7 ways to quickly improve retention and profitability of your renewal portfolio
Recently, I realised that there are over 20 areas outside of pricing where inefficiencies can diminish your pricing models’ performance.
Let's start with 7 ways to improve your renewal process.
We’ll discuss here:
- Business goals and strategy
- Renewal capping
- Variants of renewal offer
- Separating risk models for new business and renewals
- Separating price tests for new business and renewals
- Separating price optimisation for new business and renewals
- Being bold in healing your portfolio.
Disclaimer: not all of them are relevant for all countries or products, due to local regulations.
1. Business goals and strategy
I think there is no need to convince anyone that setting goals is important and actually helps achieve much better results.
What’s the problem with renewals here? Many insurance carriers don’t measure KPIs separately for new business and renewals. As a result, they don't monitor separately their GWP, headcount of policyholders, or profitability, and they don’t prioritise retention. Actually, there are even companies that are not capable of simply identifying whether the policy is new or renewed (or for how many years).
If you want to improve your renewals, start with calculating those KPIs to get a grasp of the current level and issues they may indicate. Then, follow with setting inspiring (yet realistic) goals, and build necessary monitoring. Remember, there is no good in goals whose results you cannot verify.
2. Renewal capping
Imagine your policy was priced at 500 EUR last year, and the next year, you get 1000 with no claims in the previous period. People usually compare premiums from different years and who would accept such a change?
Too low premiums also don't make sense - if they afforded a higher premium last year, there is no need to offer a much cheaper price now. It’s a margin for free, and trust me - you need it!
How to apply renewal capping?
Take your renewal premium offer from your models and apply a rule like:
min(max(renewal_premium, 0.9*previous_premium), 1.1*previous_premium).
So effectively, your renewal premiums will be limited by +-10% to the previous year's price. 10% is just an example. It depends on the product, market, and economic situation. In case the inflation is 15%, you won't limit your premiums at +10%.
Of course, it depends if you want to keep this customer. If they appeared to be worse risk than you had thought, reporting claims in the last period, then you may not need capping from the top, and your lower bound should also go up. Simple “if” condition can help.
Renewal capping can grant you a massive increase in retention and save your company's reputation, and there are still many companies not being able to utilise it, due to their legacy technology.
3. Variants of renewal offer
You would be surprised how many companies around the World lose great customers and a lot of margin by sending wrong renewal offers. What does it mean?
If your policyholder had last year full golden package and your renewal offer is only for a bronze one… you may get the renewal but much less caloric. Usually, such behaviour is a result of technical limitations.
On the other hand, there are companies who overengineer it and send 10 different renewal variants to customers. Like people don’t have other problems in their lives. From psychological point of view, sending maximum of 3 variants increases retention – you can offer the obligatory package, the same they had, and a broader one if they qualify. Why? Given 2 variants many people would choose the cheapest one, while being offered with 3 – they aim for the middle one, or higher. This is a common marketing knowledge.
To summarise – sending only minimum scope (only legally required, such as MTPL) leads to contraction in your portfolio, while offering too much of a choice overwhelms people. Stick to 2 or 3 offers, including the one they had last year, definitely not just the minimum one.
4. Separating risk models for new business and renewals
I think everyone agrees that those two segments of your portfolio are entirely different. You know your current portfolio much better than new customers - even if you have access to rich external databases.
Still, many companies are not technically capable of separating their ratebooks or more advanced pricing models between those two. Their systems can only sustain 1 ratebook at a time. That’s a bummer! Using renewal years or tenure is very often not enough as it only grants you alignment with the average risk level but you miss all those beautiful dependencies.
You know MUCH more about your current customers. You can use cross-product information, such as about their house value or if they have a pet, etc. – to assess their risk profile as accurately as possible. Also, if people report claims from other products, you should also expect claims from this one – they tasted how great insurance is, they are aware customers, and they will keep using their policies. Nothing wrong with it, just be prepared.
Renewal channel (automatic, broker-based, online) can also be a good risk differentiator!
Separating risk models would require bigger volumes of data and more advanced deployment capabilities, but those CoR points and retention are worth the investment!
5. Separating price tests for new business and renewals
Price tests are necessary to properly measure your customers' price elasticity in order to position your premiums well. If you want to learn more, there is a blog post about it.
Launching the same price tests for both segments is wrong. For new business, we usually make symmetric tests to assess similar levels of discounts and surcharges, while for renewals, it makes more sense to test higher increases than drops.
Price tests should also take into account differences in product bundles customers had last year. Usually, people stick to the same package, so it makes sense to run price tests not for individual products but for the whole bundle instead. For new business, you know much less about the policyholder preferences.
6. Separating price optimisation for new business and renewals
Price optimisation is an advanced procedure which adjusts premiums within the agreed range to maximise written margin, while achieving desired portfolio KPIs (conversion, Loss Ratio, etc.). It uses machine learning algorithms. If you want to learn more, there is another blog post about it.
To offer individually optimised premiums to new business customers, you would need to have a pricing engine (not a rating one!), capable of storing advanced machine learning algorithms and scoring them quickly.
New business and renewal portfolio should have separate price tests, separate demand models (price elasticity, features, and average hit ratio is different), and should have separate local and global constraints. Hence, differently optimised premiums.
Many companies would like to utilise price optimisation but replacing their current limited engine is not an easy thing to do. In such a case, you can start with so-called offline price optimisation, which can be done in your actuarial software. Optimised premiums can be easily exported and pushed to your systems and it can be repeated for every renewal batch you have (for example, every month).
So, no need for a sophisticated pricing engine to leverage price optimisation for renewals!
Also, for renewal portfolio it’s much easier to optimise product bundle premiums than for new business and you should do it to improve conversion and your combined ratio.
7. Being bold in healing your portfolio.
Sometimes, the only way to heal your portfolio is to fearlessly refine it. If your risk selection has been really poor so far, and your current portfolio gives you 150% Combined Ratio, would you really like to retain it? Increasing premiums by 10% won’t get you soon enough to a situation you want to be in.
In such a case, you need to completely refine your risk models and be bold in losing significant share of the worst risk profiles. Usually, “bad” segments push down profitability much harder than "good" push it up.
Sales will complain and brokers will be furious but you need to stay strong. And your most difficult job is to convince the Board to trust your judgement, your scenarios, and analyses. Management needs to have your back in keeping renewal premiums much higher (forget renewal capping here) for bad risk profiles. Let them go to your competitors and burn their money, not yours.
Conclusion
To summarise, some limitations are only in our approach and current processes, while others are a result of legacy technologies. Investing in a proper process assessment conducted by a subject matter expert, and in new software, can have a massive return and help your company thrive.
If you’re interested, Quantee could help with both – book a free consultation! :)
