The impact of geographical factors on churn prediction: an application to an insurance company in Madrid’s urban area

Abstract

Geography has previously been noted as a decisive factor in business literature. This paper provides evidence of the significant role geography plays in customer lapse behaviour in an urban environment. This novel approach is based on the idea that the customers who cancel all policies and leave the company are not randomly distributed; rather, a mimetic performance of close individuals is noted. The physical proximity of the customer to the geographical focus (strategical centre, as insurance offices) and the interaction with nearby customer are spatial factors that increase (or decrease) the probability of churning. An empirical analysis using more than 7000 spatially georeferenced offline customers of a Spanish insurance company in the urban area of Madrid (Spain) demonstrated that the customer’s proximity to offices of such insurance company under study decreases the probability of churning, whereas high lapse risk was detected in customers in the surroundings of the company’s competitor branches. In addition, we identified spatial autocorrelation in churn probability, thus demonstrating that the probability of churn of a customer increases if nearby customers churn.