Insurance Pricing on the Edge

Insurance companies have long operated in stable economic conditions and learnt how to deal with pricing cycles that occur due to monetary impacts, sometimes in combination with large loss events. They could rely on basically stable statistics. The companies that could use the most precise and appropriate statistics were able to offer the best pricing. But this has changed. The recurrence of inflation and the elevated exposure to natural catastrophes force insurance companies to change their approach to pricing. The growing influence of price comparison websites contributes to the acceleration of change in insurance markets. This has been demonstrated by the rollercoaster-like developments in motor insurance in the UK. After price increases of more than 40% in 2024 the market currently witnesses a steep decline. Price comparison websites demand high technological capabilities of insurers, low delays and ultra-high adaptability.

We see insurers in many markets struggling to cope with the new challenges of pricing, facing problems in deployment time for new pricing models and slow adaptation to market changes. Both problems may lead to serious consequences. Deployment of new rating models should be quick and easy, driven by the pricing team and not hampered by burdensome IT administration. 60–70% of insurers are still using Excel for pricing-related tasks. Excel is a good solution and can be helpful in data analysis, but the insurance business should not rely on it for the entire pricing process.

In Excel…

• you cannot cover the whole pricing process
• you cannot run portfolio simulations  with sufficient accuracy
• you cannot test efficiently

Similarly, the support provided by Policy Administration Systems (PAS) in pricing is not sufficient.

In core system technology…

• you cannot deploy quickly and easily
• you cannot deploy advanced pricing strategies
• you cannot have live pricing strategy validation

Pricing engines can help insurers quickly and effectively deal with new risks, while eliminating the potential consequences of inefficient pricing. In several pricing engine implementations, we see the benefits of pricing engines. Better, faster implementations times, fewer pricing errors, a single source of truth, reduced reaction time to market changes are the most outstanding examples in a long list of advantages. According to GIRO 2022, more than 150 industry experts have estimated that the adoption of the pricing engine and its features, can lead to a 2.8% reduction in loss ratios. We often observe that the problem at the beginning of our discussions about pricing engine implementation is the attachment to legacy solutions, such as Excel. How can these objections be overcome?

There is no possibility to have a stable pricing process, while using Excel and similar tools. In such an environment the whole process is distributed across many different sub-sectors, responsible employees can get easily lost as they cannot rely on a single source of truth. A simple and fast implementation process allows for quick benefits. We have seen insurers who have had  to wait even six months to implement the rate changes, because they needed to contact the PAS vendors. With pricing engines at work, actuaries will be able to focus on their genuine skills and work in their respective field. Actuaries have both broad analytical and technical skills. Insurers should make them develop at the right place and avoid time-consuming and difficult-to-maintain portfolio simulation macros. Data is the basis of the rating and pricing process. All quotes, whether they result in the purchase or renewal of a policy, should be stored for further analysis by actuaries. Pricing engine ensures that all quotation data is recorded and stored in the right place.

While deciding on a pricing solution an insurer should consider the following:

• Management features of the model: Oversight mechanisms should meet the expectations of both management and regulators. Moreover, the professionals responsible for creating, refining and implementing models need immediate insight into previous iterations of their work, along with access to other models that may contain relevant components or techniques they can incorporate. Therefore, version control capabilities in the pricing engine are important for pricing team members.

• Model import features: There are situations where actuaries develop the initial models outside the pricing engine. A pricing engine with a modelling system that can seamlessly import and run external models with little or no customisation provides significant efficiency and value.

• Integration and compatibility: Smooth and easy integration between the pricing engine and the policy administration system is a must for insurers. In many situations, we observe that the deciding point in the final decision to implement a new pricing engine is an existing unstable integration that leads to performance issues and results in the loss of potential new customers who wait too long for a quote.

• Reporting and audit: Comprehensive reporting helps to ensure that pricing decisions are both transparent and reasonable in audits. Having an automated reporting and audit process inside the pricing engine can save insurers a lot of time and avoid unpleasant situations.

• AI capabilities: In recent years we have seen more and more AI features being implemented in pricing engines. AI can be a friend to modelling and pricing, helping the insurer to meet their target.

Sollers offers a pricing engine implementation support that covers the entire project by preparing both the product and the new organisational structure, taking care of the PAS integration, testing and data management. In our advisory projects we support setting up the entire IT and business architecture change.

Insurers that postpone pricing changes may face the consequences of poor pricing, which can be divided into two categories: underpricing and overpricing. Underpricing has a direct negative financial impact as claims payouts and operational costs exceed revenues, threatening an insurer's financial stability. Overpricing, on the other hand, impairs the growth and the overall competitiveness of an insurer. It also has a very negative impact on reputation. Overpriced insurance cover regularly causes uproar in the media, among market watchdogs, regulators and even politicians, as we have seen recently in the US, the UK, and even Denmark.

It can result in negative regulatory measures. This is publicity that an insurer would do well to avoid. Technology, experience, execution: it’s all there.