Customer Value Measurement Working Party report

Document description

Customer Value Measurement ("CVM") is widely used across a number of industries including financial services industries. However even within a single company it finds diverse and sometimes inconsistent applications across or even within individual departments. In addition most approaches have concentrated on spot values and have not considered the impact of volatility. Actuarial involvement has been somewhat limited to date. A CVM represents an area of opportunity for actuaries.

This paper sets out the range of approaches taken to Customer Relationship Management. Customer value is investigated from the points of view of shareholders, of management and of customers themselves. CVM is discussed within the framework of a Control Cycle. The range of strategies and outcomes that may be developed within the CVM framework are discussed. The methodologies for measuring value are delineated and a critique is given of the strengths, weaknesses, opportunities and threats of the approach. A discussion is given of the parties involved in making CVM work and how CVM relates to processes currently carried out within insurance companies and of pricing, marketing and underwriting in particular. The CVM approach is exemplified at the level of individual customers for single peril Travel Insurance product differentiated by customer type. The approach is also exemplified by a simulation approach where the impact of different strategies is tracked in terms of their effect on different measure of customer value. A range of wider issues is discussed around brokers, channels, analysts, consumer groups, the press, the FSA and regulators. A brief literature review is presented.