This blog, originally posted in October 2018, is being re-published with updated statistics for year over year industry-wide retention rates.
Insurance carriers are all too aware of the importance of retaining quality policyholders within their book of business. Research conducted by LexisNexis Risk Solutions affirms what the market knows to be true: carriers cannot grow without keeping an eye on both acquiring new business and retaining their current customers. Bringing new customers on board is fruitless if they are only replacing a high quality, long tenured policy that just walked out the door. Our research has revealed that it takes between three and seven years for a new policy to reach the value of the average lost policy.
So what is happening at an industry level in terms of retention? Because of our position in the market, LexisNexis Risk Solutions has a unique perspective of the industry – our bird’s eye view of 93% of the auto policies in the US allows us to draw insight from the activity we see in the marketplace.
LexisNexis defines and measures retention as the percent of insured households that maintain coverage with the same carrier through at least one policy renewal. After seven quarters of seeing the retention rate decline, we saw that trend start to reverse in the last quarter of 2016 through to mid-2017. However, that respite soon ended and we are retention began to decline late-2017 and through the first quarter of 2018 to 81%.
Chart 1: Auto Industry Trends – Year over Year Change in Annual Retention Rates
Surely, one of the biggest influences on retention over time are rate changes, namely rate increases that carriers take in order to remain profitable. For instance, the downward retention trend for the industry that began in late 2015 and persisted through mid-2017 was largely driven by carriers reacting to increases in claim frequencies. We do not know exactly what caused the rate of claims to increase so suddenly, but, in hindsight, we do know average number of miles driven increased. In this case, we attribute most of the increase in miles driven to increasing employment and, to a lesser extent, lower gas prices.
Without these rate increases, carriers could go insolvent and the auto insurance market may collapse. Nevertheless, these rate increases drove their customers into the market, at the same time many traditionally stable customers entered the market seeking lower premiums. After a period, carriers no longer needed to raise their premiums and retention began to level out and even improve. That is, until the most recent quarter when we again see customers flocking to the market and their likelihood to switch carriers when they shop is increasing. What is interesting this time around is that we are observing a divided market; some carriers are raising rates while others are lowering rates. We are also seeing some carriers increasing their advertising investments in a big way to take advantage of this opportunity to capture market share.
Our analysis indicates that retention is falling for nearly all segments of the market. For instance, we found that customers who have been with their current carrier five or more years now make up nearly one third of policies that are lost to a competitor. While this segment continues to shop less than shorter tenure policies, we have observed the rate at which they shop has gone up by over 5% in the past year. In fact, we now see that a little more than 40% of all policies shopped at least once in the past 12 months and nearly 78% have shopped at least once in the past five years.
So what do these industry-wide retention trends mean for carriers? The answer varies depending on each carrier’s own specific situation. Viewing market dynamics through a macro lens provides a great benchmark for carriers to measure themselves against, but we have only scratched the surface here. In order to fully understand what is happening within their own book of business and uncover potential blind spots and areas for concern, a carrier needs to perform a deeper benchmarking analysis.
 2017 LexisNexis Insurance Research Study. Please note that all specific retention statistics presented in this blog are the result of the annual LexisNexis quantitative auto shopping study.