This article originally appeared in The Banking & Finance Post.

Customer persistency remains a deep-seated concern for life insurers across the world. In the US, the persistency ratio fluctuates between 81% to 86% while in developing countries like India on an average of only 61% of policies are renewed after one year of sale. Combined with the fact that global life premiums increased only marginally by 0.5% in 2017, low persistence (or high lapsation) rates are worrisome to insurers.

The reason: it impacts profitability with fixed costs being spread over a smaller base. This not only increases expense ratio but also forces insurers to acquire new customers, leading to higher acquisition costs and lower efficiencies. So how can insurers control lapsation rates while improving the number of paying customers?

Often, lapsation occurs due to lack of customer understanding of policy or poor policy fitment with customer profile and needs.

The key to decelerating lapsation rates, therefore, lies in better understanding customer’s propensity to lapse, based on their demographic and economic profile, risk appetite, life stage and other factors.

Insurers also need to put greater emphasis on improving customer engagement by pitching the right products at the right time, allowing for richer customer experience and enhanced customer retention.  However, in a typical scenario, organizations target customers based on broad segmentation that does not correlate with individual customer needs and preferences, resulting in disconnected customer experience, poor brand perception and customer attrition.

Also, organizations in mature markets collect premium payments through direct debit from a bank account or a credit card. However, in emerging markets where customers prefer making cash payments to using credit cards, directly debiting premium from the current account is a cumbersome process and takes a long time to activate.

Cash payment based policies typically experience high attrition, with most customers dropping off before they reach break-even. In fact, more than 23 licensed eWallets in the Indonesian Fintech market lack the features that could become suitable substitutes for credit cards. As a result, insurers can only target a small fraction of the potential market, even when the emerging segments can afford insurance.

So, how can insurance organizations target the right set of customers and enhance profits?

Smartphone behaviour-driven credit scoring: Upping the customer retention

Applying AI to smartphone device data can help insurers gather a unified view of customer’s risk profile to predict customer loyalty. It provides deep insights into customers’ past behaviour, and helps identify customer needs and policy lapse patterns to pitch the right products.

Take, for instance, smartphone behaviour-driven credit scoring, underpinned by AI. It can help predict customer repayment behaviour, analyze customer-product match, and assess the possibility of customers surrendering and cancelling policies. This is a great way to mitigate persistence concerns by targeting and onboarding low risk, high-value customers. An AI-based scoring solution that uses metadata from the smartphone offers several benefits:

• Provides real-time and automated scoring while protecting customer privacy.
• Helps assess and segregate customers at scale and depth, enabling insurers to make granular assessments of their customers and maximize customer lifetime value.
• Expedites the underwriting process while keeping potential fraudulent customers in check.
• Detects behavioural changes that may be used as a proxy for a financial crisis or personal circumstances that can lead to changes in the policyholder’s needs, enabling insurers to proactively reach out to customers and enhance retention.

The result: lower risk and superior customer engagement and retention initiatives for enhanced ROI.

Using customer intelligence to augment persistency management

As the insurance industry grapples with the twin challenges of technological disruption and evolving customer and regulatory demands, efficient persistency management offers significant business value in the form of customer lifetime value, cross-selling/upselling potential and customer satisfaction. Adopting an AI-driven scoring approach enables insurers to gather strategic insights into key factors influencing customer behaviour to make informed, qualitative decisions and target the right customers, arresting lapsation and increasing retention.  This means companies that use an AI-driven scoring approach that leverages smartphone metadata will benefit from superior customer intelligence, leading to optimal persistence rates and improved profitability.

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