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Understanding the value of customer segments and leveraging these insights

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In this session at the Willis Towers Watson ‘Creating value through customer centricity’ forum (29-30 September 2016, Cologne), Francesco Daboni and Michael Kluettgens considered Customer Lifetime Value and how it is widely used by insurers. However, the quality and sophistication of Customer Lifetime Values varies enormously. The presenters considered how some insurers base their Customer Lifetime Value purely on historic claims experience and have overly simplified models with no assumptions on how risk or premium will vary over time. The presenters also explored how, in many cases, some of the complex models already in place are not used for the Customer Lifetime Value. The presenters demonstrated how these models can be integrated in the Customer Lifetime Value which will help insurers achieve better alignment between pricing and marketing.

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Understanding the value of customer segments and leveraging these insights

  1. 1. 30 September Customer Centricity Conference © 2016 Willis Towers Watson. All rights reserved. Understanding the value of customer segments and leveraging these insights Francesco Daboni and Michael Kluettgens
  2. 2. Agenda © 2016 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 2 Value of in-force per policy Analyse and Assess Customer Behaviour Customer & Sales Management Up-Selling to Existing Customers Smarter Handling of Low Value Customers Cross Selling to Existing Customers Use Analytics to give better targeting of offers Maturity and Retention Mgmt. of High Value Customers Review level and structure of renewal commissions
  3. 3. Calculating a VIF per Policy with your Solvency II model requires additional considerations but a lot can be leveraged © 2016 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 3 Yield Curve  No extrapolation or transitional provision to measure economic value  Use of illiquidity premiums in valuation appropriate provided liabilities allow for this and investment assets are expected to earn the premium  Going Concern approach appropriate but decline of in-force to be reflected properly  Be careful not to overestimate profitability of small premium policies  Cost may vary significantly by administration system  To be assessed whether GLM techniques can result in materially improved biometric assumption at customer level  Customer behavior could be included individually (see analysis later in presentation) Biometric Assumptions Yield Curve  Mismatch cost to be allocated only to new business if asset risk exposure considered important to remain attractive for new customers  Solvency risk margin not a good proxy for cost of capital Expenses Cost of mismatch and cost of capital
  4. 4. It is not the objective to get to a realistic impact of lapses on the whole portfolio relevant for embedded value, Solvency II planning purposes P&C actuaries are using GLM type approaches for many years to assess the risk exposure of individual customers Customer behavior: the tools and techniques are available © 2016 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 4 Objective is to Assess the Lapse Probability of each Customer Individually Identify customers who have surrendered in the past Analyse which customer attributes (“variables”) strongly correlate with lapse experience Perform regression analysis to determine for each variable a lapse factor relative to a base lapse rate Rank policyholder by individual lapse probability and focus activities Goodness of fit test
  5. 5. 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Hürr ürpch Dürsch Hxndyungsqüvoyymächtpgtür / zprmünvürspchürung p Coyognü Ozzpcü Wpüsünüwsky, Uyrpch HüpSSM000007661 xyTü yüpPZpGüR yüqünsvürspchürung x.G. Hürr Dxnpüy zrxnkü Coyognü Ozzpcü Wpüsünüwsky, Uyrpch HüpSSM000007661 xyTü yüpPZpGüR yüqünsvürspchürung x.G. Hürr Rüpnhxrd Kunz Mptgypüd düs Vorstxnds Coyognü Ozzpcü Wpüsünüwsky, Uyrpch HüpSSM000007661 xyTü yüpPZpGüR yüqünsvürspchürung x.G. Hürr Cxrstün Müyür qürüpchsyüptür Pyxnung, Controyypng / Rpspko-Mxnxgümünt Example: Result of regression analysis by customer © 2016 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 5 Age Policy Year Income relative to age Life Event Driven Total factor Cu_x 30 3 high House bought Factor 1.6 1.5 1.4 1.2 4.2 Lapses.. ..reduces with increasing age .. reduces with increasing policy term … is particularly high with very high and very low wages relative to age ..increase with various life events Lapse prob.* Customer Value Cu x 21% (5%*4.2) 1000 Cu y 26% (5%*5.1) -500  In a retention campaign the focus should be on customers of type x. Customers of type y should be eased to surrender  It is important to measure success of activities by defining control groups External data sources Age Policy Year Income relative to age Life Event Driven Total factor Cu_y 50 12 low Lost job Factor 0.9 1.1 1.3 3.9 5.1 *5% base lapse rate assumed
  6. 6. Insurers may obtain data from various sources 6 By using granular user data, insurers gain valuable customer insights and can make better use of the individual cross- und up-selling potential. External data Professional data traders (e.g. Experian, Acxiom, RapLeaf) collect data, enrich data and summarise the results in extensive user profiles. The main disadvantage of this approach is again the missing real-time context. ... Internal data The number of insurers that are launching apps is increasing. These apps often have nothing to do with the core business itself but are designed to collect useful data. These methods go far beyond the opportunities of classical web analysis. Social media data The current social media platforms gather numerous user data with an extraordinary high real-time context. For example: Facebook offers a free API interface to seek the information that is publicly available. Public data Insurers have access to public birth, marriage and death records and can use these records for marketing purposes. This approach is already applied in practice. The disadvantage of this approach is the missing real-time context. © 2016 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.
  7. 7. Obvious action points for two customer profiles © 2016 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 7 Life P&C Total Customer Value 50 200 250 Exposed to surrender? Upselling potential Value of up-sale 20 50  Customer we want to retain  Exploit upside potential  Exclusion from retention program  Customer we want to retain  Customer retention program  Exclusion from upselling activities low high Life P&C Total Customer Value 50 200 250 Exposed to surrender? Upselling potential Value of up-sale 20 50 high low VN1 VN2
  8. 8. Life P&C Total Customer Value -150 200 50 Exposed to surrender? Upselling potential Value of up-sale 20 50  Ideally, customer surrenders life policy only and buys new contracts  To be assessed whether lapse incentives may not yield the opposite of the objectives  Customer we may not want to retain  Upselling potential to small to offset negative life customer value  To be assessed whether lapse incentives may not yield the opposite of the objectives high high Life P&C Total Customer Value -500 20 -480 Exposed to surrender? Upselling potential Value of up-sale 20 20 high high VN3 VN4 Less obvious action points for two further customer profiles © 2016 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 8
  9. 9. “Customer Centricity is not About Being nice to Customers. It’s About Making Money” © 2016 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 9 Positive customer value for Life Positive customer value of for P&C Positive customer value for Health Which clients may buy a new product (and what type of product)? Which customers do we risk to (or may we want to) loose?

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