While 85% of auto insurance customers say they are loyal to their existing provider, more than one-third of these policyholders have shopped around for a new provider, according to the '2008 Insurance Retention/Defection Study' from J.D. Power and Associates.
Identifying those customers with a higher propensity to switch and employing the tactics needed to keep their business is critical for insurance carriers, the study concluded.
While many insurers categorise and segment their customers using underwriting data alone (such as driving history and demographics), the study suggests that incorporating attitudinal data (such as shopping habits, investment style, and affinity for new products and brand names) can improve a provider's effectiveness in modelling long-term customer retention and value.
But because attracting new customers is much more expensive for an insurance company than simply retaining existing customers, the most cost-effective approach has to be to anticipate which customers are most likely to look for a new provider and launch an appropriate customer retention campaign before they even begin the process of shopping around.
The study found that 15% of policyholders had defected to another provider during 2008, while an additional 20% were at risk of leaving their current insurance provider. Among the 15% of customers who had defected, only 33% said they intended to switch provider when they first started to shop around, suggesting that insurers have an opportunity to retain up to 67% of their potential defectors. However, only 30% of defectors reported that their previous insurer had made any attempt to keep their business.
Perhaps not surprisingly, the study also noted that price has become a key driver among both defecting and loyal customers. Nearly 60% of customers who had defected cited price as the primary driver for switching, and 40% of loyal (retained) customers cited price as their primary reason for remaining loyal to their insurer. Interestingly, nearly 80% of retained customers said that price discounts were the most common offer they received from their insurers, compared to only 51% of defectors.
"While retaining customers starts with providing high quality service, it is also critical to identify those customers who are most likely to switch, and to do so early enough to allow time to try to salvage the relationship," said Bowler. "While offering competitive pricing and discounts is one way to persuade customers who are at risk of defecting, educating them about their policies and providing thorough policy reviews on a regular basis is another key tactic in persuading them to stay loyal. Initiating proactive contact with customers after they initially sign on can help prevent them from falling into the at-risk category in the first place, which ultimately saves providers time, effort and money."
Other findings from the study included:
- Customers in the at-risk category who ultimately remain loyal to their insurer have been with their carrier an average of four years longer than those in the category who ultimately defect.
- Nearly 25% of customers with bundled packages (e.g. auto and home insurance policies) shopped for a new insurance provider, while 40% of non-bundle customers did so. Ultimately, only 25% of customers shopping for both auto and homeowners insurance are likely to defect, while almost 50% of those shopping for only auto insurance are likely to switch insurers.
- More than 45% of Generation Y customers (aged 18 - 23) had shopped for a new carrier in the previous 12 months, compared with 38% of Generation X (aged 24 - 44) and only 31% of Baby Boomers (aged 45 - 62).