market segmentation for insurance:­ tearing down the silos within insurance companies

foto van Jochem van Vuren
Jochem van Vuren
Client Manager

March 20th, 2019

The insurance market is currently in dire straits. Especially property and causality focused insurers and underwriters are struggling to be profitable and experience difficulties in lowering the combined ratios of their portfolios to healthy levels without compromising on volume growth. A recent publication of Amweb shows that on average Dutch car insurances in 2017 paid out 1.22 euro for every euro premium earned and circumstances have not changed yet.

Digitization has largely contributed to the current state of the insurance market. The rise of online channels that most of the times improved the customer experience, came with adverse side effects for the insurer. Customer interactions have become anonymized, deteriorating the relationship between consumer and business. Market transparency increased, granting consumers access to information about almost all insurance providers, and negligible switching costs lowered the loyalty of the customer. These three trends combined highly intensified price competition and pushed the focus of insurers towards offering the lowest premium.

Conflicting interests: marketing versus actuarial

Price competition does not automatically mean better value for the customer. Customer interactions have become short-term and transaction focused while long-term value creation for the customer and engagement declined.
When taking the perspective of the insurance provider, we encounter a different problem. Decision making within the current organizational structure of many insurers is not optimally designed to offer a competitive premium and control for both volume and a healthy combined ratio.

This is caused by conflicting interests between departments, in this case the marketing and the actuarial department. The marketing department is mainly focused on volume. Their objective is to attract as many new clients as possible and to let the insurer’s portfolio grow. The objective of the actuarial is to control for a healthy portfolio in which claim expsenses does not exceed premium income. These two deviating objectives have brought the insurer into a vicious circle. The marketing department is mass targeting with the premiums they receive from the actuarial department, not able to pay attention to differences in risk profiles and thereby attracting customers with high risk profiles which are jeopardizing the state of combined ratios. In reaction to this the actuarial department is compelled to increase premiums on a general level, which in turn makes it even harder for the marketing department to attract profitable customers, as these profiles will get better offers from competitors who take risk profiles into account and are able to set lower premiums for low-risk profiles. This process fueled by different department incentives is not beneficial to the organization as a whole.

Tear down those silos

To become profitable again and at the same time increase the volume of portfolios, insurers have to start thinking outside the existing silos and optimize business decisions on an organization level. Decisions need to be taken from the perspective of the customer based on all information within the organization, not by separate silos. By doing this the insurer can become truly customer-centric and the vicious circle will be broken.

Market segmentation in insurance

So how should the actuarial and marketing departments join forces to attract the right customers? Which customers are contributing to the profitability of the portfolio and are willing to form long-term relationships? Based on the available data in the organization, profitable customer segments can be discovered by segmenting the portfolio on predicted Customer Lifetime Value. Data Science & Machine Learning techniques can be used to identify new customers in the market which are valuable over their lifetime based on learnings from the existing portfolio. Algorithms analyzing the current portfolio distill characteristics of customers that bare high and low risks. The marketing department then has the relevant knowledge to attract similar customers having low risk characteristics, improving combined ratios. Premiums can therefore be lowered, increasing the competitive edge of premiums in the market. On top of that, marketing propositions can be adjusted to the specific segments to create a better fit between insurance product and policy holder, increasing the added value for the policy holder and thereby increasing loyalty.


When segments of valuable customers are identified and propositions are set right, business actions can be aligned by actively allocating marketing resources to target the right customer segments. Comparison websites play a major role in attracting new customers, wherein common strategy is to become in the top 3 for every customer. By now we know this is not a profitable strategy. By offering competitive premiums (become in the top 3) for low-risk profiles only, competition can be beaten, while maintaining a healthy portfolio. Furthermore, advertisement banners, Adwords and Social Media can be optimized by bidding on the best fitting characteristics of customers within these platforms. By doing this the return on investment from marketing efforts can be increased and costs can be reduced.