Study: Insurers’ Customer Retention Critical in Hard Economic Times

As millions of U.S. households face financial hardship in the current U.S. recession, retaining existing customers has never been more important.

For insurance carriers in terms of long-term profitability, customer retention is tops, according to the J.D. Power and Associates 2009 Personal Insurance Retention Special Report.

The report finds that in the past 12 months, 30 percent of households with annual incomes below $50,000 shopped for a new insurance carrier and 45 percent of those customers eventually switched carriers. In contrast, only 26 percent of more affluent households (those with incomes of $100,000 or more) shopped for a new carrier, with only 31 percent of shoppers eventually switching.

“While 90 percent of customers overall stayed with their insurance carrier during the past 12 months, those households that are potentially more impacted by the recession present a real challenge for insurance carriers,” said Jeremy Bowler, senior director of the insurance practice at J.D. Power and Associates. While some insurers have managed to grow their customer base in this challenging economic climate, their growth comes at the expense of other insurers in the mature U.S. personal auto insurance market, Bowler says. “As such, keeping customers on board is absolutely critical for the long-term profitability of an insurance carrier.”

Retention rates are particularly high among those customers who bundle multiple insurance products, according to the report. Retention rates average 95 percent among customers who bundle home and auto policies with the same insurance carrier and 92 percent among those who bundle auto and rental policies. Conversely, retention averages only 83 percent among mono-line auto customers and only 85 percent among policyholders who do not bundle their auto and homeowners insurance.

“For any of the 50 largest U.S. personal auto insurers, improving retention by one percent for the next five years can equate to tens of millions of dollars over that time period, so even seemingly small differences in retention rates can have a substantial impact on an insurance company’s bottom line,” said Bowler. “Making strides to improve satisfaction and retain customers clearly has a significant financial incentive for carriers.”

The report also finds that there are considerable variances in customer retention between different consumer demographic or attitudinal groups. For example, while retention rates average 91 percent among married customers, the retention rate among divorced policyholders is 2 percentage points lower, on average.

“In light of differences between demographic groups, which can be indicative of different lifestyle and insurance needs, auto insurers need to tailor their products, services and retention tactics to specific attitudinal or demographic segments to increase the likelihood of retaining customers, rather than treating everyone with a ‘one size fits all’ mentality,” said Bowler.

The 2009 Personal Insurance Retention Special Report is based on surveys from more than 275,000 auto insurance customers evaluating more than 30 insurance carriers across the industry, including AIG /21st Century, Allstate, American Family, Farmers, GEICO, Liberty Mutual, Nationwide, Progressive, State Farm, The Hartford, Travelers and USAA. The study was fielded from January to March 2009. To download a copy of the report, click here.

Source: J.D. Power and Associates