Why Rewarding Policyholders Is Also A Gift To Data Modelling

By Austin Winton, Data Analyst, Marketing Metrix

Logic dictates that long-standing insurance policyholders ought to be rewarded for their loyalty with cheaper premiums relative to new customers. If people are willing to continue using your brand or service, they will more than likely expect a reward for doing so.

Austin Winton
Austin Winton

This is especially true in today’s financial services market where price comparison sites dominate, constantly encouraging churn with high-profile brand awareness campaigns.

In fact, the opposite is often the case – existing customer premiums are slashed over time. In some cases, the disparity can be significant in order to attract new policyholders. The UK’s Financial Conduct Authority (FCA) has estimated that 6 million people with home and motor insurance policies are being overcharged; in particular policyholders enrolled in auto-renewal, eliminating the opportunity for a review of their premium every year.

The result? Swathes of policyholders quit because they can find a better deal elsewhere, and the cycle of churn starts all over again. In the case of motor insurance companies, some organisations are losing up to 50% of their customers each year.

Aside from the obvious financial loss this causes, it also presents problems when it comes to number crunching to determine patterns relating to why people leave. A particular modern-day difficulty is the disruption caused to machine learning lapse modelling.

A lapsed model identifies policyholders who are most at risk of lapsing, considering their demographics and interaction with the insurance company. These can include:

  • additional products
  • add-ons
  • number of years a policyholder has remained with the company

The fact is that more expensive policy renewals means customers can grab massive savings on offers from other insurers for new policyholders. They are attracted to savings from a cheaper plan elsewhere. This inevitably weakens lapse prediction models to the point of these models being worthless: someone’s likelihood of lapsing is massively correlated to cost saving and little else.

But change is in the air. A recent initiative from the FCA means the picture could change completely. In an interim statement released in October, the FCA noted, “competition is not working well for all consumers in these markets. It sets out concerns about how pricing in these markets leads to consumers who do not switch or negotiate with their provider paying high prices for their insurance”.

The FCA statement added: “We have set out a package of potential remedies to ensure these markets are truly competitive and address the problems we have uncovered. We expect the industry to work with us as we do so.”

The regulator’s ideas to stamp out the issue are now being discussed in consultation with insurance industry stakeholders, including the companies that sell policies to customers.

Proposed remedies include:

  • Tackling high premiums for consumers – this could include banning or restricting practices like raising prices for consumers who renew year on year, or requiring firms to automatically move consumers to cheaper equivalent deals
  • Stopping practices that could discourage switching – including restricting the way that firms use automatic renewal
  • Ensuring firms are clear and transparent in their dealings with consumers – including improvements to the way firms communicate with their customers. The FCA is also considering whether firms should publish information about price differentials between their customers
  • Harnessing the benefits of innovation in the longer-term – so that general insurance markets benefit positively from technological developments including Open Finance

In essence, the plans mean insurers will have far less flexibility on price setting and will be obliged to offer loyal customers cheaper deals when they come to renew, in line with what they offer new policyholders.

If the FCA decides on implementing these restrictions – and a final decision appears to be imminent – existing customers will be naturally less likely to search for new deals elsewhere. It’s fairly easy to switch companies these days, but many consumers would presumably be happy to do nothing and remain with the same insurer if it wasn’t hitting them in the pocket.

Citizens Advice estimate that 6.9 million policies are switched each year – the removal of the loyalty penalty, which saves them on average £500 a year, will significantly reduce the switching.

All of this would now leave customers, old and new, on a level playing field. What does this mean for lapse prediction modelling?

It’s good news for data folk, and for the sector as a whole. Insurance companies will ultimately have significantly more accurate models that can identify at-risk customers at scale.

By removing the ‘unknown’ of fed-up existing customers jumping ship because of unfair pricing, data analysis will improve these models greatly to make them more powerful in understanding why customers leave. This means organisations can call on marketing solutions to try to fix the problem of customer retention.

It seems fair to predict that with the combination of a reduction in premiums for existing loyal customers and the subsequent improvement in the power of lapse modelling, the net effect will be an increase in customer retention.

Suddenly, lapse modelling will not just be about price but other factors, too. The anticipated FCA adjudication is a win-win for insurers and their customers alike. Now it’s up to companies to ensure they have the necessary skills on hand to make the most of this new landscape.