DETERMINANTS OF CUSTOMER RETENTION IN NYALA INSURANCE
ABSTRACT
Customer retention plays a significant role for profitability and growth of a company. Accordingly, the aim of this study was determining the factors that affect customer retention in Nyala Insurance S.C. where its customer retention rate has been going down on an alarming rate. The study has analyzed the impact of selected independent variables, which are believed to have major impact in service rendering sector based on previous research findings. The determinant variables, which are satisfaction, trust, premium and switching barriers were selected based on the theoretical references made. The relevant data for the analysis of the research was gathered from a sample of 143, out of nearly 2,000 customers of NISCO Addis Ababa branches. Respondents were selected using convenience sampling method. The data was collected using a questionnaire comprised of 21 close-ended questions, mostly with Likert scale. The return rate was 90.2%. The data was analyzed on three layers. The demographic and univariate analysis was carried out using descriptive analysis; the bivariate analysis was computed using Pearson Correlation analysis; and, finally, binary logistic regression was used for the multivariate analysis. Major findings of the research showed that the attrition rate of the company still lies around 31.8%. Amongst the independent variables, trust is found to be the most significant factor in determining customer retention rate. Secondly, customer satisfaction is found to have a strong impact in affecting customers’ decision whether to stay or not. Premium price and switching barrier were found to have non-significant impact on retention. Based on these findings, a recommendation that stresses on developing trust and customer satisfaction has been forwarded.
Key Words: customer retention, Attrition, Trust, Customer Satisfaction, Premium, Switching Barrier.
CHAPTER ONE
INTRODUCTION
This chapter presents a general background of the study, Objectives of the study as well as statement of the problem. The chapter further describes the scope of the study, significance of the study and organization of the study.
1.1 Background of the Study
As per the financial definition, insurance is a financial arrangement that redistributes the costs of unexpected losses. Article 654 (2) of the commercial code of Ethiopia, provides a legal definition of insurance policy as “An insurance policy is a contract whereby a person called the insurer undertakes against payment of one or more premiums to pay to a person, called the beneficiary, a sum of money where a specified risk materializes”. This contract of agreement is subject to specific period, usually one year, and can be renewed for further period based on an additional charge and the mutual interest of the insurer and the insured.
Thus, renewed policies assure customer retention.
In this complex and dynamic business environment, organization‟s survival is highly determined by its ability to attract and retain customers. Ramakrishnan (2006) defines customer retention as the marketing goal of preventing customers from going to the competitor.
In Ethiopia, the insurance industry falls under the category of fast growing sectors. This can be witnessed by the availability of many new entrants that are joining the market. Currently, the government of Ethiopia has given special emphasis to the sector by which it had introduced compulsory third party insurance act regarding motor vehicles. Moreover, it is also in process to declare a compulsory health insurance act for employees. This and other factors increase the market demand. On the other hand, as a supply response, some new insurance companies has joined the market and others are on establishment to join the market. Currently the total number of insurance companies in operation has reached seventeen. Thus, it is common for the prevalence of stiff competition and switching of customers among the insurance companies.
Customer retention is the way in which organizations focus their efforts on existing customers in an effort to continue doing business with them (Mostert et al., 2009). However, customer retention can also mean the number of customers who stay with the provider in the course of an established period, such as a year (Dawes, 2009: 232). Customer retention is a key factor in determining the success of businesses today. Fluss (2010) notes that competitors are always on the lookout to steal customers through better deals. Fluss has observed that annual customer attrition rates range from 7% in industries that have high Switching Barriers such as banking and insurance, to almost 40% in the mobile phone industry.
However, currently Nyala Insurance S.C experiencing higher attrition rate than stated, which is 30% though there are Switching Barriers. This results a significant negative impact on the company‟s market share and profitability.
Customer retention has a direct impact on long-term customer lifetime value, which is a more profitable avenue for firms that seek to pursue growth and sustainability or those that seek to protect themselves from market shrinkage resulting from a contracting economy (Gee et al., 2008). Therefore, Customer retention is important when brand loyalty is decreasing and sales cycles are aggravating the business environment because under these circumstances, losing an important customer to a competitor would affect significantly the organization's profitability and growth
Different studies like Rust and Zahorik (1993) indicates that acquiring new client costs five to twelve times greater effort than retaining existing client. Therefore, it is vital to emphasis on maximizing customer retention through addressing issues that affect retention so as to ultimately ensure the company's sustainable growth and profit.
This research mainly focuses on identifying the customer retention factors and their degree of influence on company under study, Nyala Insurance S.C. Thus, having recognized the factors, the company can control or minimize its alertly increasing attrition rate and increase its market share. Moreover, different researchers studied the relationships of customer retention and its factors in different sectors. However, there is no prior similar research conducted on the insurance industry in Ethiopian context. Hence, this research has a great significance for insurance industry in general and for Nyala Insurance S.C. in particular.
1.2 Statement of the Problem
Insurance companies in Ethiopia are in expansion, targeting lucrative businesses favored by construction development, growth of foreign direct investment and the overall economic growth. Thus, competition tends to be high among existing and the incoming insurance companies. The nature of service given by all insurance companies is subject to renewal of policy period which require the customer's willingness to stay longer with its insurers.
On the other hand, insurance companies are always exerting their effort on acquisition of new customer and retaining of the existing customers to achieve their production goal. Retaining customer for the organization is indispensable target for survival and maximizing profit. Different studies show that customer retention has as many advantages over customer acquisition as the cost of attracting new customer is five to twelve times
Therefore, considering these facts, insurance industries are expected to maximize their retention rate in order to survive and to make profit. Nyala insurance company is in a move to increase its production by increasing its branches and by diversifying its products. the
Though, company‟s minimum targeted retention rate is 80%, currently (2012/13) the annual retention rate shows 70%, while in 2011/2012 budget year it was 79%. Thus, the current retention rate is interpreted as out of 100 customers only 70 customers are retained and 30 customers are lost per annum due to various reasons. In correlation with this retention rate, the market share of the company also decreased from 6.1% in 2011/12 to 5.6% in 2012/13 which is a significant lose for the company. In the prevailing dynamic market and demanding customers, there are many factors that affect customer retention in insurance industry. Identifying these factors that affect customer retention is very important for Nyala insurance S.C. and for other similar companies in order to device appropriate retention strategy, maximize profit, and increase market share. Therefore, this study carried out to examine factors that affect customer retention particularly in Nyala
Insurance S.C. Moreover, as per the researcher‟s exhaustive search for available sources, previous works in particular to Ethiopian insurance industry have not been found. Thus, this research is unique and vital since it considers the context of local market practice.
1.3 Research Questions
Derived from the research problem, The following questions are raised in order to determine the relationship between the dependent and independent variables.
- What is the relationship between customer satisfaction and customer retention?
- What does the relation between trust and customer retention in Nyala insurance S.C. look like?
- What is the effect of premium /price on customer retention in Nyala Insurance S.C.?
- What is the relationship between switching barrier and customer retention?
1.4 Objective of the Study
In correlation with the discussed problems, this research has put forward general and specific objectives to be addressed by the research findings.
1.4.1 General Objective
The general objective of this study is to examine factors that affect customer retention in Nyala Insurance S.C.
1.4.2 Specific Objectives
To assess the effect of customer satisfaction on retention
To examine the effect of trust on customer retention
To determine the effect of premium price on retention
To assess the effect of switching barrier on customer retention
1.5 Definition of Terms
The following terms are used in this research as per their theoretical definition stated here under.
Retention rate: It is the percentage of maintained customer over a period. (Ramakrishnan 2006)
Attrition rate: It is defined as the percentage of lost customer over a period. (Fluss 2010)
Acquisition: It is the action of taking possession of customer. (Fluss 2010)
Market share: It is described as a percentage of the total production volume in market captured by a company (Kotler et al., 2002)
Switching barrier: It is a constraint that prevents the customer from switching to other company. (Gremler and Brown, 1996)
1.6 Significance of the Study
The study has a great significance to Nyala Insurance S.C. and the insurance Industry in Ethiopia as a whole. Major benefits that would be obtained from the study are:
- It helps Nyala Insurance S.C. to identify determinants of customer retention and distinguish the factor that has a greater effect over customer retention.
- By identifying and capitalizing on the determinants of customer retention NISCO can Ø Reduce the cost of acquisition through maximizing retention. Hence it indirectly will serve as a free advertising method through retained customer's Ø word of mouth activity.
- Maximize its market share, production, and profit.
- Generate new ideas so that they can device their marketing strategy in accordance to win maximum retention.
- It also helps to Similar insurance companies to identify customer retention determinants so as to device proper strategy
1.7 Scope of the Study
The study is limited to Nyala Insurance S.C.'s service centers, which are found only in
Addis Ababa. One of the reasons behind this is that the concentration of Nyala Insurance S.C's branches in Addis Ababa is 58% and in premium contribution, Addis Ababa branches share 73% of the total premium. The head office of the company is also found in Addis Ababa. Moreover, Addis Ababa is a better representative of the nations and nationalities of the country.
1.8 Organization of the Study
The study comprises five main chapters. Chapter one is devoted to the general introduction covering the background of the study, the statement of the problem, the objectives, significance, scope and how the research was organized. Chapter two is mainly concerned with the review of related literatures on customer retention determinants as well as the impact on corporate performance. Chapter three provides the methodology that was applied to achieve the research objectives including primary data and method of analysis. Chapter four covers the analysis and presentation of data. This chapter discusses the result obtained in accordance with the research questions. Finally, chapter five deals with conclusions of the findings and recommendations forwarded.
DETERMINANTS OF CUSTOMER RETENTION IN NYALA INSURANCE
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DETERMINANTS OF CUSTOMER RETENTION IN NYALA INSURANCE.docx
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DETERMINANTS OF CUSTOMER RETENTION IN NYALA INSURANCE
ABSTRACT
Customer retention plays a significant role for profitability and growth of a company. Accordingly, the aim of this study was determining the factors that affect customer retention in Nyala Insurance S.C. where its customer retention rate has been going down on an alarming rate. The study has analyzed the impact of selected independent variables, which are believed to have major impact in service rendering sector based on previous research findings. The determinant variables, which are satisfaction, trust, premium and switching barriers were selected based on the theoretical references made. The relevant data for the analysis of the research was gathered from a sample of 143, out of nearly 2,000 customers of NISCO Addis Ababa branches. Respondents were selected using convenience sampling method. The data was collected using a questionnaire comprised of 21 close-ended questions, mostly with Likert scale. The return rate was 90.2%. The data was analyzed on three layers. The demographic and univariate analysis was carried out using descriptive analysis; the bivariate analysis was computed using Pearson Correlation analysis; and, finally, binary logistic regression was used for the multivariate analysis. Major findings of the research showed that the attrition rate of the company still lies around 31.8%. Amongst the independent variables, trust is found to be the most significant factor in determining customer retention rate. Secondly, customer satisfaction is found to have a strong impact in affecting customers’ decision whether to stay or not. Premium price and switching barrier were found to have non-significant impact on retention. Based on these findings, a recommendation that stresses on developing trust and customer satisfaction has been forwarded.
Key Words: customer retention, Attrition, Trust, Customer Satisfaction, Premium, Switching Barrier.
CHAPTER ONE
INTRODUCTION
This chapter presents a general background of the study, Objectives of the study as well as statement of the problem. The chapter further describes the scope of the study, significance of the study and organization of the study.
1.1 Background of the Study
As per the financial definition, insurance is a financial arrangement that redistributes the costs of unexpected losses. Article 654 (2) of the commercial code of Ethiopia, provides a legal definition of insurance policy as “An insurance policy is a contract whereby a person called the insurer undertakes against payment of one or more premiums to pay to a person, called the beneficiary, a sum of money where a specified risk materializes”. This contract of agreement is subject to specific period, usually one year, and can be renewed for further period based on an additional charge and the mutual interest of the insurer and the insured.
Thus, renewed policies assure customer retention.
In this complex and dynamic business environment, organization‟s survival is highly determined by its ability to attract and retain customers. Ramakrishnan (2006) defines customer retention as the marketing goal of preventing customers from going to the competitor.
In Ethiopia, the insurance industry falls under the category of fast growing sectors. This can be witnessed by the availability of many new entrants that are joining the market. Currently, the government of Ethiopia has given special emphasis to the sector by which it had introduced compulsory third party insurance act regarding motor vehicles. Moreover, it is also in process to declare a compulsory health insurance act for employees. This and other factors increase the market demand. On the other hand, as a supply response, some new insurance companies has joined the market and others are on establishment to join the market. Currently the total number of insurance companies in operation has reached seventeen. Thus, it is common for the prevalence of stiff competition and switching of customers among the insurance companies.
Customer retention is the way in which organizations focus their efforts on existing customers in an effort to continue doing business with them (Mostert et al., 2009). However, customer retention can also mean the number of customers who stay with the provider in the course of an established period, such as a year (Dawes, 2009: 232). Customer retention is a key factor in determining the success of businesses today. Fluss (2010) notes that competitors are always on the lookout to steal customers through better deals. Fluss has observed that annual customer attrition rates range from 7% in industries that have high Switching Barriers such as banking and insurance, to almost 40% in the mobile phone industry.
However, currently Nyala Insurance S.C experiencing higher attrition rate than stated, which is 30% though there are Switching Barriers. This results a significant negative impact on the company‟s market share and profitability.
Customer retention has a direct impact on long-term customer lifetime value, which is a more profitable avenue for firms that seek to pursue growth and sustainability or those that seek to protect themselves from market shrinkage resulting from a contracting economy (Gee et al., 2008). Therefore, Customer retention is important when brand loyalty is decreasing and sales cycles are aggravating the business environment because under these circumstances, losing an important customer to a competitor would affect significantly the organization's profitability and growth
Different studies like Rust and Zahorik (1993) indicates that acquiring new client costs five to twelve times greater effort than retaining existing client. Therefore, it is vital to emphasis on maximizing customer retention through addressing issues that affect retention so as to ultimately ensure the company's sustainable growth and profit.
This research mainly focuses on identifying the customer retention factors and their degree of influence on company under study, Nyala Insurance S.C. Thus, having recognized the factors, the company can control or minimize its alertly increasing attrition rate and increase its market share. Moreover, different researchers studied the relationships of customer retention and its factors in different sectors. However, there is no prior similar research conducted on the insurance industry in Ethiopian context. Hence, this research has a great significance for insurance industry in general and for Nyala Insurance S.C. in particular.
1.2 Statement of the Problem
Insurance companies in Ethiopia are in expansion, targeting lucrative businesses favored by construction development, growth of foreign direct investment and the overall economic growth. Thus, competition tends to be high among existing and the incoming insurance companies. The nature of service given by all insurance companies is subject to renewal of policy period which require the customer's willingness to stay longer with its insurers.
On the other hand, insurance companies are always exerting their effort on acquisition of new customer and retaining of the existing customers to achieve their production goal. Retaining customer for the organization is indispensable target for survival and maximizing profit. Different studies show that customer retention has as many advantages over customer acquisition as the cost of attracting new customer is five to twelve times
Therefore, considering these facts, insurance industries are expected to maximize their retention rate in order to survive and to make profit. Nyala insurance company is in a move to increase its production by increasing its branches and by diversifying its products. the
Though, company‟s minimum targeted retention rate is 80%, currently (2012/13) the annual retention rate shows 70%, while in 2011/2012 budget year it was 79%. Thus, the current retention rate is interpreted as out of 100 customers only 70 customers are retained and 30 customers are lost per annum due to various reasons. In correlation with this retention rate, the market share of the company also decreased from 6.1% in 2011/12 to 5.6% in 2012/13 which is a significant lose for the company. In the prevailing dynamic market and demanding customers, there are many factors that affect customer retention in insurance industry. Identifying these factors that affect customer retention is very important for Nyala insurance S.C. and for other similar companies in order to device appropriate retention strategy, maximize profit, and increase market share. Therefore, this study carried out to examine factors that affect customer retention particularly in Nyala
Insurance S.C. Moreover, as per the researcher‟s exhaustive search for available sources, previous works in particular to Ethiopian insurance industry have not been found. Thus, this research is unique and vital since it considers the context of local market practice.
1.3 Research Questions
Derived from the research problem, The following questions are raised in order to determine the relationship between the dependent and independent variables.
1.4 Objective of the Study
In correlation with the discussed problems, this research has put forward general and specific objectives to be addressed by the research findings.
1.4.1 General Objective
The general objective of this study is to examine factors that affect customer retention in Nyala Insurance S.C.
1.4.2 Specific Objectives
To assess the effect of customer satisfaction on retention
To examine the effect of trust on customer retention
To determine the effect of premium price on retention
To assess the effect of switching barrier on customer retention
1.5 Definition of Terms
The following terms are used in this research as per their theoretical definition stated here under.
Retention rate: It is the percentage of maintained customer over a period. (Ramakrishnan 2006)
Attrition rate: It is defined as the percentage of lost customer over a period. (Fluss 2010)
Acquisition: It is the action of taking possession of customer. (Fluss 2010)
Market share: It is described as a percentage of the total production volume in market captured by a company (Kotler et al., 2002)
Switching barrier: It is a constraint that prevents the customer from switching to other company. (Gremler and Brown, 1996)
1.6 Significance of the Study
The study has a great significance to Nyala Insurance S.C. and the insurance Industry in Ethiopia as a whole. Major benefits that would be obtained from the study are:
1.7 Scope of the Study
The study is limited to Nyala Insurance S.C.'s service centers, which are found only in
Addis Ababa. One of the reasons behind this is that the concentration of Nyala Insurance S.C's branches in Addis Ababa is 58% and in premium contribution, Addis Ababa branches share 73% of the total premium. The head office of the company is also found in Addis Ababa. Moreover, Addis Ababa is a better representative of the nations and nationalities of the country.
1.8 Organization of the Study
The study comprises five main chapters. Chapter one is devoted to the general introduction covering the background of the study, the statement of the problem, the objectives, significance, scope and how the research was organized. Chapter two is mainly concerned with the review of related literatures on customer retention determinants as well as the impact on corporate performance. Chapter three provides the methodology that was applied to achieve the research objectives including primary data and method of analysis. Chapter four covers the analysis and presentation of data. This chapter discusses the result obtained in accordance with the research questions. Finally, chapter five deals with conclusions of the findings and recommendations forwarded.
DETERMINANTS OF CUSTOMER RETENTION IN NYALA INSURANCE
Attached Files