The Effects of Customer Satisfaction on Company Profitability: Evidence From the Property and Casualty Insurance Industry

• Author: Mark J. Browne,David M. Pooser
• DOI: http://doi.org/10.1111/rmir.12105
• Date: 01 September 2018
• Published date: 01 September 2018

Risk Management and Insurance Review

C

Risk Management and Insurance Review, 2018, Vol.21, No. 2, 289-308

DOI: 10.1111/rmir.12105

FEATURE ARTICLE

THE EFFECTS OF CUSTOMER SATISFACTION ON COMPANY

PROFITABILITY:EVIDENCE FROM THE PROPERTY AND

CASUALTY INSURANCE INDUSTRY

David M. Pooser

Mark J. Browne

ABSTRACT

Prior literature presents a positive link between customer satisfaction and firms’

financial outcomes, including greater revenue, profitability, and prices. How-

ever, few studies approach the topic of customer satisfaction in the insurance

industry. Using a unique data set obtained from J.D. Power, we observe cus-

tomer satisfaction among U.S. auto insurers and link their customer satisfaction

rating to insurer profitabilitymetrics. Our results support the notion that greater

customer satisfaction leads to reduced expenses and increased profitability. A

potential explanation is that more satisfied customers are more likely to remain

with an insurance company and refer others to the insurer, reducing customer

acquisition expenses.

INTRODUCTION

Studies in the risk and insurance field often focus on the topic of insurance company

profitability. Elango et al. (2008) and Liebenberg and Sommer (2008) examine insurer

performance as a function of diversification. They find that more concentrated firms

tend to have greater returns, although Elango et al. find a nonlinear effect. Shim (2011)

also finds a negative association between corporate diversification and profitability, and

further finds that insurer performance declines surrounding merger and acquisition

(M&A) activity.Ma et al. (2014) examine profitability relative to contingent commissions.

They find no relation between the use of contingent commissions and returns,but a small,

positive relation in the extent of contingent commission use. Focusing on underwriting

performance, Choi and Weiss (2005) find that moreconcentrated insurers are associated

with higher prices and greater profitability. They also present evidence that insurers

with a greater market share are more profitable. Regan and Kleffner(2010) also focus on

underwriting performance and find that the use of contingent commissions is associated

with a lower loss ratio but not with the combined ratio.

David M. Pooser is an Assistant Professor of Risk Management and Insurance, School of Risk

Management, Insurance, and Actuarial Science, Peter J. Tobin College of Business, St. John’s

University,New York, NY; e-mail: pooserd@stjohns.edu. Mark J. Browne is the Robert Clements

Distinguished Chair in Risk Management and Insurance, School of Risk Management, Insurance,

and Actuarial Science, Peter J. Tobin College of Business, St. John’s University, New York, NY;

e-mail: brownem1@stjohns.edu.

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In other fields of research, customer satisfaction has been found to be associated with

measures of financial success across many industries. Anderson and Mansi (2009) study

a sample of over 150 publicly traded firms from 1994 to 2004. They find that firms with

lower levels of customer satisfaction do not fare as well as other firms in credit markets.

In particular, they find these firms have lower credit ratings and higher debt costs.

The authors attribute this finding to firms with higher levels of customer satisfaction

having more stable cash flow as a result of having more stable future sales. Anderson

(1996) reports empirical evidence that shows customers who experience increases in

customer satisfaction have greater price tolerance. Anderson et al. (2004) report a positive

association between firm-level customer satisfaction and shareholder value. They further

find that the degree of association varies across industries.

Empirical studies find that customer satisfaction is related to consumer behavior. An-

derson and Mansi (2009) provide a review of this extensive literature. Prior studies have

found a positive relationship between customer satisfaction and customer retention,

word-of-mouth referrals, tolerance for higher prices, and cross-selling opportunities.

They report that customer satisfaction is also associated with a reduction in events hav-

ing a negative impact on a firm, including customer complaints and customers failing

to pay.

In spite of the apparent importance of customer satisfaction to cash flows, price tolerance,

and shareholder value found in studies of other industries, there has been little to no

research on customer satisfaction in the insurance sector. This is a bit surprising as

customer satisfaction has been linked to customer retention, and insurance renewals

have been found to be more profitable than new business. A reasonable expectation

is that insurers with higher rates of customer satisfaction will have higher rates of

profitability as a consequence of renewing more business than insurers with lower rates

of customer satisfaction.

The current study examines a topic that has received little attention in the risk and

insurance literature: customer satisfaction in the insurance industry. One reason for the

scarcity of literature on this topic may be the lack of available data. Nearly all researchon

customer satisfaction in insurance comes from surveys. Many of the studies published

to date are based on data from markets other than the United States (e.g., Colgate and

Lang, 2001, New Zealand; Durvasula et al., 2004, Singapore; Guillen et al., 2012, Europe).

Our study employs a unique data set of customer response data. The data come from J.D.

Power, a large, highly regarded marketing company that performs studies on customer

satisfaction for numerous industries in the United States.

Our study explores whether or not customer satisfaction has an impact on firm financial

performance. This topic has been examined in prior literature—especially in the ac-

counting field—but most of these studies also use non-U.S. data and focus on a variety

of industries. Our sample consists of only U.S.-based property and casualty insurers that

sell automobile insurance. We believe that by using a more homogeneous sample than

has been employed in prior literature, differences in customer satisfaction will more

accurately describe variations in firms’ profitability.

Our findings indicate a negative association between customer satisfaction and the

expense and combined ratios. Wefind no significant relation between customer satisfac-

tion and an insurer’s loss ratio. This supports the notion that better customer satisfaction