Driving Effective Customer Retention forLife & Pension CompaniesIntroductionIn an industry where it costs 13 times more to...
Driving Effective Customer Retention for Life & Pension Companiesand the most appropriate “basket” of offers for each cust...
Driving Effective Customer Retention for Life & Pension CompaniesEVERY customer touch-point, regardless of channel. A cent...
Driving Effective Customer Retention for Life & Pension Companies             ment” or “Customer Value Management”. The in...
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Driving Effective Customer Retention for Life & Pension Companies

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In an industry where it costs 13 times more to acquire a new customer than to retain an existing customer, where a 5% improvement in customer retention can cause an increase in profitability between 25% and 85% (Reichheld and Sasser 1990) and where only 37.6% of customers think their insurer made a great or fair amount of effort to retain them, life and pension companies might consider shifting some of their sales and marketing investment from attracting new customers to maximizing customer value through persistency and improved customer retention.

As insurance organizations expand focus to include not only customer acquisition but also persistency and retention, they can learn from leading organizations that have gone before them using an analytical Customer Relationship Management (CRM) approach. We have identified a few key high value practices from these leaders related to retention. These high value practices are partially enabled by technology and partially enabled by leadership's ability to think "outside the box" in pursuit of attrition reduction.

Learn more:
http://www.pega.com/resources/driving-effective-customer-retention-for-life-pension-companies

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Driving Effective Customer Retention for Life & Pension Companies

  1. 1. Driving Effective Customer Retention forLife & Pension CompaniesIntroductionIn an industry where it costs 13 times more to acquire a new customer than to retain an existing customer, where a 5%improvement in customer retention can cause an increase in profitability between 25% and 85% (Reichheld and Sasser1990) and where only 37.6% of customers think their insurer made a great or fair amountof effort to retain them1, life and pension companies might consider shifting some of their Pega is at the forefront of thissales and marketing investment from attracting new customers to maximizing customer shift with a market leadingvalue through persistency and improved customer retention. CRM solution that combines sophisticated predictive andAs insurance organizations expand focus to include not only customer acquisition but also adaptive analytics, real-timepersistency and retention, they can learn from leading organizations that have gone before decisioning, and a guided userthem using an analytical Customer Relationship Management (CRM) approach. We have experience to help insuranceidentified a few key high value practices from these leaders related to retention. These high organizations improvevalue practices are partially enabled by technology and partially enabled by leadership’s persistency and retention andability to think “outside the box” in pursuit of attrition reduction. drive incremental revenueCreating the 1:1 Business Case for RetentionIn the Insurance Industry, marketing organizations are most familiar and comfortable with ‘segmentation’ strategies,where policyholders are broadly grouped and labeled. Once these groups are created, packages or strategies are offeredto each group. These mass segmentation strategies may work reasonably well for policyholder acquisition (they cast a“wide net”), but in retention, where you have intimate knowledge of the policyholder, using mass segmentation sacrificespersonalization and as a result, massive amounts of revenue.As an example, imagine that we create a segment called “medium value” policyholders. Within the segment are 5 policy-holders that have a lifetime value of between 250K and 750K. We want to retain this group of policyholders. We invest thesame to retain all the policyholders and propose the same offer.In all cases but one, we did not invest the right amount or propose the right offer. The loss resulting from the underinvest-ment in policyholders 2 and 5 exceeds the loss resulting from the overinvestment in policyholders 1 and 4.Extrapolated to a large policyholder base, thisover/under investment costs millions of dollars in OVER/UNDER INVESTMENT OF SEGMENTATION RETENTION ERODES REVENUElost revenue from attrition. 750 Life Value of PolicyholderLeading organizations take a radically differ-ent approach to the entire retention process by 500 Understarting with the value of the customer. They use Underreal-time decisioning combined with a guided Over Over Investment Level 250interaction to present a specific retention budget 0 A B C D E Attrite Retain Policyholder Within Segment 1 Global Consumer Insurance Survey 2012, Ernst & Young
  2. 2. Driving Effective Customer Retention for Life & Pension Companiesand the most appropriate “basket” of offers for each customer at the moment of truth. This individualized approach opti-mizes profitability by making each offer a “perfect fit” against retention value. The retention budget should be thought ofas a 1:1 business case that considers customer metrics (e.g. LTV and Influencer Score), and corporate and departmentalmetrics (e.g. Corporate retention budget, quarterly Net Add performance, and even communication center queue time).Applied to the insurance industry, insurers who sell through agents or third parties can identify policyholders likely toattrite or at risk for non-renewal. “Alerts” can be sent to the agent that includes a list of suggested offers tailored for thatparticular policyholder and the policyholder’s value to the organization. For example, one such “offer” could be the waiverof a monthly premium in recognition of a 5 year customer anniversary. These same “offers” could be presented to com-munication centers’ representatives servicing or selling to policyholders and to policyholders using a self-service portal,creating consistent customer treatment across channels.Starting Retention at “Hello”When insurers first implemented their retention initiatives, they applied them against policyholders that were dissatisfiedand trying to leave. This strategy, exemplified in the elite communications center “save group”, is an example of “reactiveretention”. It is a fine place to start, but it is likely the most expensive retention strategy since it requires changing thepolicyholder’s mind after their decision has been made.A more cost effective approach is to make sure policyholders never get on the exit path in the first place by engaging twonew types of retention strategies, preemptive and proactive. Preemptive strategies are those applied before there are anyrecognizable churn signals from the customer for example, offering a waiver of premium to military personnel for thetime deployed out of country. Proactive strategies are those applied when initial churn signals first appear such as when apolicyholder makes a policy value inquiry 2 weeks before the request to surrender or when the surrender call comes1 month after the policyholder is orphaned. Sometimes these events are not evaluated directly but combined into predic-tive churn models.Executing preemptive strategies requires the ability to effectively predict the customer’s lifetime value since insurers willlikely want to execute more expensive preemptive strategies first with high value policyholders. The point of preemptivestrategies, again, is that they areexecuted WITHOUT consideringthe likelihood of churn, and are ex- NOT THINKING THINKING LEAVING ABOUT IT DOING IT DID ITecuted in the name of providing an ABOUT ITexcellent customer experience.Since proactive strategies are ap-plied against early warning indica- RETENTION STRATEGY PREEMPTIVE PROACTIVE REACTIVE WIN BACKtors of churn, they introduce a newrequirement – predicting likelihoodof churn. Leading organizations usehistorical data to find common behavior patterns that are reliable churn/attrition indicators. They then apply these predic-tive indicators to current data in order to identify policyholders predictively at risk.The execution of preemptive and proactive strategies also creates a new requirement for the organization. The offers as-sociated with these strategies must be presented at the right time. With reactive retention and win back, the presentmentof offers could be made by a small subset of resources within a specific channel (e.g. communications center’s “savegroup”). Now, with preemptive and proactive strategies, companies are integrating these strategies and their offers into Copyright ©2013 Pegasystems Inc. All rights reserved
  3. 3. Driving Effective Customer Retention for Life & Pension CompaniesEVERY customer touch-point, regardless of channel. A centralized source (e.g. “decision hub”) provides every channelwith the right offer at the right moment in the customer lifecycle, in real time or otherwise.Finally, with all retention strategies, a critical factor in driving effectiveness is taking a customer-centric approach todetermining ‘propensity to accept’ when presenting offers of products, services or treatment. This propensity modelingsignificantly improves acceptance rates, and in assisted channels, has the follow-on impact of driving more agent confi-dence and higher initial present rates as well.Focus on Decisions, not DataConventional wisdom dictates that large data management initiatives (e.g. Master Data Management or “MDM”) are aprerequisite of effective retention. For some IT departments and System Integrators, their position is that the data hasto be (nearly) complete and (nearly) perfect before it can be safely used. The result is months of delay waiting for “dataimprovement” and “data quality” initiatives to complete before the business gets a solution.Leading organizations are finding that they can get good retention results even on incomplete and imperfect data. Bystarting with limited data values that are just good enough to make sensible recommendations or automate retentiondecisions, they can still obtain positive business results.Some high-value practices employed by the leaders to address data volume and quality include:� Construction of a minimal set of data that supports the highest value decisions. Then use of predictive analytics and decision strategies to confirm the key data elements that will deliver actionable results (this is usually a fraction of what’s available – out of 1,000 customer data elements, only 5-25 may actually wind up in a good quality predictive model, decision strategies may focus on 50-100 key fields overall).� Making sure the decision strategies automatically prompt for missing data elements that are used as input to the rules or predictive models embedded in that strategy.� Setting up the solution to statistically analyze data and make it either useful (after dealing with outliers, missing values, unusual distributions, etc.) or automatically reject the offending data element (see http://www.pega.com/resources/do-the-right-thingthe-use-of-predictive-analytics-in-business-processes).� If after (automated) data analysis, there is not enough data remaining to create and support an accurate predictive model, they simply deploy a model with known lower predictive performance. Even models with lower predictive capa- bility are likely superior to assumptions or guesswork. Using these lower quality predictive models as ‘seed’ models for more advanced adaptive capabilities significantly speeds time to market without sacrificing performance.Business results generally provide a solid starting point for an investment discussion. Leading organizations use resultsfrom the early phases of their retention efforts to fund additional data quality initiatives. The real-world experience gained,and the power of the analytic capabilities implemented can accelerate the delivery of data quality results.Who Owns Retention?Finally, leading organizations are realizing that their existing functional organizational silos do not enable a holisticapproach to retention. Since Sales, Marketing, and Service are all compensated based on different customer metrics, it isdifficult to get the entire organization thinking about retention across the entire customer lifecycle. Therefore, leadingorganizations are changing their organizational structure and empowering a senior leader to focus on “Base Manage- Copyright ©2013 Pegasystems Inc. All rights reserved
  4. 4. Driving Effective Customer Retention for Life & Pension Companies ment” or “Customer Value Management”. The individual in this role executes across functional organizations and is dedicated to using analytics, decisioning, CRM highly valued practices and technology to drive incremental margin per policyholder and maintain low levels of customer churn. Conclusion In its most basic form, the business model employed by life insurer’s is driven by three major levers – acquisition cost, investment return and customer tenure. Over the next few years, competition is likely to significantly drive up the cost of acquisition, as insurers spend more in marketing and subsidy to attract an ever shrinking pool of new customers. It is also likely that the world economy will continue to put pressure on investment returns. As acquisition costs increase, and returns decrease, insurers need to figure out ways to retain their better customers longer to ensure profitability. The ideas presented in this article, represent what is likely only the beginning of the movement toward more sophisticated retention and persistency programs. Advancements in core computing power’s ability to analyze massive amounts of data; the emergence of social influences as a major factor in defining customer value; and the advancement of technology solutions that put real-time decisioning power in the hands of front-line employees are all contributing to rapid advance- ment of the state-of-the-art programs. Insurers who fail to recognize this movement or to adopt a proactive approach to retention and persistence will likely be left behind. About Pega To learn more, visit www.Pega.com or contact a member of our Insurance Practice.2013-1 INS Copyright ©2013 Pegasystems Inc. All rights reserved

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