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Customers for a Lifetime

News Direct – Number 56 | June 2007

Customers for a Lifetime

By Arthur Middleton Hughes

The goal of any insurance company is to acquire profitable customers who will buy a lot of products and stay with you for a lifetime. Modern marketing and communications methods are making this more and more possible today. In this article, I am going to describe how some of the most successful insurers are going about this process.

In the first place, they are building and maintaining outsourced customer and prospect marketing databases, updated daily, which their marketing and management staff can access on line at any time. These databases have demographic and behavioral data appended to each consumer, plus model scores and promotion history. The consumers on these databases can be selected by age, income, family, type of housing, policies purchased, financial history, promotion and response history and scores of other factors.

Using these databases, insurers are learning a lot of valuable lessons. The first lesson is that lowball discount price offers may not attract the right kind of customers. The database permits marketers to use models to see the characteristics of customers who consistently renew their policies, buy second policies, and do not make excessive claims and to find out how these good people were acquired in the first place. Reports of this kind can lead to a revision of the customer acquisition methods.

A second lesson is the value of selling a second product to any policyholder. The retention rate of all customers is typically a function of the number of individual policies that they buy. The database can be used to develop graphs of retention rates and number of policies owned. One company with independent agents used their database to determine the Next Best Product for each of their millions of current policyholders. They defined the Next Best Product as the most profitable product that that particular policyholder was most likely to purchase if offered. Once they knew what that policy was, they were able to develop personalized communications to each policyholder offering them a discount on their current policies, if they purchased the additional one.

This company used direct mail personal notes from the agent to the agent's customers, created through an agent Web site. The notes calculated the dollar saving for each policyholder with notes such as: "Dear Bob and Kitty: As I figure it, you could save about $206 per year on your auto premium if you have this new homeowner's policy. Call me today and we can talk about it... Susan."

When the agent's Web site was set up, 89 percent of the agents who were invited went to the Web and arranged to have Next Best Product letters mailed to their customers. Fifty-two percent created the personal notes. Results: the households who received these notes bought 11 percent more than a control group that did not get these notes. A second follow up letter, created by the Web site, produced 8 percent more sales. A follow up phone call gained 43 percent more sales. In all, the personal notes increased sales by 140 percent over messages that had no personal notes.

Travelers Insurance used their customer marketing database to set up a policyholder communications system designed to boost the retention and renewal rate. Before they did this, they had used their database to learn that:

  • 62 percent of customers who failed to renew their policies never talked to an agent first, and
  • 80 percent of people who talked to an agent did not leave.

The program created six communications per year from their agents to their customers. The six messages were:

  • Letter 60 days before annual renewal
  • Annual review
  • Thank you card in 1st quarter
  • Cross sell postcard in 2nd quarter
  • Newsletter in 3rd quarter
  • Seasonal card in 4th quarter

The results of the communications were to increase the customer renewal rate from 85.1 percent to 90.5 percent—compared to controls. This boost was worth millions of dollars to Travelers. In this program, the agent paid all the costs (printing and postage). Prior Traveler's programs had been subsidized; the agent risked nothing. But these prior programs had all failed to meet their goals. Since they were paying for it, the agents wanted to make sure that their money was not wasted.

Prospect Databases

The biggest gain from setting up a customer and prospect marketing database is vastly improved acquisition. As most insurance direct mail is conducted today, the insurance company rents names from a couple of hundred lists that have proved profitable in the past. These names are processed to put them into a common format and to consolidate the duplicates. After the mailing, the insurance company gets to keep the 1 percent or so names of the responders, but has to erase the names of those who did not respond. Next month, the insurer goes through the process all over again.

What the insurance company learns from this monthly exercise is which lists work best and which offer produces the most response. What they do not learn are the response rates by income, age, home value, wealth, children, educational level and scores of other relevant factors. It is not possible to learn these things because this data is not present in the rented names.

A prospect database works quite differently. Names are rented for an entire year, not just for a single mailing. The names are kept on the database at an independent service bureau that provides monthly reports to the list owners. The list owner is paid every time one of his names is used in a mailing. Since the insurance company has these names for a year, the company can afford to append such information from AmeriLINK® or other sources as:

  • Date of Birth
  • Phone Numbers
  • Income
  • Adults and children in the household
  • Net Worth
  • Own versus Rent
  • Home Value
  • Length of Residence
  • Dwelling Type
  • Ethnic Group
  • Occupation
  • Ailments
  • Insurance Coverage for Prescription Drugs

In addition, the company appends promotion history to each record, so during the year their marketing staff learns how many times they have mailed to each person on their database, what they have mailed, and what the prospect's response was.

The most important parts of the prospect database, however, are the model scores. Using a model, insurers use each prior mailing to determine the characteristics of people who responded, who converted, and who continued to pay their policies subsequently. All prospects are ranked by likelihood to respond, convert and renew. So, instead of selecting people for mailing by the list they were on, insurers could select them by the factors listed above. The insurer is able to vary the promotional message based on the prospects age, income, housing type, children, and many other factors. The result: much higher response rates. Here is what one insurer found by using a prospect database:

    Control Group Optimized Group  
Total Mailed 1,264, 571 1,264, 571
Cost of Mailing $547, 559 $547, 559
Number of Responses 13, 366 16,090
Response Rate 1.06% 1.27%
Number of Sales 1,599 2,323
Sales Rate 12.00% 14.40%
Total Revenue $2,605,603 $3,158,151
Revenue per Sale $1,630 $1,360
Profit $95,896 $187,851
Return on Promotion 18% 34%

He mailed the same number of households as he had before, but he doubled his profits because his response rate and his conversion rate went up.

A major nationwide insurance company that mailed about 10 million pieces a month set up a prospect database at an outside service bureau a couple of years ago. Once the system was set up, their response rates from their mailings increased by 34 percent. Their mailing costs decreased by 9 percent and their list rental costs dropped by 35 percent. Why did their list rental costs decrease?

This is probably the most interesting part of the prospect database system. All their mailed names were selected based on the 35 models that they set up for the database. Previous to the prospect database, they had mailed only rented response names that cost them $100 per thousand or more. With the new system, they were able to use compiled names that cost them half that amount. The reason they could use compiled names was because the models—and the appended AmeriLINK® data—were so accurate that they selected exactly the same households as the ones they had previously paid twice as much for.

So an outsourced customer and prospect marketing database can be used to acquire the right type of customer, to sell second products, to improve the retention and renewal rate, and to reduce the cost of customer acquisition. Not a bad return on a modest investment.

Arthur Middleton Hughes is vice president/solutions architect of KnowledgeBase Marketing (www.kbm1.com) which builds customer and prospect marketing databases for major American insurers. He is the author of Strategic Database Marketing 3rd ed. (McGraw-Hill 2006). Hecan reached at Arthur.hughes@kbm1.com