Briefing: Can offering a good customer experience lead to higher profits?

By Matt Scott

The issue of fair value has been in the headlines a lot lately.

Whether it’s the question of how insurance companies must change their operations, whether all the planned changes are good for the customer, or what the FCA actually means by fair value, the issue has rarely been off the news agenda.

One of the questions I’ve grappled with lately is what the impact of offering a fair and good customer experience really means for insurers’ profitability.

You’d like to think that insurance companies would want to offer a good customer experience just because it is the right thing to do - and of course, this will be the case for many. But ultimately, it is the effect on the bottom line that will be the driver behind many insurers’ initiatives to improve customer service.

There has always been a lot of talk around good customer service leading to increased brand loyalty and improved retention, but what does customer service mean for profitability? And does offering a good customer experience actually translate into higher underwriting profits?

Luckily, I have been able to do a bit of digging around regarding this question and when you do the maths, you find that there is indeed a link between the two.

First, a little public health warning: statistics jargon dead ahead.

Crunching the numbers

To establish the nature of the relationship between customer experience and underwriting profitability, I compared the insurer results of the July 2021 Insurance DataLab Customer Experience Report, which scored and ranked 25 insurance providers on their customer experience, with the combined operating ratios (CORs) from each insurer’s latest solvency and financial condition report.

The CX ratings ranged from 46% to 74% across all the insurers analysed, while the CORs ranged from 53% to 137%.

By plotting these measures against each other, I was able to calculate a Pearson correlation coefficient of around -0.37, which represents a moderate level of negative correlation between customer experience and underwriting profitability.

For any statistics geeks like me reading this, the correlation was significant at the 10% level, with a p-value of 0.079.

This means that for every increase in the customer experience rating, you can expect to see a corresponding decrease in the COR.

And, when you run the linear regression, you find out that - for this sample at least - every percentage point increase in the customer experience score leads to just over a 0.8 percentage point decrease in the COR.

This might not sound like a lot, but the data also shows that of the five insurers ranked top for customer experience by Insurance DataLab, three reported a sub 100% COR.

This compares to just 28% of insurers across the whole sample achieving a COR of less than 100%.

Plus, all but one of the five lowest-ranked providers for CX had a COR north of 100%, with an average ratio of 115%.

Now, of course, this analysis cannot say definitively that having a good customer experience leads straight to better underwriting results – it could just be that those performing strongly with their underwriting are better able to invest in their customer service.

But it does at least add some weight to the argument that offering good customer experience is also good for business. Now it’s time to see who sits up and listens to the numbers.