A company can anticipate as much as 200-300% of initial premium commitment as additional premium from the same customer. The net present value of such anticipated premium accretion is the customer lifetime value (CLV) for a life insurance company. In a business model that envisages consistent growth at a rapid rate, the CLV could be strategically important. While designing growth strategy, this factor can be safely accounted for, provided the employees are trained in the concept and are motivated to tap this low-cost and almost perennial source of revenue.
Healthy relationship with policyholders is likely to generate much higher premium income from each of them through renewal premium, repeat purchase with higher sum assured commensurate with the risk profile and saving propensity at different life stages. However, the ground reality makes the concept of CLV a far-fetched one. Most organisations and their customer relationship employees consider customer relationship management (CRM) as a tool for preventing complaints and redressing grievances.
But they would see more value in their job if the concept of CLV is explained to them and if they are trained to leverage this for accelerating growth.
In India, companies have paid very little attention to value creation from the same customer by ensuring right sale and appropriate post-sales relationship. Besides, the migration or dropout rate of customers by way of surrender of policies or through programmed lapsation has been quite high. In fact, 15 years ago, once during my supervisory tour as senior divisional manager of LIC to Rudauli, a remote rural branch office in UP, I met a policyholder who was waiting in the queue to pay his premium. He informed me that for last 15 years, he had been paying R515 as half-yearly premium. I asked him whether he would like to take another policy and, if so, how much premium would he be ready to pay. He replied: no body ever asked me to pay more, but I am willing to pay R3,000-4,000 extra.
This experience suddenly awakened me to the hidden and untapped potential available with each of the existing customers. I was delighted with this eureka experience and later converted such potential to rich cash flow for the Lucknow Division of LIC.
This experiment with existing customers made me believe that an enlightened CRM programme can yield phenomenal premium income in addition to premium from new customers every year. Leveraging CLV is, therefore, an important management function and needs to be practiced consciously. Customers, once enrolled, must not be alienated through indifference or overconfidence about their loyalty. Companies must have well-defined strategies to convert each customer into a permanent source of incremental revenue over a long period of time. Such strategies would certainly make a very positive impact on company’s profitability. This method of income generation is far less expensive than the strategy of focussing only on new business.
In consumer product business, CRM aims to prevent a loyal customer from shopping around. While this holds good in insurance business too, the phenomenon of repeat sales with higher value of premium makes the business somewhat unique. The actuarial valuation of present value of future premium helps in projecting the embedded value of business at a particular point of time. But CLV based on future sales to some customers would certainly necessitate a parallel projection and, if pursued carefully and vigorously the projection, may be realised faster and even more accurately.
Scientific analysis of customers has proved that, globally, 20% customers contribute 80% of total premium in a year. Hence, spending a little more on their acquisition would make great business sense though I am not sure how it is possible under the current regulations. But the industry can demand relaxation in this regard from the Irda .
Similarly, channels that promise greater CLV can be awarded more generously and even the customers could be offered some rewards for subsequent purchases or for direct purchase of policies. For cultivating loyalty of customers with higher CLV, the industry needs to learn from the aviation sector and the cash-back programmes of credit card and debit card issuers.
The writer is advisor (Life Reinsurance) GIC Re and former MD & CEO of Star Union Dai-ichi Life