Chase to Cross-sell Credit Card Insurance to Card Holders ...

Case Type: new product; math problem.
Consulting Firm: Capital One Business Analyst first round job interview.
Industry Coverage: banking; financial services.

Case Interview Question #00472: Chase Bank is the consumer and commercial banking subsidiary of J.P. Morgan Chase & Co. (NYSE: JPM). The bank was known as Chase Manhattan Bank until it merged with J.P. Morgan & Co. in year 2000. With more than 5,100 branches and 16,100 ATMs nationwide, J.P. Morgan Chase is one of the Big Four banks of the United States with Bank of America, Citigroup and Wells Fargo. In 2004, J.P. Morgan Chase acquired Bank One, making Chase the largest credit card issuer in the US.

Recently, the credit card division of Chase is considering launching a new financial product: cross-selling credit card insurance policy to its credit card holders. Credit card insurance usually come in a variety of forms. The four main types are credit life insurance, disability insurance, unemployment insurance, and property insurance. For this case Chase plans to launch unemployment credit insurance only. The insurance product works this way:

• customers who buy the unemployment credit insurance policy would pay 1% of their monthly balance for insurance premium;
• if customers are involuntarily laid-off or downsized, they can file insurance claim and Chase would pay their credit card debt in the month they are laid-off;
• customers? credit card purchases after the involuntary unemployment would not be covered.

Question #1: Is this credit card insurance product going to be a profitable business for Chase?

Additional Information:

• On average Chase credit card holders spend $1000 in credit card purchase each month.
• Market research predicts that, due to bad economic environment, 5% of Chase credit card holders who buy the unemployment credit insurance policy would file insurance claim within 6 months of buying the insurance.
• There is no additional cost to Chase in terms of IT implementation, management, and maintenance of the insurance program.

Possible Answer:

To evaluate whether the credit insurance program will be profitable or not, we will have to weigh both the cost and the benefit of the program. To simplify the calculations, let?s suppose 100 people will purchase the unemployment credit insurance policy.

1. Cost

100 people, 5% will file insurance claim in 6 months, average monthly balance is $1000, thus costs to Chase = 100 people * 5% * $1000 = $5000

2. Benefit

100 people, paying 1% of their monthly balance ($1000) for 6 months, revenues to Chase = 100 people * 1% * $1000 per month * 6 months = $6000

3. Net Profit

Profit = Revenue ? Cost = $6000 ? $5000 = $1000 per 100 customers

Therefore, by doing a simple cost-benefit analysis, it seems the credit card insurance program will be a profitable business for Chase.

Question #2: We haven?t talked about marketing cost and customer acquisition cost associated with launching the credit insurance program. Chase?s marketing department will be using direct mail marketing to acquire customers. It costs Chase Bank $0.25 to send out a mail. Market research has shown that the direct mail marketing campaign only has 1% response rate, meaning among the mails sent out to Chase credit card holders, only 1% card holders will actually buy the credit insurance. Now, adding the marketing cost, is the credit card insurance program a profitable business?

Possible Answer:

With a low response rate of 1%, in order to have 100 customers buying the credit insurance, Chase needs to send out 10,000 mails at least. Thus, marketing cost = 10,000 * $0.25 = $2500.

Now, Profit = Revenue ? Cost = $6000 ? $5000 ? $2500 = -$1500 per 100 customers

Therefore, by adding the marketing cost of $2500, the credit insurance product becomes unprofitable now.

Question #3: What if the response rate of Chase?s direct mail marketing campaign doubles to 2%? Will the business be profitable?

Possible Answer:

With a response rate of 2%, and insurance claim rate remains at 5%, for every 10,000 mails sent out, 200 people will buy the credit insurance product, and 200 * 5% = 10 people will file insurance claim within 6 months.

1. Cost

Marketing cost: 10,000 mails * $0.25 = $2,500
Insurance claim: 10 people * $1000 = $10,000

2. Benefit

200 people * 1% * $1000 per month * 6 months = $12,000

3. Net Profit

Profit = Revenue ? Cost = $12,000 ? $10,000 ? $2,500 = $-500 per 200 customers. So, it looks like even with a doubled response rate of 2%, Chase is still going to lose money.

Question #4: What is the required response rate in order for Chase Bank to break-even in the credit card insurance business?

Possible Answer:

Assume that the break-even response rate is X%, for every 10,000 mails sent out, 100X people will buy the credit insurance product, and 100X * 5% = 5X people will file unemployment insurance claim within 6 months.

Cost = Marketing cost + Insurance claim = $2,500 + 5X * 1000 = 2,500 + 5000X

Revenue = 100X * 1% * $1000 per month * 6 months = 6000X

To break even, profit = revenue ? cost = 6000X ? (2,500 + 5000X) = 0, X = 2.5

Therefore, Chase?s direct mail marketing campaign will have to achieve a response rate of at least 2.5%, in order for the credit insurance program to break even.

Question #5: Assume that the credit insurance claim rate is unknown, what would the relationship between insurance claim rate and response rate be if Chase wants to break even for the credit insurance product? Draw a graph to show their relationship. What does the graph tell you?

Possible Answer:

Let the credit insurance claim rate be Y%, and response rate X%. Again, for every 10,000 mails sent out, 10,000 * X% = 100X people will buy the credit insurance product, 100X * Y% = XY people will file unemployment insurance claim within 6 months.

Cost = Marketing cost + Insurance claim = $2,500 + XY * 1000 = 2500 + 1000XY

Revenue = 100X * 1% * $1000 per month * 6 months = 6000X

To break even, profit = revenue ? cost = 6000X ? (2500 + 1000XY) = 0, Y = 6 ? (2.5/X)

To plot the graph, we could get the (X, Y) for a few points:

• X = 0.417, Y = 0
• X = 0.5, Y = 1.0
• X = 1.0, Y = 3.5
• X = 2.5, Y = 5.0
• X = 5.0, Y = 5.5
• X = 10.0, Y = 5.75

The insurance claim rate (Y) vs marketing response rate (X) is shown in Figure 1.

From the graph, we can see that: even if the insurance claim rate (Y) only increases slightly, Chase would have to significantly increase the direct mail marketing response rate (X) in order to break even. Therefore, to make money for the credit insurance product, it would make much more sense for Chase to keep the insurance claim rate under control instead of trying to boost direct mail response rate.

Source: http://www.consultingcase101.com/chase-to-cross-sell-credit-card-insurance-to-card-holders/

ama awards 2011 ama awards 2011 uekman uekman music awards music awards giants eagles