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How to Maximize the Profit from Your Term Life Insurance Block

Are you losing millions of dollars as your term life policies lapse at PLT?

Life insurance companies lose hundreds of millions of dollars every year as their term life customers drop policies that reach post level term (PLT).  As term life policyholders receive their rate change notices in the mail (often with very little warning, 60-90 days, and with no personal reminders or consultation from their original agents), these orphaned customers are usually quite shocked to see that their premiums will soon increase 5-10 times the rate they have been paying during their level period. Sadly, what happens next is very predictable. As much as 80-90% (or more) of policyholders lapse their contracts at PLT, or a few months thereafter when the reality of the premium increase hits their pocketbooks. 

"Often called the "shock lapse," these extremely low PLT persistency levels can have a devastating impact on the revenue and profitability of in-force term blocks."

Often called the "shock lapse," these extremely low PLT persistency levels can have a devastating impact on the revenue and profitability of in-force term blocks. In addition, shock lapses do not help establish a positive customer experience. When the actuaries originally designed and priced these term products, they usually predicted (and often planned and designed for) high lapse rates, but not necessarily the 80-90%-plus levels they are experiencing today. When these products were first designed and priced, actuaries focused on the desired financial results over the level term period, not maximizing results during the post-level term period. These problems cannot be ignored and they appropriately find their way into the C-suite where they get attention from the CEO, CFO and other top execs.

How Advanced Market Research and Predictive Analytics Can Maximize Profit (and the Customer Experience) from Your In-force Term Block.

Thankfully, there are a number of ways to successfully address this vexing problem. And, each solution relies on some combination of advanced market research and predictive analytics for answers. Let's take a look at a few solutions that every life insurance carrier should consider as they evaluate their in-force term blocks.

Solution I - Reduce the Shock by Altering the EOLP Premium Scales

As I've previously mentioned, the end of level period (EOLP) pricing on in-force term blocks is the culprit behind the customer's shock and lapse when reaching PLT. By adjusting the EOLP premium scales, carriers can retain some policyholders a few years longer, which can drive greater revenue/earnings from the block. At a typical EOLP price increase of 6-7x the level premium, the policyholder lapse rate is 82% (source: 2010 SOA Report on Lapse and Mortality Experience of PLT Premium Plans). However, when the EOLP increase is reduced to 3-4x, the lapse rates fall to 51%. Finding the right new EOLP premium scales requires market research and advanced analytics to help settle on pricing that attracts enough healthy customers to cover the increased claims that will be incurred. These adjusted scales should be thought of as a new "concept" to be tested and then targeted to the most appropriate current policyholders. As such, best practices market research can accurately test the concept and predict which customers (by health cohort) will remain at varying price levels. Predictive analytics can then be used to score and target the very best customers (the healthiest customers who are most likely to adopt the product) for this offer. So, if the carrier finds the right blend of price/adoption/health, they can successfully execute the EOLP changes.

Solution II - Cannibalize Your Current Policies with Your New Policies

If the EOLP scale adjustment solution is not favored and/or the carrier would like a multi-solution approach, they should consider offering alternative products before the shock lapse occurs. Instead of sitting back and letting your customers walk into your competitor's arms, smart carriers will proactively offer desirable alternatives that are easy to understand and buy. In other words, they will cannibalize their own policies. For example, a Simplified Issue (SI) product can be offered. Requiring very little paperwork and no body fluids, the SI can be an attractive option to many policyholders. Like the EOLP price change solution, this is a product concept that requires testing and targeting to get maximum results. Again, market research confirms the product is desired (and which features and price points are the key drivers) while predictive analytics precisely identifies the very best customers (the healthiest customers who are most likely to adopt the product) for this offer.

Solution III - Deliver Targeted and Timely Communications

Regardless of the offer (revised EOLP pricing, SI product, or other offers), carriers simply must improve the targeting, timeliness and type of communications as their customers approach PLT. After all, is the "expected" shock lapse an acceptable component of a well-oiled customer experience (CX) strategy? Often, the default communication is a highly impersonal 60-day notice to customers indicating their level term policy is ending and their new premium is 6-7x higher. Carriers that rely on this "CX approach" are creating self-inflicted shock lapses among their policyholders. It's at this point that it's worth pointing out my strong preference for the term "paying customers" vs. "current policyholders." While the latter moniker is most prevalent, I believe it only serves to depersonalize the customer. And, it certainly doesn't encourage carriers to think about the best possible CX.

"Is the expected shock lapse an acceptable component of a well-oiled customer experience (CX) strategy?"

In any event, these paying customers deserve the right communications (personal call, email, direct mail or all three) at the right times (in general, sooner and more frequently) to produce a more than satisfactory CX. As you might guess by now, market research and predictive analytics play a huge role for this solution. Market research can tell you exactly which messages will motivate different customers for different needs and solutions. Predictive analytics will identify which customers are most likely to lapse, which are most likely to adopt specific offers, which are healthier, and which to target with certain offers and messages.

A PLT Policyholder Story With a Profitable Outcome and a Positive Customer Experience.

Ok, we've covered a lot of ground on this blog post. Now, let's wrap it up with a story and some next steps. First, the story. Imagine that YOU are the paying customer. Instead of getting a 60-day notice in the mail, your carrier...as part of its comprehensive CX strategy...has determined that you are likely to appreciate a different EOLP price or an alternative product that fits your needs. Furthermore, they take the proactive step of notifying your agent to contact you personally. You get a call six months before you reach PLT. This gives you time to evaluate your options and make the best decision for you. You avoid the unnecessary shock and you happily remain with your carrier. What's more, you actually recommend your carrier to your co-workers at the office (and maybe even a few friends on Facebook). Now, how did you like that market research and predictive analytics-enabled story? That's the power of research and analytics to maximize profits and the CX.

"That's the power of research and analytics to maximize profits and the CX."

Three Next Steps for You to Get Started

So, what can you do to improve the CX of your term life paying customers in order to earn more of their business and drive greater revenue and profit from your in-force blocks?

1) Step one: Assemble a small team that includes the term block owner, an actuary, someone from marketing/sales, someone from CX, and a few market research and analytics pros.

2) Step two: Calculate the financial impact of the annual lapses. I call this quantifying your pain and your opportunity.

3) Step three: Brainstorm the three solutions above, among others. Then, test something. Do something. Try something. And, steadfastly refuse to sit by and wring your hands as your customers and revenue quietly walk out your back door.

Click here now or click the box below to discuss this blog post with FGI and explore how it applies to your current business. We look forward to discussing it with you.

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Key sources and further reading:

1) The Financial Reporter, Society of Actuaries (SOA), Dec 2013

2) SOA Annual Meeting, Oct 2013

3) The Messenger (Risk Management Newsletter)

David W. Wilson
David W. Wilson
David W. Wilson

David Wilson has over 25 years of experience helping leading companies improve their marketing results using digital marketing, direct marketing, database marketing, consumer data, predictive analytics and marketing research.