Academic journal article Journal of Risk and Insurance

Survival Analysis of a Household Portfolio of Insurance Policies: How Much Time Do You Have to Stop Total Customer Defection?

Academic journal article Journal of Risk and Insurance

Survival Analysis of a Household Portfolio of Insurance Policies: How Much Time Do You Have to Stop Total Customer Defection?

Article excerpt

ABSTRACT

Customer-side influences on insurance have been relatively ignored in the literature. Using the household as the unit of analysis, this article focuses on the behavior of households having multiple policies of different types with the same insurance company, and who cancel their first policy. How long after the household's cancellation of the first policy does the insurer have to retain the customer and avoid customer defection on all policies to the competition? And, what customer characteristics are associated with customer loyalty? Using logistic regression and survival analysis techniques, an assessment is made of the probability of total customer withdrawal, and the length of time between first cancellation and subsequent customer withdrawal. Using a European database spanning 54 months of household multiple policyholder behavior, the results show that cancellation of one policy is a very strong indicator that other household policies will be canceled. Further, the insurer can have time to react to retain the customer after the first cancellation, however, this time is significantly dependent on the method used to contact the company, household demographics, and the nature of the household's insurance policy portfolio. Surprisingly, core customers having three or more policies in addition to the canceled policy are more vulnerable to total defection on all policies than noncore customers. Further, the potential customer repelling effects of premium increases seem to wear out after 12 months. Strategic implications of the results are presented.

INTRODUCTION

It has long been recognized that insurance operates in a marketplace. Yet, the focus of the vast majority of research has been supply-side, emphasizing study of financial and actuarial elements. Very little has been published concerning the dynamics behind customer demand for insurance products. (1) This article expands perspectives on the marketplace to the study of customer behavior.

The Importance of Customer-Side Analysis

A firm must generate sales to survive, and just as actuarial estimations and financial analyses are critical for an insurer's long-term business survival, so too are sales and customer relationship management. In this regard, the firm's sales are not only a function of new customer numbers, but are also of how many existing customers are retained. Managing customer growth and market share requires consideration of customer-side marketplace dynamics in order that customer relationships may be developed and matured. (2)

Persistency Studies and the Importance of the First Notification of Cancellation Signal

Persistency studies have been conducted in life and annuity markets to determine factors correlated with policy lapses (LIMRA International, 2001; Kuo, Tsai, and Chen, 2003; Drinkwater et al., 2002). Although these studies provide customer-side information in the form of sales operations, servicing operations, etc, they are generally conducted using a single policy as the unit of analysis. There has not been a tendency to conduct persistency studies in the property and casualty area, even for single policy units of analysis, although insurance companies do focus on both retention of existing customers and attraction of new customers (Cooley, 2002).

In spite of the lack of attention given to persistency in property and casualty, policy lapses are important there: first, because of the heavier load of expenses in the first years of a policy, and second, because in multipolicy households, policy cancellation can be a customer behavior that signals purchasing decisions in process or on the customer's decision-making horizon. Often a household will buy multiple policies from the same insurer, and consequently a lapse in one may be a signal of the beginning of the customer's defection to a competitor.

In most cases, lapses signal the customer's brand switching behavior: moving from one insurer/company to another indicates the customer's defection to the competitor in a customer-side market analysis. …

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