Customer Retention ~ A ‘Complex Systems’ Problem for Health Insurers

Australia now has a relatively mature Private Health Insurance industry with 34 private health insurers and over 11 million members. The number of people with PHI has been growing steadily, with annual increases of 2.5% over the last decade. In 2014, 47.2% of the population was covered for hospital treatment and 55.2% covered by general treatment policies.

The health insurance industry is expected to grow to over $21bn in annual revenue in 2015, with projections of 4-5% annual growth predicted leading up to 2020. It is now the largest individual segment in the insurance sector in Australia. There is an industry ‘centre of gravity’ with the 5 largest insurers (Medibank, BUPA, HCF, NIB and HBF) accounting for over 82% of policies, and the remaining 18% distributed across 29 other companies, mainly not-for profits. The larger funds therefore have the most to gain financially from improving retention strategies.

The evolving Australian insurance market is growing in complexity. Consumers have access to a choice of over 17,000 different policies and over 25,000 policies currently in use in the market. Policy products have become increasingly diverse with a complicated level of cover, exclusions, restrictions, excesses and co-payments. It is almost impossible for consumers to “compare apples with apples” and make rational purchase decisions.

A number of insurers experience lapse rates that exceed 20% of customers. This equates to lost revenue exceeding $2bn per annum from an estimated 940,000 members who switched funds in the 2013-14 financial year. Such high lapse rates have a significant financial impact on insurers due to the relatively tight net profit margins of most funds i.e. an average of 4.1% across all funds in 2013-146. Additionally, insurers and customers waste a significant amount of time negotiating and resolving issues related to poor purchasing and claims experiences, consuming significant financial resources in call centres and branches. At the same time, consumer expectations of value are increasing. They want to be better understood and have access to products and services that specifically meet their needs.

In theory, the broad range of products now available in the market enables more choice in trade-offs between price and coverage for consumers. This strategy is intended to attract different segments of the market to PHI. From an insurer’s perspective, product design also supports diversity of risk in their age and health profiles and is intended to improve the claims experience. Traditional actuarial determination of product design therefore assumes that consumers choose policies based on their expectations of future healthcare needs and their risk profiles relative to premiums. It is questionable whether current methodology is adequately consumer-centric in practice, as noted by the increasing lapse rates.

“Choice is not always a good thing for customers”

~ Harriet Wakelam, Head of Customer Experience, Medibank

From a consumer perspective, it is a difficult stretch to believe that consumers can really understand, much less predict, their future health needs. It is also doubtful that this is an actual driver to purchasing or retaining policies with an insurer. Whilst each customer segment behaves differently, expert contributors to the Customer Experience and Retention for Private Health Insurance White Paper acknowledge that today’s customers, particularly Gen Y, demonstrate a greater propensity to switch funds if they are dissatisfied with their experience. This suggests that the current complex environment is leading to poorer customer experience overall.

To add fuel to the fire, the 6.2% average premium rise in 2015 was the second highest health insurance premium increase in a decade, setting the stage for a “perfect storm” of unprecedented lapse rates in the industry. Consumers may also switch in record numbers due to ‘disruptive’ switch campaigns such as Onebigswitch (backed by media conglomerate and the growing adoption of brokers such as,, and

The irony is that switching funds can actually raise premiums as it increases the costs of acquiring new customers10. These costs can then be indirectly passed on to consumers. Along with rising medical claims costs, this phenomenon thereby creates and reinforces a ‘vicious cycle’ of rising premiums in the industry. This negative cycle may be further supported by traditional theories and potentially dated industry ‘myths and assumptions’ about how modern customers actually perceive, value, purchase and retain private health insurance.

In a ‘complex system’ such as the health insurance market, the root causes of issues are often multifactorial. The paper describes those multiple factors from the consolidation of inputs from interviewees. It also adopts a ‘systems thinking’ approach in consolidating those issues and making a more accurate diagnosis of the underlying conditions. This exercise was further aided by PanSensic’s text analytics capability.

As an introduction, ‘systems thinking’ is a sophisticated more complete approach to problem solving. It involves viewing ’problems’ in the holistic manner of an overall system rather than in its individual parts or silos in isolation. Systems thinking or ‘system science’ concerns an understanding of a system by examining the linkages, interactions and relationships between individual elements within PHI and the broader health system. Insurers that react to specific parts, silos or company structures ignore the effects on the overall market and consumer outcomes. This potentially contributes to further development of ’the problem’ such as the ‘vicious cycle’ of premium rises and increasing lapses.

Events such as consumer lapses and bad experiences are often caused by cyclical relationships in a system rather than linear cause-and-effect. It allows executives to see problems as they really are – dynamic processes of change rather than ‘one-time’ snapshots of events. This leads to a search for types of systems structures that are recurring and deeper patterns underlying negative events for insurers and consumers. A systems thinking approach therefore identifies not one root cause or solution, but a set of practices within a system that have become dysfunctional over time. Such an approach provides more advanced insights in diagnosing complex problems.