Farmers Insurance's Shiv Gupta on How Predictive Models Can Improve Direct Mail ROI
TM: Demographic and behavioral characteristics of the most valued customers are included in this predictive model. How does that help Farmers Insurance target these consumers?
SG: We do not use demographic variables for our modeling aside from the ones that we are allowed to collect for rating [or policy pricing levels]. ... We are able to now understand behaviorally how these customers go about buying insurance ... Do they first check on the Internet and get a quote on the Internet? Do they get referrals from friends? ... And how is that different from the lower lifetime value segments? ... How do they go about consuming media, and where should we be advertising? ... Furthermore, in the near future, we can start discussing, "Can we design products to meet their needs better? Are there things that they would like their insurance company to provide that is unique to that segment that isn't being provided today? And can we find ways to service them better?"
TM: How does predictive modeling aid in retention?
SG: One thing we've done, when we looked at our customer lifetime value model, we said we wanted to measure what the intrinsic stickiness is of a customer. ... So we wanted to understand, "What if the effect, by measuring intrinsic value first, we were actually able to separate out the importance of acquiring the right type of customer and then the importance of servicing the right type of customer?" And that was very powerful in that we found out that, for us, 70 percent of the gain really came from acquiring the right customer. ... Only 20 [percent] to 30 percent of the loyalty that a customer exhibits is actually coming from the service that we're providing. ... And that means a lot of economic implications for our company, in that we are now much more careful in terms of spending ... on service in a more appropriate way ...