Increasing Sophistication of Insurance Pricing Processes Challenges Insurers

Insurers must integrate rating plans and prices with other elements of their customer value proposition, while remaining nimble in response to changes in customer behaviors, competitor actions, and environmental factors.

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For the past two decades, as insurance pricing processes have become increasingly sophisticated, the emerging challenge for insurers in the U.S. has been achieving balance between seemingly conflicting objectives: integrating their rating plans and prices with the other elements of their customer value proposition, while remaining nimble in responding to changes in customer behaviors, competitor actions, and environmental factors that require pricing actions in response.

The need to integrate pricing with all the other facets of customer experience is part of an insurer’s value proposition. It’s a complicated and sometimes cumbersome process. And integration points range across the value chain from customer acquisition and renewal to product features and benefits, as well as customer service and claims, to name just a few. When everything is aligned, it’s easier to attract target customers at their key shopping points and manage the entire customer lifecycle. With the rise of InsurTechs, new competitors and shrinking markets, companies that don’t offer a compelling, clear and integrated value proposition to consumers are doomed to shrink gradually to oblivion.

On the other hand, there is an increasing imperative to be nimble in a market where profound changes in competitors’ strategies and in consumers’ behaviours are happening at an unprecedented, accelerated rate. The impact of COVID-19 has dramatically changed how consumers drive, shop, work, dine, and socialize (or not). Some of these changes will be permanent, others will diminish or disappear in a post COVID world. The ability to quickly respond to these changes (and to competitor actions as they respond to the changes) will be a key factor in which insurers succeed and which do not.

Meeting Contradictory Objectives

Of course, different insurers have different strategies, different customers in different target segments, hence different approaches. Some insurers take a highly-centralized approach to the market, treating all of the U.S. as a single market, for example. In this scenario, a very small core group of senior managers sets the strategy, and all the tactics are executed from within this group. Problems or issues that arise in a highly-centralized approach tend to be company-wide and are often solved centrally with solutions developed by a small team of talented people.

Other insurers take a more distributed approach to the market by adopting state-oriented or local market-oriented solutions. These companies have empowered people, in many cases remote employees, to make quick changes in reaction to what is going on in the marketplace. Both strategies are perfectly acceptable and can return degrees of success depending on what the insurer’s distribution system is, what the overarching value proposition is, and who the company’s primary customers are.

Regardless of the approach selected, however, successful insurers all have one thing in common: solidly identified target customers and a strategy for acquiring and retaining those target customers. Following on that insight, successful insurers then build organizations that are nimble enough to execute on that strategy. There are several things to consider when attempting to meet these somewhat contradictory objectives.

Pricing Innovation

Over the past fifteen years, modelling approaches have profoundly changed due to two main drivers: more sophisticated math and the ubiquitous use of data. Twenty years ago, there were only a handful of insurers who were really good at sophisticated pricing. Today, it has expanded both in terms of insurers’ size, with small and mid-size insurers becoming very good at it, and in terms of lines of business, moving from auto personal lines to all personal and small to mid-size commercial lines.

Further, technology today delivers almost unbelievable insight. Consider that telematics can provide the ability to see not only how individuals or fleet operators drive, but also under what circumstances, such as traffic, road conditions, and drive times. That combination of information is a much more powerful predictor of insurance losses than previous demographic information used, including age, gender, marital status, where the car is garaged, and credit history.

Once insurers are able to consume such data, typically with the help of modern pricing analytics platforms there is an opportunity to get more granular in how prices are set and to provide feedback to customers which will help proactively manage risk. It’s a win-win combination for both the company and the customer, reducing risks and losses.

Adopting and Adapting

Insurers are much more enthusiastic about innovation now than five, or especially ten years ago. There is a general recognition that the competitive intensity of the insurance industry has heated up a great deal in the past fifteen years or so. Technology is a big factor in the ramp up of competitiveness in the industry. In fact, technology has rapidly accelerated and enabled change in the way insurers do business, in insurance products, and in the pricing of insurance products as well.

Subsequently, more and more insurers have embraced the idea of using technology in a way that really advances the sophistication of insurance pricing, customer service, claims handling, and many other different facets of the insurance business. Quite naturally, this has levelled the playing field a bit in the insurance industry. In the past, the race went to the big traditional insurers. Nowadays, it is smart, nimble insurers of all sizes that are harnessing emerging technologies to create new opportunities who win in the marketplace.

But, being nimble isn’t easy. Many insurers don’t realize that cycle time starts when a problem or opportunity first emerges in the market. Companies that are doing great at pricing sophistication start with really good customer and competitor intelligence, a solid understanding of the market and ongoing changes. Then, it’s decision time. How will the company address market changes and still deliver a quality customer experience?

Solution development may be an opportunity to shorten cycle time. If the company is going to develop a new rating plan, for example, can an aggressive timetable be achieved? This is the part where a lot of the opportunities today go bad and where insurers fail. In the past, the development time of a brand-new complete rating plan could take well over twelve months. By compressing this timetable with modern pricing platforms, insurers can quickly develop and implement solutions at scale, turning an opportunity into a key competitive differentiator.

What Lies Ahead

The world has gone from a steady state and changing gradually, to a one in which change is very abrupt with declining economic activity, a massive change in the way people shop, work, and commute. And, by the time the pandemic is over, there will undoubtedly be far fewer small businesses in the market.

So, as the multi-level crisis created by the global pandemic begins to ease over the course of the next year, multiple questions emerge. What will the world look like after that? How rapidly will it recover? What will the new normal be?

This is the challenge for insurers in the coming years. Fortunately, new tools and processes are available now to help insurers quickly react to those changes. This takes us back to nimbleness: companies that are going to do well are the nimble ones, that can adapt and switch directions quickly.

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Fred Cripe // Fred Cripe is a former senior executive at Allstate and has been involved in the U.S. insurance industry for 40 years.

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