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Pricing has always been at the heart of every insurance operation. But today, as new technologies and methods are lowering barriers to innovation, pricing sophistication is becoming easier than ever to achieve. But what are some of the drivers of sophisticated pricing and how can your insurance company achieve it in a way that makes sense for your business?
Neil Chapman is global product leader of pricing, product, claims and underwriting at Willis Towers Watson (WTW), providers of the market-leading pricing tool, Radar Live. He joins Anders Skovlykke Knudsen, Tia’s Director of Product Management, to discuss the ins and outs of sophisticated pricing and how to take advantage of the latest pricing technologies.
“The drivers of sophisticated pricing are the same drivers of much of the innovation in the insurance industry,” says Anders. “First and foremost, consumers are more sophisticated. They are well-informed and they expect a certain level of pricing transparency. They also expect to see product offers customised to them, based on variables such as security and type of coverage. These offers require sophisticated pricing structures.”
Consumers are also increasingly empowered by a fast-growing array of price and feature-comparison websites that allow them to compare and contrast hundreds of insurance products by price, value and benefits. “These sites are educating consumers on how to effectively match a product choice with their needs and willingness to pay,” adds Anders. “And they are fanning the flames of competition in the insurance market.”
Thanks to these websites as well as car manufacturers, retailers and other non-traditional players and a range of new business models and products, competition in insurance has never been fiercer. Sophisticated pricing capabilities have become a key competitive advantage to companies who implement them successfully.
New, innovative pricing models are being enabled by big data, Internet of Things and predictive data analysis tools. These technologies give insurance companies the ability to design innovative pricing models, estimate risk or consumer willingness to pay, buy or churn more accurately, and draw from new, external sources.
“New technology is providing an abundance of data sources,” says Anders. “Insurance companies are offering preventive solutions such as devices that detect and stop the flow of water if there is a leak. These devices give the insurer data they can use to determine risk and build more sophisticated pricing models.
Another example of data abundance is in the automotive industry. By 2020, 90% of new cars will be equipped with internet access and interactive dashboards. It’s one more way that insurance companies can receive data. “We have talked about IoT and price sophistication for years,” says Anders, “but now it’s actually happening. The technologies are mainstream, creating new pricing opportunities for insurers.”
“Anders is right,” adds Neil. “Predictive modelling has been instrumental in driving improvements in pricing sophistication over the last two decades – and this has reshaped the competitive landscape. But a plethora of external data sources only makes sophisticated pricing more achievable, especially with the right pricing system.”
Sophisticated pricing systems offer the ability to achieve enhanced profitability from advanced pricing decision support and flexible pricing approaches, including the use of wider data sources, machine learning methods and the ability to deploy multi-product or multi-brand pricing strategies.
“Pricing sophistication leads inevitably to a better customer experience, as it enables more customised products based on the specific variables the customer cares about,” says Neil. “It also enables better accuracy as sophisticated pricing systems can significantly reduce the risk of errors in pricing. They also offer cost reductions through effective, rapid and accurate delivery of rates from conception to production.”
Traditionally, pricing teams analysed historical data to determine appropriate rate changes. These were then passed to a rate deployment team for implementation using a rate engine. In many cases, the process of updating pricing parameters was time consuming and undertaken at least monthly. However, implementing enhancements to the rate algorithm beyond parameter changes, such as adding new factors or modifying the nature of the algorithm, was often a lengthy and expensive process, with time frames extending to years and costs stretching into millions.
“This traditional approach tended to limit or delay the return on investment in new data sources and deflect insights and model enhancements identified by the pricing team,” says Neil. “It also limited the ability of a company to use a test-and-learn approach, which was becoming increasingly necessary in more sophisticated and transparent markets.”
Today, the barrier for many insurers to adopting sophisticated pricing is complexity. The more refined your segmentation, the more complex it is to implement a sophisticated pricing system. Beyond this, it can be difficult to understand how to use the abundance of available external data. There’s also a perception that it’s difficult to integrate sophisticated pricing systems into legacy IT systems.
“This is actually a bit of a myth,” says Neil. “Integration can be really simple if your core system has a connector to your pricing system. This is the case with Radar Live. If you’re a Tia customer, Radar Live is a simple matter of plug ‘n’ play.”
Radar Live also takes on the complexity of drawing from external data sources. Neil continues, “The Radar Live system harnesses different data sources and can be amended to introduce new ones frequently. That basically takes all the guesswork out of leveraging external data to improve your pricing accuracy.”
Tia and WTW have collaborated since 2017 to offer an easy flexible connection to Radar Live. “Sophisticated pricing has been of growing importance to Tia customers and we wanted to offer a best-of-breed pricing solution directly through the Tia system,” says Anders. “Our partnership with WTW has been of great value to our joint customers and we believe more insurers will take advantage of it as we enter the golden age of pricing sophistication.”
About Neil
Over most of his 15 years at Willis Towers Watson, Neil has specialised in personal lines pricing and related software. He has worked for most of the UK’s main personal lines insurers and has broad international experience, both with client work and as a speaker in seminars worldwide. Neil graduated in mathematics with a first-class degree from Oxford University in 2004, qualified as a Fellow of the Institute of Actuaries in 2008 and completed his MBA from the Open University in 2019.
About Anders
Anders helps insurance companies exploit and use their digital opportunities to excel in innovation and beat the competition. With more than two decades in the insurance industry, he understands everyday life in insurance companies. He listens carefully to customer needs and uses that to effectively map the trends into leading edge technology.
