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July 17, 2002

Andrew F. Giffin

Managing Customer Value for CustomerSatisfaction, New Markets and ProfitEnhancement

Paper Presentation - International Insurance Society

Annual Seminar - Singapore

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What is the value of a customer?

Consider:

Profitability from existing business

Profitability from future businessProbability of salesProbability of retention

Value is generated by customer

contributions of distributable earnings

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The value of all customers equals the value of the

company

Embedded Value

Future Business =

Customer Value

contributions to

distributableearnings

Adjusted Net Worth

Company Value

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What is Expected Customer Value (ECV)?

For example:ECV = (Probability of response) x (Value of first policy)

+(Probability of 1st renewal) x (Value of 1st renewal)

+(Probability of 2nd renewal) x (Value of 2nd renewal)

+etc.

+(Probability of cross-sell 1) x (Value of cross-sell 1)

+etc.

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Customers segments have different influences and

behaviors . . .

CUSTOMER BEHAVIORS

n Propensity to buy different

products in different ways

n Persistency by product

n Loss experience

n Propensity to refer

Socio-economic

factors

Demographic

factors

Agent

behavior

Customer

management

effort & expenditure

INHERENT FACTORS

INFLUENCES

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Different characteristics and behaviors producemeasurable differences in customer profitability

0%

100%

200%

Approximately15% of customers

contribute 100% ofvalue

CumulativeValue

Contribution

Percentage of Customers0% 20 40 60 80 100%

40% of

customerscontribute 190%

of value

5% ofcustomers

destroy 40%of value

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Pricing elasticity,channel usage,improved underwriting,product design andmulti-tier service levelsreduce customer cross-subsidization andenhance valuedcustomers experience

Pricing elasticity,channel usage,

improved underwriting,product design andmulti-tier service levelsreduce customer cross-subsidization andenhance valuedcustomers experience

Improving customer value

focuses on four stages of the customer lifecycle

Customer Relationship Lifecycle

Predictive modeling ofproduct purchasepropensity, event-driventrigger sales andsegment-of-one offerdesign can enhance your

share of wallet andrelationship profitability

Predictive modeling ofproduct purchasepropensity, event-driventrigger sales andsegment-of-one offerdesign can enhance yourshare of wallet andrelationship profitability

Segmentation, targetoffers and responseanalysis can increaseresponse andacceptance rates, whilemining more profitable

target groups andestimating potentialvalue can improve youracquisition economics

Segmentation, targetoffers and responseanalysis can increaseresponse andacceptance rates, whilemining more profitable

target groups andestimating potentialvalue can improve youracquisition economics

Behavioral analysis andattrition modeling, loyaltyprogram responseanalysis, targeted callingand customized offerprograms can raiseretention levels

Behavioral analysis andattrition modeling, loyaltyprogram responseanalysis, targeted callingand customized offerprograms can raiseretention levels

RetentionCross

Selling

Customer Management

Acquisition

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Acquisition: CVM helps you target the most attractive

prospects

Value targeting: life insurance example

New BusinessProfit

150

200

100% 80% 60%

Percentage of customers targeted

100

X

Targeting the best 70% by valueincreasing profit

by 126%

Targeting by propensity only increases profit by 30%

X

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Advantage of risk classification:

avoid anti-selection

Dist. of risk

portfolio

Actual Prem.

Pay too much Pay too little

Actual cost

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Refinement of risk classifications provides more

homogeneous segments

,t

,1 ,2 ,3

Without RiskSegmentation

After RiskSegmentation

Average

Premium

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Customer behavior affects products differently

Base case

-5

5

15

25

35

45

SPIA SPDA VUL Term

9

43

28

-1

3 x Lapses

-5

5

15

25

35

45

SPIA SPDA VUL Term

9

26

7

-1

Persistency/retention can have a large, but varied impact

on value

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Distributor relationships: traditional performancemeasures are misleading

Economic Contribution of Individual Agencies

FYC

Agency Performance

+0

Source: Tillinghast analysis

Agency Channel: CVM analytics can be used to

understand drivers of channel profitability

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Making CVM Work

n

Data - use whats available; dont overdo itn Simple segmentation

n Know valuable customers?

nLeverage value knowledge?

n Match channels to segment preferences?

n Do sale reps follow value targeting?

nDoes service maintain customer relationships?