The Probability of First-time and Estimation of the Customer Lifetime Value in Health Insurance Data Using Markov Chain Model

Abstract

It is undeniable that customers have significant role for the firms steadiness. They are one of the factors that could ascertain the firm to run well. The firm oftenwould have to spend much money to acquire some new customers and retain some loyal customers every year. The customers could be considered as some profit generators. One of customer profit measures is the customer lifetime value.Here, customers in certain time periods are considered to be at some certain states. If the behavior of a customer is recorded well as a sequence of states from time to time, then a stochastic model can be applied to that behavior. Markovchainisa stochastic process that isoftenconsidered to be suitableto suchsequence.Here,the Markov chain will be applied to study the states representing behavior of the customers in health insurance.In the marketing system, the customer lifetime value is the potentialprofitof the insurance firm from one customer starting from the present until a time in the future.Thispapercalculatesthe customer lifetime value based on Markov chain models from Pfeifer and Caraway (2000) with two cases of interest rates, the constant one, and the dynamical one.Data was taken from fourkinds of customers characteristics from one of the insurance firms in Bandung, Indonesia. The result shows that customers which raise its contract value of life insurance and the loyal customers have the highest lifetime value.