The price is right–or is it?
For insurance industry leaders, getting prices right has become intensely complex and sophisticated. When pricing is out of alignment with market conditions or individual behaviours, whether too high or too low, the result tends to be the same —lost revenue and narrowing margins.
Traditionally, insurance premiums have been set using the “cost-plus” method. Cost-plus is an actuarial assessment of the risk premium, a component to cover direct and indirect costs, as well as a margin uplift.
In many cases, especially in personal property and casualty products such as auto and household, cost-plus can still work well by generating an accurate price that a buyer can accept and that also allows insurers to operate at the desired combined ratio at or below 100 percent.
Yet, even though traditional pricing methods work today, they have several drawbacks that inhibit future-readiness. In its relative simplicity, for example, cost-plus lacks the ability to easily incorporate non-technical pricing factors and the adaptability to respond quickly to changing market conditions. These can be factors such as:
- New transparency created by price comparison websites such as check24.de or bizcover.com.au. Transparency, in turn, creates greater competition in more commoditised personal and commercial product lines.
- New unstructured data sources, such as those made available by way of telematics and IoT. These can provide greater context of the insured persons and objects, increasing or decreasing risk and, thus, risk premium.
- Increasing demand for personalisation, highlighted in a survey by the IBM Institute for Business Value (IBV), which revealed that 50 percent of customers prefer tailor-made products. Traditional pricing models aren’t designed for individualised products.
- Expansion of insurtechs. By their very nature, born-on- the-cloud green-field players, such as Lemonade, have higher flexibility to react to market changes, showing customers what is possible and increasing pressure on incumbents to react.
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