- Some of them may stop paying premium after sometime (Lapsation)
- Some may not buy any other policy thereby limiting the revenue they can generate
- Few of them may be involved in fraudulent claim activities
On the other hand they may be customers whose premium is less but they are loyal and may buy more policies in the coming years. These customers end up giving more revenue and profits for the organization.
Clearly premium amount cannot be the only parameter to decide the valuable customers. A comprehensive approach it to analyse the Customer Life Time Value (CLTV). A comprehensive framework to calculate CLTV is as below:
A brief description of the framework is below:
- LTV is defined as the total premium of all current and future policies expected from a customer over a period of 5 years. This duration of 5 years is optimal as the business and customer have relatively higher stability over this period. Beyond 5 years there may be lot of external parameters impacting business and accuracy of model decreases.
- Lapsation : When a customer stops paying premium of a policy it is termed as lapsed policy. A lapsation model calculates the probability of a customer lapsing and the timeframe in which that may happen.
- Repurchase : Repurchase models provides the following
o Probability of a customer purchasing additional policies
o Value of such policies
o Time frame in which the policies are likely to be bought.
A comprehensive CLTV model can be very effective in targeting the right customer for increased revenue. It also help in effectively utilizing call centre and other marketing channel costs. All the models built in the process like Lapsation model, cross-sell model etc. can be leveraged to arrest customer attrition and increase sales.
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