Customer Retention

Angat Sandhu of Oliver Wyman discusses the customer retention crisis in the Australian life industry.

The Australian life insurance industry has recently experienced its highest lapse rates of the past 20 years. This in itself would be a cause for alarm, but the impact of high lapse rates has been compounded by a spike in claim rates, looming economic uncertainty and falling profitability (34.7% drop in industry profits in the year ended March 20141). Moreover, these pressures come at a time when customer expectations are rapidly evolving and the industry is grappling with enormous regulatory changes.

Even as insurers have been busy fire fighting these changes, they have had to be selective in picking their battles and industry lapse rates remain high. An improved economic environment would only partly ameliorate the underlying issues and an industry led solution does not appear imminent. Sustained success will only come by enacting a significant, proactive retention program.

This article briefly explores seven ingredients that contribute to an effective retention program.

THE SEVEN INGREDIENTS

1. ROOT-CAUSE DIAGNOSIS

Traditional detailed lapse experience investigations are valuable in understanding the drivers and causes of poor lapse experience. However these investigations need to focus adequately on the “why” and “so what” as well as the technical. At a minimum, good practice involves diagnosing the drivers across the key areas of the business. Some examples include:

  • Product and pricing: Are specific products / portfolios more adversely impacted? How does new business pricing compare with in force? What is the customer and adviser feedback on pricing and product competitiveness?
  • Distribution: Is there a specific profile of the worst advisers (e.g. owned vs. aligned vs. Independent Financial Advisers, tenure, size of in-force book etc.)? Are advisers and Business Development Managers (BDMs) aware of their retention performance?
  • Customer operations and servicing: Is there a dedicated ‘save team’? Does the ‘save team’ have next best offers available? Are customers who are at risk of lapsing pro actively being identified?

Answers may not be readily available for all these points but insurers that start to pro actively ask the right questions are better placed to get business buy in and develop appropriate solutions.

2. VALUE FOCUSED DECISIONING

Effective retention programs clearly connect the findings from the diagnosis, the program in place and the value drivers of the business. They are designed to have initiatives that illustrate a clear linkage to the core value drivers of the business, with the impact measured by a set of agreed upon value metrics. In practice, organisations need to find the balance between:

  • simple value metrics that are easy to understand and communicate (e.g. net cash flows, DAC at risk, etc.) and;
  • complex value metrics that may better capture the long term nature of the business and its value drivers (e.g. embedded value, customer lifetime value across lines of business, etc.), but may be challenging to calculate as well as to communicate.

Often, it is better to start with simple metrics that can be quickly calculated and easily communicated and that have the benefit of increasing business awareness of retention. As capabilities progress, a migration to sophisticated measures of value that better capture the business characteristics is feasible.

3. CULTURE THAT APPRECIATES THE IMPORTANCE OF RETENTION

Most insurance companies have been guilty at some stage of placing a greater focus on new sales and implicitly setting a lower priority on retention. Over time, this has become ingrained in the culture of organisations and has helped promote sales, often at the expense of retention.

The importance of retention in a culture is difficult to measure; however, a few simple indicators can provide a helpful health check:

  • Is retention a Board agenda priority?
  • Is a material part of executive compensation linked to retention?
  • Are there adequate and experienced resources dedicated to retention?
  • Is there adequate internal publicity of retention? E.g. intranet? Posters in corridors etc.?

4. GRANULAR DATA, FOCUSED APPLICATION

Hampered by intermediaries that act as gatekeepers to the customer, multiple legacy systems and a mindset that treats data as part of an administrative process rather than a strategic asset, many insurers have suffered from both poor quality customer data and ineffective use of that information. To address those shortcomings, many insurers have focused on short term tactical data initiatives, while others have embarked on longer term transformational “Big Data” programs. The challenge for organisations in each of these camps is delivering material and sustainable impact from their efforts. Three simple but powerful principles are worth considering:

  • Identify and focus on highest priority / impact gaps: e.g. retention metrics in adviser and BDM performance dashboard.
  • Tap into non traditional data sources: e.g. periodic interviews with key staff and external stakeholders.
  • Build a structured feedback loop: e.g. feedback data on customer reasons for lapsing to improve save offers.

5. EFFECTIVE ENGAGEMENT

Historically, insurers have had limited reason to engage with the customer beyond renewal notices and payment reminders. This has resulted in minimal customer affinity with their insurance provider. There is an opportunity for insurers to improve retention outcomes by fundamentally reconsidering their engagement approach. Many have already started this journey by recognising and showing greater sensitivity to customer needs and how they evolve over time. Others are focusing on building and rewarding loyalty, whilst some continue to stick to the basics: engage more and reinforce the importance of the insurance cover customers have purchased.

6. APPLY AN ENTERPRISE WIDE LENS

One of the key challenges of retention programs is that the activities involved span many functions (Product, Sales and Distribution, Operations, etc.). Initiatives are often developed in isolation by each of the individual functions to meet their specific goals, and can end up being narrow in focus and limited in impact. Better performing insurers apply an enterprise wide lens, seeking input from a broad range of internal (functions, lines of business) and external stakeholders (customers, competitors, regulators, etc.). Such a process leads to a richer, more insightful and ultimately more sustainable solution. For this to be effective, the roles and responsibilities of each function and key individual must be clearly defined. Furthermore, given the large, complex and diverse nature of retention change programs, a dedicated project management team with strong subject matter and cross functional expertise and experience is often a critical yet commonly underestimated enabler of success.

7. BE BOLD

Plenty of solutions have long been debated in the industry. Most notably, a greater shift towards level premiums and amending adviser compensation structures are two potential solutions that have been discussed and debated for years.

Any move would likely draw criticism from the stakeholders that stand to lose out and potentially also present a first mover disadvantage, as other incumbents seek to exploit anyone breaking away from the pack. However, it is unclear whether players have actually engaged in rigorous analysis and internal dialogue to assess the impact of such bold moves. Many organisations may not have prioritised such an exercise (relying on an industry led initiative) or lacked the decision framework to make a tough call. Conducting such analyses and comparing the outcomes against the status quo and other potential adverse scenarios can provide useful insights for management and better equip them to make difficult decisions.

Given the deteriorating profits of the industry and limited indication of a turnaround in the near term, there is a strong call to action for insurers to revisit their customer retention business strategy. For many that are disproportionately impacted by lapses, the call for a bold move is growing stronger and may soon be a necessity.

1 Stewart, T. (2014) ‘Life Insurance Profits Slump’, InvestorDaily: http://www.investordaily.com.au/35674-life-insurance-profits-slump

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