Customer Lifetime Value in Insurance - sasCommunity.org

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But the determination of a customer`s future value is not as simple asperhaps expected, because you don`t know exactly what the incomes of acustomer will be in the future and which costs are thereby incurred.As I mentioned before, it is very difficult to predict future incomes andexpenses for several years in advance. So it is more useful and even moreexact to observe a restrained period of time like one or two years.The following concept will consider a period of time of one year, meaning thatthe incomes and expenses will be predicted for the following year.7) To illustrate how the present and the future value fit together in the CLV,let`s have a look at the following graph.The present value considers the profitability of a customer in the past.The future value in contrast, focuses on the potential of a customer in thefuture. In case under consideration the future value is the potential value foreach customer in the following year.Companies confine themselves in general to examining the present value oftheir customers.But it is precisely the determination of their future potential, which is muchmore interesting for a company.By knowing the development of a customer, you can estimate if aninvestment in this customer will be profitable or not.A student for example, who possesses in general a low present value for acompany, is likely to have a high potential in the future.Especially in bank or insurance sectors, students get offered check accountsfor free with reference to their high potential in the future.But how is it possible to determine the present and the future value of acustomer?
8) To illustrate this point, let`s have a look at the insurance sector toexemplify how both of the values could be determined.The present value for each insurance customer can be calculated out of theirincomes and expenses in the past. These data are listed in a DataWarehouse, and a present value is quite easy to find.The future value of an insurance customer could be determined by predictinga cross-selling, a cancellation- and a claim value for each customer for thefollowing year. At the end, these three components are combined and onesingle future value for each customer can be determined.There are a lot of more components which could be important for othercompanies and sectors, but I would just like to focus on these three.9) Let me start by looking at the present value of an insurance customer. Tocalculate the present value, the costs have to be taken away from theincomes in form of premiums.The biggest part of costs in an insurance company, are the costs foraccidents respectively the costs of claims. These costs can be allocateddirectly to a specific customer.Overhead costs, which are incurred by all customers, like administrative coststo run a company, can`t be allocated easily to a specific customer. But withactivity based costing, which is getting more and more important forcompanies to save costs, it is getting possible to allocate overhead costs to aspecific customer, according to the activities a customer takes up.10) I don`t want to consider activity-based costing in detail, but I will just giveyou an overview how the overhead costs of a cost center can be allocated toa specific customer.
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Customer Lifetime Value in Insurance - sasCommunity.org

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