Why customer persistency is critical to the life and pensions marketplace
By Mark Hodges, CEO of Norwich Union Life
This article is taken from 'PA Perspective on European Insurance', edition,1, 2007. To download a PDF of this article as published, please click on the link seen on the right.
Imagine you are a landlord seeking to attract a new tenant to your flat. You will first need to advertise the property, decorate the rooms and possibly even replace the carpets. You are prepared to incur these expenses in order to attract a suitable tenant who you expect to live there long enough for you to recoup this initial cost and start making money – if they move after only a few months you have to go through the whole process again.
The Life and Pensions (L&P) industry is not dissimilar to this and there are considerable up-front costs involved in attracting new business and setting up contracts. The industry is prepared to incur these costs because traditionally our products, such as pensions or protection, run for 10 or 20 years, allowing plenty of time to recoup this money.
These initial costs are often spread over 10 years or more and therefore customers who leave before the set-up costs have been repaid represent a loss of value to the company, which is captured in embedded value accounting; this includes assumptions about future customer retention rates. If actual retention is worse than had been assumed, there will be a financial loss – as experienced by several providers which have had to reduce the embedded value assumed in their books of business in recent years.
To extend the housing analogy one step further, imagine that the letting agent contacts the tenant two years later to say he has a very similar flat that has just been decorated. The customer gets a shiny new flat and the agent is paid commission by the new landlord. This situation is now increasingly common within the L&P industry as some financial advisers suggest to customers that they regularly switch products between different providers to ensure the product remains up to date – ensuring the customer gets a shiny new product and the adviser earns commission. Unfortunately, for the provider, persistency rates decline.
Providers need to ensure that the products customers buy continue to feel fresh throughout the life of the product and continue to meet their needs so they can see no advantage in changing provider. This requires a constant focus on customer wants and needs to ensure the product remains relevant. New flexible products, able to evolve and respond to these changing needs throughout the life of the product, could be part of the solution. This is particularly important because the debate over persistency needs to focus not just on the product level but also consider customer persistency, because retention of customers is much more valuable than simply retention of products.
In fact, an emphasis on product persistency obscures the reality that customers’ requirements change throughout their lives. We need to look beyond any particular product wrapper, and instead help customers to move between products as their circumstances develop and change.
So what’s driving customer persistency today?
There are many factors at work, including:
- Dissatisfaction with investment returns
- Changes in customer circumstances (employment, family, location and so on)
- Price competition (particularly in the protection market)
- Regulatory initiatives and changes (such as ‘A-Day’ in the UK pensions market in 2006)
- Advisers moving customers to new contracts (incentivised by high commission)
- Historical product design issues
- Communications and retention efforts made by the provider
- Guidance and advice provided to the customer.
Most of these factors are not new, but have taken on greater urgency due to modern social and demographic trends. Customers’ lifestyles change much more rapidly now than in the past. Jobs, homes and marriages were once relatively stable; but today employment, location and marital status change relatively frequently.
These changes manifest as marked changes in consumer behaviour: mortgages, credit cards and utilities are all prime examples of formerly sleepy markets that have been transformed by consumers’ newfound propensity to switch readily between products and providers. The L&P market should arguably undergo a similar transformation because it is increasingly unrealistic to expect customers to save consistently for 25 years when everything else in their lives changes much more frequently than that.
Norwich Union believe the way forward is a simpler, more flexible approach that makes it easier for customers to access appropriate products, and the support, help and guidance necessary for customers to buy with confidence. That requires a new business model for providers that is characterised by simplicity, flexibility, customer knowledge, excellent communications and, ultimately, trust. In developing such a model, providers should look to the experience of other retail industries and benefit from the lessons learned there.
For example, the mobile phone market has many similarities because both are based on intermediary models with high acquisition and low switching costs. Telecoms firms have developed effective retention models based on excellent management information and data capabilities, coupled with a deep understanding of customer value. This, combined with product and pricing flexibility, enables their retention teams to focus on creating strong, tailored offers and incentives to retain customers who might otherwise leave.
L&P firms need to develop similar capabilities to compete effectively for customers’ business. This will require a reworking of the relationship between providers and distributors into a partnership, rather than an arm’s length transaction. Too much current distribution is based around high initial commissions and packaged products. The growth of wraps and platforms is a fundamental force for change that should lead to a more sustainable model that delivers clear benefits for customers.
At Norwich Union, we are undertaking and planning a range of tactical and strategic activities to improve customer retention. We have put persistency on the agenda in our conversations with distributors – particularly those whose portfolios have performed poorly in terms of persistency, as well as establishing business objectives and financial incentives for our intermediary sales force based on improved customer retention. We are also supporting the FSA Retail Distribution Review, which we hope will create a more sustainable industry by helping distributors move to a more efficient business model that enables the value of their business to grow.
We are developing our customer insight by talking to our customers more frequently and making our communications much clearer. This will help them understand the continued benefits our products provide and develop a more intimate relationship with our customers. Our retention team makes sure that customers who are thinking about surrendering are aware of their options; we also call other customers who might be thinking of migrating, such as those who have recently received annual statements or stopped paying into their pensions.
Ultimately, the winners in this market will be providers who can look beyond a traditional product-based view of the world and find new models that better align consumer, intermediary and provider interests. Such a model will make it easy for customers to access products and services, offering flexibility, support, help and advice in a simple way. Together with consumer education, this will help to rebuild financial provision through trust in financial advice and the products we offer.
To download a PDF of this article as published, please click on this link
