Policy cancellations directly influence daily business operations and have an impact on the risk assumed by insurance companies. In this paper, we describe the reasons why insurance companies should perform customer loyalty and business risk monitoring and develop guidelines for the implementation of this procedure. We emphasize the advantages of this practice for the operation of the company. The Geneva Papers (2008Papers ( ) 33, 207-218. doi:10.1057Papers ( /gpp.2008 Keywords: business risk; policy cancellations; marketing in insurance
Significance of customer loyalty and business risk monitoringInsurance companies have to manage a great number of risks, which can be classified in many different ways. One possibility is to distinguish between financial risk and operational risk. 1 Financial risk is either classified as liability risk, the risk that the insurance company is assuming by selling insurance contracts, or as asset risk, associated with an insurer's asset management. These two types of risks are directly related to the business activity of the insurance company and are therefore well known and easily managed by means of various quantitative techniques.The risk that cannot be classified as either asset or liability risk is called operational risk, and it is subdivided into business risk, driven by the competitive environment, and event risk, such as, for instance, the computer system having errors or breakdowns. Business risk is defined as the variability of intrinsic business value due to business volumes and margins fluctuations triggered by the competitive environment. 2 Operational risk in general has been rarely taken into account by the insurance industry. However, the Solvency II project in Europe requires that business risk be monitored in order to improve the control and measurement of all sources of risk. The difficulties in managing operational risk stem from the lack of empirical data about the sources of this newly recognized hazard.We will develop guidelines for the implementation of customer loyalty and business risk monitoring in the insurance industry, based on our previous research. We realize that European insurance companies operate in a highly competitive market. Customers, who may want to switch from one insurer to another can easily, and at www.palgrave-journals.com/gpp low cost, obtain all the information they need about various companies via the Internet. They can compare policy prices offered by different insurance companies just by accessing their homepages or by using websites that specialize in comparing prices of several companies. This is mainly the case in property and casualty insurance, but not health and life insurance (for instance in Germany) because of the specific calculations. Therefore, information from life and health insurance contracts may lead to a false measurement of the customer loyalty because the termination of these contracts has high costs for the insurance customers. Overall, the insurance market is becoming more and more aggressive, and companies e...