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Why Does the Long-term Nature of Life Insurance Products Make Customer Retention Difficult?

Most insurers offer similar products and services, which makes it challenging to attract new customers and retain them. As an industry, insurance is low-touch, and insurers seldom interact with their customers. A report shows that the top companies have an average customer retention rate of 93 - 95 percent, while insurance companies have an average of 84 percent.

In one of my previous blog articles, I elaborated on how insurance is just an agreement. Life insurance products, specifically available to individuals, require people to pay a premium for a given period (Purchase obligation). Their life is covered during that period or a few years thereafter (insurer obligation to pay a certain amount in case of demise of life or lives specified in contracts).

Let us debate if a period of three to five years is short-term or long-term? If looked at through a lens of continuous change, product innovation, even three years, looks long, but it is small regarding life insurance. Life Insurance is a type of insurance that provides coverage up to age 85 or for the rest of one's life. Hence a period of three or five years becomes short. Even the insurance regulator (IRDAI) has specified a period of five years lock-in for Unit Linked Insurance products (ULIP) before you can get some survival benefits; similarly, traditional products limit is set at three years. Many factors contribute to the long-term nature of the life insurance product. Let's examine them.

Factors Contributing to the Long-term Nature of Life Insurance

India's life insurance space follows the concept of a level-term premium. In level term premium, i.e., insurance premiums stay the same throughout the contract term or policy period irrespective of increasing age or deterioration in health conditions of life covered in the contract.

A premium of a long-duration policy appears to be on the higher side in the initial years of the policy compared to short-term policies at the time of purchase. Still, they are beneficial to customers. With the increased age and some deterioration in health, if a person wants to extend his coverage for a few more years may not find a suitable product.

Even if the product is found, he will be charged some extra premium, which will be higher than the insurance purchased at a younger age and longer duration. From the customer's perspective, getting into a longer contract at an early age is always advisable to minimize the premiums outgo.

Looking at the Insurer side, a long-term contract is a mixed bag. Long-term contracts allow the Insurer to amortize upfront expenses like sourcing costs, agent commission, etc., over a longer period, thus lowering the yearly cost.

On the other hand, this exposes the product to market dynamics in the coming years. It needs to be resold at each premium payment. The customer is evaluating his purchase decision as he decides whether to continue or exit. He starts questioning the suitability of the product, pricing, and service levels, and each and every decision becomes questionable.

The high percentage of customers dropping out in the initial two or three years does not reflect well on the brand image of the Insurers. If this happens, customers and prospects start losing trust in the company. Insurers must ensure all the customers coming onboard keep their contracts live (premiums are paid regularly) for at least five years to enable them to cover their initial costs and project a trustworthy image in the Insurance world.

Insurance customers' expectations have grown, and competition is becoming ever stronger. Their loyalty has been negatively impacted. To achieve the objective of keeping the contract live for five years, the Insurer(s) must work hard. Insurers must:

1. Keep their customers satisfied. At the process level, they must keep doing what they are doing best and earn themselves kudos for their smooth operations.

2. If customers are unwilling to continue the contract, it requires further deep dive into their behavior and reactions:

  • Is it any given activity that is causing dissatisfaction?
  • Is there a change in the customer expectation for a given process
  • Is there any single point of service or contact or individual creating the irritation?
  • Identify if there are any legal or unforeseen events (e.g., pandemic) that are causing pain to its customers and creating the perception that the Insurer is not fulfilling its promise.
  • Keep benchmarking their process with the best not only in the insurance world but in the consumer/retail commerce space

To understand customers and their behavior, Insurers have established customer experience teams headed by very senior and experienced personnel. They have also employed various processes like seeking an NPS survey for each interaction, providing self-service portals and communication channels like e-mail, inbound calls and outbound calls, and social media listening posts.

All inputs from all these are analyzed using state-of-the-art technology like machine learning, natural language processing, voice analytics, etc. Investments in the customer experience technology and the process have reaped good results for the organization, being reflected in the continuous improvement in persistency and retention ratio in the last couple of years

Conclusion

Customer satisfaction has become an economic priority for the insurance industry. One of the best ways to differentiate between the highly regulated regime and undifferentiated products is to provide customers with an experience that perfectly aligns with their needs and matches the diversified expectations of each segment. It would not be incorrect to say that a successful insurance company's financial viability begins and ends with Customer Experience in 2022 and beyond.

Interested in learning more about understanding your customer's true sentiment? Click here to download our whitepaper, "Understanding SentiMeter®."

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Arun Agarwal
Arun Agarwal
Arun is a senior executive with over 24 years of experience in the BFSI sector. He has worked with leading insurers like Aviva and Pramerica Life and has led teams towards the achievement of the organization's long & short terms business goals. As an insurance domain expert, Arun has made significant contributions by driving excellence across operations, sales management and compensation policies and execution, financial planning & business strategy, MIS and regulatory reporting functions.

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