MODELING CUSTOMER LIFETIME VALUE WITH MARKOV CHAIN IN THE INSURANCE INDUSTRY
Abstract
In the competitive insurance industry, accurately predicting Customer Lifetime Value (CLV) is vital for sustaining long-term profitability and optimizing resource allocation. Traditional static models often fail to capture the dynamic and uncertain nature of customer behavior, which is influenced by factors such as life changes, economic conditions, and evolving product offerings. To address these limitations, this paper proposes an advanced modeling approach that integrates Markov Chains with survival analysis. Markov Chains are well-suited for modeling stochastic processes, where future states depend on current conditions, while survival analysis provides insights into event timing and likelihood for estimating the insurance premium. The proposed model combines these approaches to make a more complete and accurate prediction of CLV. This helps insurers make better decisions and improves the overall performance of their business. We employ the data of customer behavior from the insurance company in Bandung, Indonesia from 1994 to 2020. We found that CLV in the insurance industry is significantly affected by customer behavior.
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