In the property and casualty insurance industry, the occasional hard market is a fact of life. No matter how smart carriers are about assessing their risk, there are always macroeconomic trends and outside factors that can come along to drive up their combined ratios. When this happens, carriers work to increase their profitability by applying for rate increases and temporarily cutting back on marketing spending.
The last time we saw this cycle was in 2016 and 2017, when an improving economy and lower gas prices meant more consumers driving and more accidents. Meanwhile, natural disasters caused more catastrophic losses, and new automobile technology caused a rapid increase in the cost of auto repairs, which increased accident severity.
This time around, carriers are experiencing a bit of whiplash after the depths of the COVID pandemic kept drivers off the road, accidents down, and combined ratios low. Now, drivers are back on the road at pre-pandemic levels and maintaining the more dangerous driving habits they developed during 2020—trends that have led to an increase in both accident frequency and severity. Meanwhile, severity has been further increased by supply chain issues and the fallout from Hurricane Ida.
However, one of the biggest differences between this hard market and the last one isn’t about the circumstances that caused them. It’s about how much smarter carriers have become in their response, particularly as it pertains to customer acquisition. Today, leading brands are employing more accurate measurement and more sophisticated targeting and bidding strategies to continue acquiring customers as efficiently as possible—even as they look to reduce their overall marketing spend.
Here are three ways carriers are optimizing their customer acquisition performance during the hard market:
1. Carriers are making targeted cuts instead of cutting across the board
One piece of advice we always give carriers during a hard market is to cut with a scalpel, not a machete. By that, we mean that it’s best to evaluate the different components of your marketing program and start by trimming your investments in those that aren’t working.
During the last hard market, carriers looked to make immediate cuts to their marketing budgets, but some channels are harder to cut than others. For instance, television usually requires advertisers to make long-term commitments up front, which prevents carriers from having the flexibility to quickly pare back spending. Last time around, insurance brands were in such a hurry to reduce their loss ratios that they would make changes like an across-the-board 30% cut to their entire digital marketing budget. That was a mistake, as it meant that they were invariably reducing their spend on parts of their digital operation that had been delivering a strong return on investment.
This time around, leading carriers are being careful not to throw the baby out with the bathwater. They’re taking a long, hard look at the performance they’re receiving from different audience groups and channels within digital and other more flexible mediums. Then, they’re using these assessments to make targeted cuts in the places where they’re not getting their money’s worth.
2. Optimizing for customer lifetime value
Carriers are also getting smarter about how they evaluate and optimize the performance of their customer acquisition efforts.
During the last hard market, most carriers were evaluating the success of their campaigns based on the flawed cost-per-quote metric. This metric measures the average amount of money you pay each time a consumer completes your quote form—but not how many of those consumers go on to purchase a policy. If carriers were especially advanced during this time period, they might have used the cost-per-bind metric to measure how much they paid for each new policy sale.
But neither of these measurement tools factor in the value that each new customer brings to a carrier over the course of their business relationship. For instance, you might have a cost-per-bind of $2,000, but if you don’t know the average value of a newly acquired customer to your business, you won’t know whether you’re realizing a positive return on investment. And if you can’t segment your audience based on lifetime value, you won’t know which kinds of consumers are most worthy of your marketing investment.
Now, sophisticated carriers are closing this gap by measuring and optimizing performance for a powerful metric known as lifetime value-to-customer acquisition cost (LTV-to-CAC). LTV-to-CAC measures the amount of money a carrier earns from a customer over the course of their relationship divided by the cost the carrier paid to acquire them. By segmenting their target customers by LTV-to-CAC, carriers have been able to weather the hard market by paying the right price for each new customer, based on what they predict that consumer will be worth to them.
3. Expanded targeting through granular bidding
One of the big challenges of a hard market is that it creates an incentive for carriers to reduce their customer acquisition spend at the exact same time that their existing customers are more likely to be exploring other options. That is, when carriers raise their rates in search of greater profitability, consumers respond to these rate increases by searching for another policy. If carriers aren’t careful, they run the risk of losing customers to the competition.
In the last hard market, carriers made the mistake of simply bidding on fewer consumers, and many failed to replenish the customers they were losing due to increased shopping. This time around, savvy carriers are taking a more strategic approach to maintain their policies in force.
By using LTV-to-CAC, these carriers are able to accurately estimate the value of every consumer to their business. Rather than simply removing lower-value shoppers from their targeting parameters, they’re continuing to bid on and acquire these consumers—just at a lower cost that makes these shoppers profitable to their businesses. The result is that this granular bidding strategy enables carriers to lower their loss ratios with profitable customer acquisition, while still preserving their policies in force and market share.
Want more insight into this hard market? We’d love to help.
Over the past half decade, P&C carriers have become far more sophisticated in how they acquire customers, and it’s paying off as they chart their course through this hard market. By employing sophisticated measurement tools and granular bidding strategies, these brands are maximizing their customer acquisition efficiency and quickly becoming more profitable.
If you’re thinking about how you can acquire customers more efficiently during this challenging time, our team at MediaAlpha is more than happy to help. Schedule a meeting with your account manager to learn more about how you can use our transparent platform to better understand your performance and craft an intelligent, precise bidding strategy that enables you to pay the right price for every consumer. And if you’re not already a MediaAlpha client, you can set up a time to learn more on our website.