Miles of Possibilities: Actuaries taking flight in loyalty programmes

An Insights Session with Ann Cheung highlights how actuarial foundations are being applied well beyond traditional insurance settings.

Every time a customer swipes their credit card at a café or scans a boarding pass at the airport, an actuarial calculation sits quietly in the background. While this may seem far removed from life insurance reserves or claims triangles, the underlying mathematics and behavioural assumptions would be instantly recognisable to any actuary.

That familiarity was at the centre of an Insights Session with Ann Cheung FSA, GMBPSS, Programme Actuary at Cathay Pacific Airways. The session explored how actuarial techniques underpin the valuation and management of airline loyalty programmes — now among the aviation industry's most valuable financial assets.

Drawing on her experience, Cheung demonstrated how liability valuation, forecasting models and behavioural assumptions are being applied in a commercial setting that continues to grow in both scale and strategic importance.

"Our profession has empowered us with infinite possibilities," Cheung noted during the session. "The knowledge and skills we build throughout our actuarial careers are highly transferable."

The actuarial role in loyalty programmes

Loyalty programmes are now commonplace across the leisure and hospitality sector, yet the actuarial rigour required to manage the financial liabilities they create is less widely recognised.

The work parallels traditional insurance: "Similar to insurance, where you reserve for the future benefit claims after premium is collected, and you make assumptions for lapsed behaviour," Cheung explained. "Here, we reserve for the future redemption after miles are earned. And we make assumptions for the expiry pattern."

For attendees, one of the most striking insights was how closely these challenges mirror familiar actuarial problems: lapse and survival modelling, long-dated liability estimation and assumption setting under uncertainty.

IFRS 15 and liability valuation

Actuarial involvement centres on compliance with IFRS 15, which requires careful consideration of three key areas: determining the standalone selling price of miles, estimating earned breakage and appropriately timing revenue recognition.

"The fundamental of what we do—for the miles earned—actuaries project the miles that will ultimately be redeemed, or expire," Cheung explained. "And for those that will be redeemed, on what rewards? And all these go into the calculation of miles value, liability, and many more."

Activity-based expiry model is becoming dominant among loyalty programmes, under which miles expire only after consecutive months without qualifying activity. This introduces additional complexity compared with fixed time-based expiry rules. A mile earned today may expire in two years — or remain valid for decades — depending entirely on member behaviour.

This requires modelling transition rates (tracking movement to the next time-since-last-activity bucket) and rejuvenation rates (capturing the likelihood of activity resetting the expiry clock). Together, these assumptions drive estimates of ultimate breakage, with material implications for liability valuation.

Approaches to breakage modelling

Cheung outlined three approaches to estimating ultimate redemption and breakage rates.

• The first applies machine-learning techniques to segment members with similar redemption behaviour. Redemption patterns are projected using triangular methods, with breakage derived as the residual. While highly granular, this approach requires substantial historical data.
• The second leverages the mathematical relationship between redemption, rejuvenation and transition probabilities, which must sum to one within each activity bucket. Historical data calibrates the rates, which are adjusted for trends and programme changes before projecting long-term outcomes.
• The third approach, developed by Cheung, focuses on expiry mechanics. Miles that continue to transit without rejuvenation eventually expire after the consecutive periods; and with rejuvenation, miles become furthest away from expiry, which will take consecutive months of inactivity to reach expiry again. Breakage modelling can then be simplified into decision trees of transition and rejuvenation.

"This approach produces very close results compared with the more sophisticated methods," Cheung explained. It provides acceptable indications of ultimate breakage rates with only early expiry experience —valuable for programmes at early stages or those that have recently changed expiry rules.

Strategic considerations beyond reserving

Liability valuation is foundational, but actuarial involvement extends into strategic territory. A recurring question for airlines is whether a seat should be sold for cash or released for redemption — a decision that involves balancing variable costs, displacement risk, dilution effects, mileage sales revenue, working capital benefits and customer value considerations.

Actuarial models support optimisation by route, cabin class and season, incorporating KPIs such as customer lifetime value, repeat purchase behaviour and member activity rates. Market research assesses how loyalty benefits influence willingness to pay and customer retention.

Cheung emphasised that minimising breakage isn't about encouraging expiry — it's about ensuring members remain engaged with the value proposition. "By minimising breakage, I'm ensuring that our members are hooked by our value proposition," she noted. "From a long-term perspective, this is going to be far more profitable than wishing for the expiry of everyone's miles."

The pandemic reinforced this perspective. When flight operations declined sharply, mileage sales provided critical revenue diversification — elevating loyalty programmes from marketing tools to material business units requiring rigorous financial oversight.

Key takeaways for actuaries

The session underscored several insights relevant across practice areas: actuarial reserving and behavioural modelling techniques are highly transferable beyond insurance; IFRS 15 introduces complex but familiar valuation challenges; customer behaviour modelling is central to both liability management and strategic decision-making; and loyalty programmes increasingly require strong actuarial governance as material business units.

As these programmes continue to expand across industries, demand is growing for actuaries who can apply established technical skills in new commercial contexts.