Why insurers need to optimize their pricing process

Image by  Neil Tackaberry

Life insurers are suffering from a sub-par pricing process. It’s no secret that many view the insurance industry as a collection of fossils. It’s almost an overdone subject for tech and insurance thought leaders. Take, for example, the following headlines from the past year: Tech Startups Are Prodding the Dinosaur That Is the Insurance Industry, Insurers lack a ‘culture of innovation’, research says, Insurance is ready for an upgrade.

In fact, so many parts of the insurance lifecycle are outdated it’s sometimes hard to decide what should be fixed first. One thing is obvious though, insurers need to become more profitable, as current numbers are generally just not cutting it for shareholders. Luckily, one of the fastest and most effective ways for life insurers to do this is to fix their pricing to be more competitive.

The insurance landscape is changing and life insurance in particular is lacking growth. Profit margins are being eroded. Life products are struggling, and most insurers aren’t looking at the pricing process for the fix, but as mentioned in an earlier Shifting Gears blog, the pricing process is currently leaving a lot of money on the table.

For example - a large majority of insurers are reactionary in their pricing, competing solely on price and features. We can see from the state of the current market that competing over price diminishes profit margins, and with low margins, adding a few percentage points to your profit makes a huge difference. Optimal pricing can help add those few points.

One of the main barriers to optimal pricing is that at this stage ‘competitive’ pricing is industry standard. The pressure and/or awareness of the shortcomings of the current process isn’t there for most insurers to incentivise them to think further ahead. It’s tempting to settle for what’s ‘good enough’ or to get comfortable because you’re doing what everyone else is doing. This failure to innovate is one of the key reasons that industries stagnate and current dominators get left behind. For some stark examples take a look at the changes in media industries like film and TV or Borders book store’s failure to change with the times.

On top of this, the current pricing process doesn’t deliver the best price. There’s just not enough time to iterate to the ideal solution. This is mainly because the tools used for pricing - both for modelling and communication - are antiquated and only serve to slow the process down. Most aren’t even built specifically for pricing, but stretched to fit the purpose. To get to better pricing insurers need to fix the process, making it faster and more insightful.

This is then made even more difficult because current systems don’t provide enough information to find the optimal price. A key example of this is that most life insurers aren’t doing segmented pricing. This is despite the fact that segmented pricing at a customer level will often add a few percentage points to your portfolio. It for example allows insurers to optimise cross subsidisation between small and unprofitable policies, and the larger valuable policies. Segmented pricing also means insurers can choose to add more value to the customer segments that deliver the vast majority of the value given price elasticities and lapse dynamics.

Insurers need to change their attitude towards pricing, and many other processes they take for granted, and see them as ever evolving. In fact we should all take a page out of Google’s book and see everything as a constant work in progress. Every process can always be actively improved or innovated in order to better reach business goals.

Many insurers are thinking about becoming customer focussed as a way to improve relationships with clients, and increase retention rates and profit margins. The industry, which has been focussed mostly on advisors for decades, is currently figuring out what that means and how to do it. One thing is for sure though, this shift is bound to increase the complexity of pricing, something that the current processes and systems can almost certainly not handle.


About the author

Klaas Stijnen is an insurtech founder, specialist financial modeller, business actuary, and consultant with over a decade of experience working with some of the world’s largest insurance brands, including PWC and Deloitte. 

He is currently Managing Director and Founder at Montoux, a company built to solve the challenges he witnessed first hand in insurance product development.