Do customers switch property and casualty insurers because of price? Although the cost of coverage does play an important role, our research and experience with European companies show that consumers might not be extremely price sensitive. A study of the top ten auto insurers in one European market showed that their policy rates for similar customers varied by nearly 40 percent but that these pricing differences had no real impact on market share. We analyzed the portfolios of three Southern European insurers and found that annual price increases of up to about 15 percent had little effect on customer churn. Indeed, one of the companies suffered a high departure rate for certain types of clients despite reducing prices (Exhibit 1).

Since customers of property and casualty insurers experience relatively few barriers to exit, these companies have higher rates of customer churn than do other financial-services businesses. In Europe retail banks have an average churn rate of 7 percent, for example, compared with 18 percent for automotive insurers. At the latter rate, a company that has 2,000,000 customers loses 1,500 of them each business day—which can have a serious effect on its financial performance and impede growth. We estimate that a churn rate of 10 percent, concentrated among the most valuable clients, could reduce profits by nearly 40 percent.

In addition to price increases, we identified a host of factors suggesting a client's propensity to leave. Customers with high total policy spending, for example, are more likely to do so, while longtime customers usually stay. Some of these indicators vary by customer and market, but others are more universal—for instance, older customers everywhere are less likely than younger ones to stray.

Predicting customer behavior is the key to setting prices and targeting retention efforts, but few insurers segment their customers by the characteristics we identified. As a result, companies often give special treatment to people unlikely to bolt: some insurers routinely give discounts to longtime customers, many of whom are over the age of 50 and don't need special incentives to remain in the fold. Moreover, insurers too often fail to distinguish between clients worth fighting for and those they would be better off losing. Our analysis of a typical insurer's portfolio, for instance, showed that a 10 percent churn rate solely among unprofitable customers would improve the company's combined ratio¹ by 1 percent and boost profits by 25 percent (Exhibit 2).

Insurers can improve their customer retention by using information already at hand. First, they need to identify profitable customers and to evaluate the risk of losing them. By analyzing historical data at several companies, we pinpointed a number of trigger events that reliably predict a customer's decision to leave. People who submitted claims in the past year switch more often, for instance, perhaps because of an unsatisfactory claim experience, as do auto insurance customers who move to different locations. Combining this information with other indicators of the propensity to switch—such as age, total policy spending, or tenure with the company—can provide a clear picture of which customers to focus on (Exhibit 3).

Using this analysis, an insurer can move quickly to prevent departures. Often, personal interaction with an agent is enough. In tougher cases, a special offer may be useful—a gift or a special deal on additional coverage, perhaps. For the most price-sensitive clients, a company may need to offer selective discounts.

These retention initiatives are most effective when a company integrates them into its everyday operations and refines them over the long haul. Using this approach, one major European retail bank reduced its turnover by 12 percent and boosted its revenues by €20 million within a year. An Italian life insurer nearly doubled its retained capital over the same period, while a German firm cut churn in its property and casualty business by 25 percent.

Insurers who hang onto more of their customers could not only increase their profits but also facilitate growth. Assume, for example, that a company aims to expand its customer base by 10 percent. Reducing its annual turnover from 10 percent to just 5 percent would greatly decrease the number of new customers it needed to attract. And customers who decide to stay are typically more loyal—and more profitable—than newcomers are.