Marco Spagnuolo explores how customer retention management can be a win-win-win for customers, insurers and society at large
The life and health protection gap in western Europe is estimated to be US$149bn, according to Swiss Re. The reasons for this gap range from lack of affordability to people’s limited awareness of insurance products, as well as the simple optimistic belief that “it won’t happen to me”. The protection gap is believed to have widened further as a result of the economic, health, social and mental wellbeing impacts caused by the COVID-19 pandemic. This calls for a change in mindset for the insurance industry.
At the same time, a transformation in sales practices is beginning to take place in our industry. Historically, focus on growth has meant that corporate resources were allocated, and organisations structured, with the aim of expanding the company’s customer base. Boosting sales was, for a long time, the ultimate corporate mantra – and to a large extent, it still is. In some cases, this has led to aggressive sales at the expense of quality. While this approach can have a positive impact on top line and market share, the industry is starting to realise that it erodes profitability in the long run. In fact, our experience shows that poor sales translate into higher lapses.
During the past decade or so, we have observed a paradigm shift within the industry in which the weight between sales and retention has been rebalanced; increasing attention is now given to customer persistency. After all, acquiring new customers costs about seven times more than retaining existing ones, while each percentage point increase in customer retention is estimated to produce a 5% increase in profit, according to Prescription for cutting costs, Fred Reichheld’s 2001 publication for the management consultancy Bain.
Customer retention is now moving up the agenda for CEOs, and is increasingly gaining prominence in company strategies. At a societal level, it can also be a tool for closing the protection gap, or at least for stopping it from getting wider. Rather than solely focusing on selling new customers the right products, customer retention management can help us to engage with existing policyholders and make sure their insurance is right for them.
What is customer retention management?
Customer retention management is a multi-disciplinary, cross-functional approach drawing on three areas: business processes, communication and data.
Designing and re-engineering business processes to remove friction or hiccups in the customer journey are key to ensuring an optimal customer experience. Insurers can make it easy for customers to remain protected by designing an intuitive and fast reinstatement process for missed premium payments, or by having procedures for diverting cancellation requests towards channels that lead to higher retention. Potential lapses can also be turned into product amendments to better suit the customer’s changing circumstances. For example, insurers can help customers cope with affordability issues by offering them the possibility to easily adjust the sum insured or the scope of cover, and even provide a premium discount or waiver.
Figure 1 shows a 2017 case study from a UK multi-line portfolio. The premium reinstatement process was redesigned to introduce an SMS prompt to policyholders advising of outbound calls from the call centre; this boosted ‘pick up rate’ of outbound calls by 50%, and increased the save rate (the number of retained policies over the total entering the lapse cycle).
Customer communication has to be engaging, relevant and regular. Too often, policyholders hear from their insurer only twice in what is meant to be a long-term journey: once at the point of sale, and then only in case of a claim. Unless they are regularly reminded why they purchased it in the first place, individuals tend to quickly forget the benefits of insurance, or to overestimate the cost relative to its benefits. Well-conceived and executed customer engagement campaigns can have a significant impact on persistency – and require only a relatively low investment.
Figure 2 shows a case study from a 2019 Spanish life portfolio. More proactive communication to customers, powered by behavioural economics, resulted in an average 20% fall in the lapse rate across multiple contact channels against the control group. Too often, though, the rare customer touchpoints are left under the care of call centres, which may be afflicted by high turnover and, in certain instances, sub-optimal preparation and little customer focus. Significant improvements can often be made by equipping call centre agents with behavioural economics techniques, to be used in conversations with customers or in revised call scripts. Based on Swiss Re’s experience, these techniques can enable a call centre to double its save rate in less than six months.
Figure 3 shows a 2019 case study from a UK disability portfolio. A new script and training for call centre agents, aimed at enhancing policyholders’ perception of the value of their insurance, led to an increase in the save rate from 0% to more than 40% in five months.
“Too often, policyholders hear from their insurer only twice: once at the point of sale, and then only in case of a claim”
The ability to leverage data underpins optimal business processes and customer communication. Data enables companies to measure and track progress and establish a virtuous cycle of continuous refinement and improvement. The use and availability of data can vary greatly, from very basic to higher levels of sophistication. Through lapse pattern analytics, data-driven persona definition, and personalised retention and lapse predictions, data can be the key to understanding and anticipating policyholder behaviour.
In a 2018 case study from a South African life portfolio, a comprehensive predictive model was developed by leveraging customer demographic, insurance and engagement data and by incorporating a machine-learning component. The model allowed the identification and ranking of more than 20 lapse drivers with 90% precision of prediction, which enabled the company to choose specific and proactive retention management interventions.
Improvements to persistency can also come indirectly from cross-selling activities. It is well-known that customers with higher product density exhibit lower lapse rate. In that vein, data and analytics can be used to:
- Target profitable customers and minimise acquisition and service costs
- Cross-sell more effectively and build robust self-service capabilities
- Boost retention and loyalty though affinity channels and digital engagement strategies.
When dealing with the end consumers, it is important for insurers to uphold integrity and ethics. The use of data and analytics should not infringe on the fair treatment of customers, independently of their risk profile or segment. This is particularly true, for example, when leveraging behavioural economics techniques in order to ‘nudge’ customers.
The art of customer retention management lies in identifying marginal interventions that enable substantial improvements and incremental value. Based on our experience, by intervening in the three areas mentioned earlier and by ensuring they have the right amount of expertise, insurers can reduce customer lapses by 10-15% in relative terms. This is a win-win-win situation.
First, customer retention management benefits policyholders because it keeps them protected against adverse life events. The three cornerstones of customer retention management are helping existing customers to understand and value the insurance protection they have, reminding them of the risks they could be exposed to without it, and proposing alternative or more suitable options. In most cases, staying protected is a far better outcome for the policyholder than being uninsured.
Second, for the insurer, lower lapsation generally means higher return on the initial investment made to acquire clients. It fuels growth (£1m of saved in-force premium is comparable to achieving up to £7m of new business premium), stabilises earnings by reducing the risk of deferred acquisition cost write-off, and sustainably protects the portfolio’s embedded value. It can also reduce distribution channel leverage. In addition, there are many indirect benefits to understanding lapse drivers, such as feedback loop into product design (right product or pricing for right segment), distribution (improving customer understanding of products through quality sales processes), and claims handling (preventing lapses due to poor customer experience at the claim stage).
Finally, by keeping individuals insured, and thus protected, insurance can alleviate the burden on the state, help close the protection gap, and ultimately help to make society more resilient.
Marco Spagnuolo is head of inforce solutions EMEA at Swiss Re
Image credit | Ikon