interaction Attitude Cluster % of total Key theme Securityoriented individualist Demanding supportseeker Loyal qualityseeker Priceoriented minimalist Supportseeking skeptic 13% 12% 19% 18% 21% 17% "I know what I want and organize myself" "I need personal advice" "I trust my insurer and remain a loyal customer" "I do not like insurers make it cheap and stay away" "I need advice but prefer to keep distance from my insurer" Informed optimizer "I take time to research to find the best" Source: IBM Institute for Business Value survey data 2010, n=21,740

A psychographic segmentation approach has higher predictive value for consumer interaction than demographics Usage of interaction point "Website insurer" for searching (Percentage of time spent) Source: IBM Institute for Business Value survey data 2010, n=21,740

As usual, psychographics are most affected by cultural background and values, not demographics Australia 10% 4% 19% 28% 16% 23% China 14% 22% 12% 6% 28% 19% India 20% 18% 15% 7% 18% 22% Japan 11% 11% 5% 27% 33% 13% Singapore 15% 16% 19% 9% 26% 15% Korea 18% 15% 12% 12% 33% 11% Malaysia 16% 23% 20% 7% 22% 12% Security-oriented individualist Demanding support-seeker Loyal quality-seeker Price-oriented minimalist Support-seeking sceptic Informed optimizer Source: IBM Institute for Business Value survey data 2010, n=8,033 38

Even for the English-speaking countries in our survey, the spread of the segments was quite varied Australia 10% 4% 19% 28% 16% 23% Brazil 15% 22% 18% 6% 16% 24% Germany 15% 6% 24% 22% 18% 15% Singapore 15% 16% 19% 9% 26% 15% UK 14% 2% 9% 39% 9% 29% USA 9% 6% 24% 24% 18% 19% global 13% 12% 19% 18% 21% 18% Security-oriented individualist Demanding support-seeker Loyal quality-seeker Price-oriented minimalist Support-seeking sceptic Informed optimizer 39 Source: IBM Institute for Business Value survey data 2010, n=21,740

Understanding the customer profile can help distinguish potentially higher profit customer from lower profit customers Global A-Customer 10% 15% 28% 12% 22% 13% B-Customer 13% 12% 21% 16% 21% 17% C-Customer 16% 10% 10% 24% 20% 21% A-Customer 5% 2% 26% 28% 19% 20% Australia B-Customer 11% 5% 17% 26% 15% 25% C-Customer 15% 5% 9% 34% 11% 26% Security-oriented individualist Demanding support-seeker Loyal quality-seeker Price-oriented minimalist Support-seeking sceptic Informed optimizer Source: IBM Institute for Business Value survey data 2010, n= 21,740, n=801

Customers with higher profit potential tend to use personal interaction more strongly Insurance purchase by customer profitability (Percentage of respondents) 46.8 43.9 34.4 25.7 25.5 23.5 11.4 6.1 2.6 Personal contact tied agent Website insurer Personal contact independent agent Telephone at an insurance company Website independent provider Personal contact bank advisor Retailer Conventional mail Smartphone apps 10.1 7.1 2.9 37.4 36.2 25.7 32.8 19.9 46.6 A-Customers C-Customers Note: figure shows future, i.e. planned purchase Source: IBM Institute for Business Value survey data 2010, n=4,491 (A); n=7,124 (C)

Agenda The growth challenge The multi-modular customer Building an interaction strategy

Consumers willingness to pay heavily favors personal interaction 36.3 Willingness to pay for the use of interaction points (Net payer score) 28.2 25.5 25.3 2.8 Personal contact with an independent agent or broker Personal contact tied agent Retailer Personal contact with a bank advisor Independent Website -2.0 Conventional mail -2.4 Website insurer

...but there are a multitude of factors to consider when deciding on the interaction mix Willingness to pay Loyalty Stickiness / signings rate Quality Reach Cost Prior mix => Optimal mix Personal interaction??? Web interaction???

To conclude this brief overview: An interaction strategy that integrates from information all the way to organization is key Issues / Findings Trust is low and loyalty is declining Interaction strategy initiatives Make insurance personal (even on the Web) Improve interaction quality The customer is multi-modal customer Increase the number of available interaction points Follow your customers Understanding the mix Use customer analytics Build a comprehensive business case