Liberty retains its best customers

Customer retention improves 30 percent within profitable segments

"To help our clients to live safer lives" is the motto of Liberty Seguros, the Spanish subsidiary of an international insurance company with consolidated assets of US$78.8 billion. In 2005 it returned a net income of US$1 billion on revenues of US$21.1 billion.

As well as the United States and Canada, Liberty is present in Latin America, the United Kingdom, Asia Pacific, Spain and Portugal. It's part of the company culture to manage subsidiaries locally but to share best practice across the group. "We have taken lessons learned from around the world and applied them in Spain," says Carlos Larrea, who is responsible for market research and product development at Liberty Seguros.

In Spain the company has 1,200 staff serving customers primarily in the motor (55 percent of revenues), life (22 percent) and household (11 percent) sectors. Liberty Seguros has annual revenues of approximately EU€900 million (US$1.15 billion), with the bulk of its sales through agent and broker intermediaries (42 percent) and the remainder shared equally between direct (including Internet and telesales) and institutional channels.

"When a lot of your business is through intermediaries and corporate partners, retaining customers becomes more difficult," says Larrea. Attrition has been a serious challenge for Spanish insurers over the past eight years, particularly in motor insurance. It peaked at around 20 percent in 1999 when insurers tried to clean up their portfolios and then declined as insurers learned how to identify and retain the more profitable accounts. But it picked up again in 2004, hitting more than 11 percent.

"Over the past 18 months companies have gone after market share, because the business had become more profitable," says Larrea. "But this has been at the expense of margins. Average premium growth has declined to zero, while general price inflation is at around 3 percent." In other words companies have been sacrificing revenue and profits growth in order to win a share of competitors' profitable portfolios: they have been engaging in an aggressive price war, and getting increasingly lax in the application of underwriting rules.

This does not make for a business with good prospects. Not only is it difficult to win new sales; profitable customers are increasingly at risk. Liberty decided that the best approach was to differentiate itself through good service levels at a fair market price while achieving sustainable rates of growth. "We wanted to buck the market trend!" says Larrea.

Liberty identified that roughly 20 percent of its customers generate 80 percent of value, and decided that the way to succeed was to focus on these top customers, in particular those that were at most risk of defecting to the competition. But of course it had to do this efficiently, without adding to costs that would put pressure on its price competitiveness. The first challenge, therefore, was to identify the profitable customers at risk, and the profitable customers with cross-selling and up-selling potential, and focus precious marketing resources on these individuals – not just those who have been profitable in the past, but more importantly, those who are likely to be highly profitable in future.

"Improving customer intelligence, based on clean and reliable data, was absolutely key to this project, as well as supporting other actuarial analysis and process automation," says Larrea. Once the data mart was in place, Liberty initiated a pilot scheme to test if the new approach was going to succeed, with a deadline to make the decision by December 2005. The project team focused mainly on motor and household business, but also looked at a third of non-life (accident) accounts because these offer good cross-selling potential.

SAS software enabled Liberty to calculate the current total value of each individual customer (premiums minus expenses) and the predicted value for the next year, plus expected lifetime value (both calculated using SAS advanced analytics). By adding the three together, analysts could see the total future value of each customer, up until the end of the customer's relationship with Liberty.

More than 100,000 policies were selected for the six-month pilot scheme, which focused on selected portfolios worth around EU€3.5 million within the intermediaries channel.

Selecting more than 1,000 high-value, high-risk clients, Liberty reduced customer attrition by 30 percent. Moreover, the company increased sales by 100 percent within target segments (high current value and high probability of additional sales). This was achieved while driving down costs: missed mailings were reduced by 85 percent. To validate these results, Liberty selected a control population for similar marketing actions and compared the results.

There were also qualitative benefits. Intermediaries got to know about the project by word of mouth, and were keen to get on board. "We identified a significant increase in their satisfaction with the service provided by Liberty," says Larrea.

"It is important to bear in mind that the tools we used during the pilot project were refined as we gained experience. So we are excited about the results we will achieve when the solution is fully rolled out," says Larrea. He stresses the importance of a step-by-step approach and data quality as critical success factors. Involvement of the end users and senior management was also key.

"Ultimately we got good results – even better than those we predicted in the business case we made for the project – because we thought very carefully up front what we wanted to achieve. You can't just go out and buy a CRM solution; you need to match strategy and technology. The SAS team has been fantastic in their support, especially during the challenging times we spent cleaning up our operational data," concludes Larrea.

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