Winning the Battle for Customer Ownership and Retention

Table of Contents

• EXECUTIVE SUMMARY
  • Introduction
    • What is customer ownership?
  • Poor customer ownership and retention is extremely costlyfor the life industry
    • Persistancy issues in the life and pensions market costthe industry millions each year
      • Persistency of policies is vital for policies to be costeffective
  • The opportunity exists for providers to boost theircustomer ownership and retention levels
    • The key customer ownership opportunity arises through theclients who are not effectively serviced by their IFA
    • Two key strategic issues exist that stand in the way ofproviders' current customer ownership
    • Some key tools for enhancing customer ownership aremissing from life insurers' current propositions
      • Lack of customer understanding of products leads to policylapses
      • The timing of product surrenders are often driven by theproduct structure
      • Remuneration methods create artificial churn
      • Failure to segment the customer base limits the success ofcurrent retention strategies
    • Customer ownership and retention can be improved throughseveral key changes to strategy and outlook
• CHAPTER 1 INTRODUCTION
  • What is this report about?
  • Defining customer ownership and its benefits
    • What is customer ownership?
    • Why is customer ownership worth striving for?
      • Improved levels of customer ownership boost opportunitiesto increase share of wallet
      • Increased loyalty and retention can be achieved throughhigher levels of customer ownership
      • Ease of customer acquisition and increased referrals allowproviders to cut costs
• CHAPTER 2 SIZING THE LOST MARKET OPPORTUNITY FROM POORCUSTOMER OWNERSHIP
  • Key findings
  • Business in force and persistency have both declined inthe past few years
    • Despite the substantial new business inflows over thisperiod, changes in business in force figures have not been positive since2001-2002.
    • Persistancy rates in the UK life and pensions markets havebeen falling between 1998 and 2001
      • Lapse rates for regular premium products decrease overtime while single premium lapses rise
  • Policy lapses have significant cost implications for theindustry
    • Policy lapses cost the industry 14% of the total newbusiness premium value between 1998 and 2002
    • Persistency of policies is vital for policies to be costeffective
    • Falling persistancy rates also have implications forgovernment policy
• CHAPTER 3 THE CUSTOMER OWNERSHIP OPPORTUNITY
  • Introduction
  • Key findings
  • IFAs dominate sales of long-term savings products
    • 70% of new business in the life and pensions market comesthrough IFAs
    • Nearly half of IFA firms are small single outlets
      • Small IFAs have limited resources with which to servetheir clients
  • The majority of IFAs have a small number of frequentclients
    • Frequent clients represent just 28% of IFAs' total clientrelationships
    • Frequent customers are not necessarily wealthy customers
    • IFAs tend to initiate contact with frequent clients
    • Referrals and recommendations provide IFAs with deeperclient relationships
  • There is substantial opportunity for providers to retainand acquire customers in this under-served segment
• CHAPTER 4 STRATEGIC OPTIONS AND ACTIONS
  • Introduction
  • Key findings
  • Life insurers need to recognize the shortcomings of theircurrent strategic position
    • The traditional life company business model leaves themvulnerable to poor persistency levels
    • However options are limited for providers wishing tomaximise persistency
  • Some key tools for enhancing customer ownership aremissing from life insurers' current propositions
    • Current product structure often encourages policy lapses
      • Lack of customer understanding of products leads to policylapses
      • The timing of product surrenders are often driven by theproduct structure
      • On the positive side, developments are already takingplace that could reverse this trend
    • Current distribution strategies fail to strengthenrelationships between providers and customers
      • Remuneration methods create artificial churn
      • IFAs often fail to effectively service their back book ofbusiness
    • Failure to segment the customer base limits the success ofcurrent retention strategies
      • Operational CRM involves gathering of information but lifecompanies fail to use the information effectively
  • Customer ownership and retention can be improved throughseveral key changes to strategy and outlook
    • An important cultural shift must take place
      • Open and flexible communication channels are vital
    • Improved customer relationship management is key
      • The use of a dedicated customer retention team can helpboost persistancy
      • One simple method of segmentation is by age group or"life-stage"
      • Valuable cross-selling opportunities exist among youngercustomers
    • Providers must get involved in the education of customersand advisors
    • Product structure can be adjusted and simplified to helpreduce surrenders
    • Changing remuneration structures is crucial to reducingchurn and strengthening relationships
    • The shift to a higher level of customer ownership willtake dedication from across all departments
• CHAPTER 5 APPENDIX
  • Definitions
    • Single premium policy
    • Regular premium
    • New business
    • Wrap accounts
    • Single Premium Life
    • With-profit bond
    • Guaranteed Equity bonds
    • Distribution bonds
    • Purchased Life Annuities
    • Other bonds
    • Annual Premium Life
    • Endowment Policy
    • Term Assurance
    • Income Protection
    • Critical Illness
    • Collective Life
    • Persistancy
    • Embedded Value
    • Experience Variences
  • Further reading
  • SPP writing team
• List of Tables
  • Table 1: Total life and pensions business in force, £m1998-2004
  • Table 2: Annual change in business in force, £m1998-2004
  • Table 3: 2 year persistency rates for UK life andpensions products 1998-2001
  • Table 4: Value of new business premiums lost throughlapsed policies 1998-2002
  • Table 5: New business premiums in the total UK life andpensions market 2000-2005, £m APE
• List of Figures
  • Figure 1: The sources and benefits of improve customerownership levels
  • Figure 2: Business in force figures for regular premiumlife have lagged behind the business inflows
  • Figure 3: 2 year persistency rates in the UK regularpremium life and pensions markets have fallen
  • Figure 4: Lapsed policies cost the industry £3,587m APEin terms of premiums between 1999 and 2002
  • Figure 5: IFAs are the dominant channel in the total UKlife and pensions market
  • Figure 6: 46% of the IFA market was comprised of smallsingle outlet firms in 2005
  • Figure 7: Most IFAs have a small number of frequentclients
  • Figure 8: Frequent clients come from a range of wealthbands
  • Figure 9: IFAs control when they meet with theirfrequent clients
  • Figure 10: Life insurers strategic predicament inenhancing customer ownership
  • Figure 11: The structure of the product influences thetiming of surrenders
  • Figure 12: The Treating Customers Fairly Principles 2004
  • Figure 13: Upwards and downwards communication is vital
  • Figure 14: Different types of customer must be targetedusing different methods
  • Figure 15: Sales to existing customers peak around age40