Harnessing the Power of Data-driven Pricing Tools

By Tom Chamberlain, VP Customer and Consulting at hyperexponential

The insurance industry is facing an ever-changing landscape with rising competition and new entrants in the market. As a result, insurers need to reevaluate their pricing strategies to stay competitive. However, not all insurers are prioritising pricing technology that could set them apart from their contemporaries. Excel still prevails in an industry that has been historically slow to change and adopt new technologies, meaning a significant number of insurers are still pricing 21st-century risk with 20th-century tools.

Next generation pricing tools can help insurers take advantage of a hard market and emerging risks.These technologies leverage data to enable insurers to quickly and efficiently adapt to changes in the market, optimise their product offerings for different customer segments,prioritise the best risks, and evaluate the impacts of pricing adjustments. By utilising these technologies, insurers can ensure they stay ahead of the competition and maximise their returns.

A growing desire for change

Despite being notoriously hesitant to innovate, there is a growing desire for pricing transformation within the insurance industry. Recent data shows over 68% of actuaries surveyed at leading actuarial conference GIRO 2022 cited pricing as a key priority for their transformation agenda. However, despite this acknowledgement, many insurers are still yet to make the shift to leveraging new technologies. In fact, 25% of actuaries reported that their companies were either not investing at all in pricing technology, or not investing enough. This reluctance is leaving insurers at risk of getting left behind. As digital transformations have shown in other industries, leveraging data and investing in new technologies can unlock billions in profitability and create market leaders across many industries. Likewise, insurance should actively embrace new technologies to increase efficiency, better meet customer needs, and stay ahead of the competition.

How pricing technology can transform insurer fortunes

Profitability: Investing in next generation pricing technology will enable insurers to reduce their loss ratio and improve profitability more than reducing expenses alone. Pricing technology enables insurers to price risks better and with increased accuracy. By leveraging data to identify patterns, trends and hotspots, insurers can quickly assess the impacts of pricing adjustments and adapt to changes in the market more efficiently. This is reflected by industry sentiment, with a poll of the GIRO 2022 audience showing 63% of actuaries predicted that investing in better models and data could result in more than a 2% points improvement in loss ratio. A post-COVID-19 McKinsey article on insurance pricing corroborates this, stating that full-scale pricing transformation has been seen to drive impressive results of 3 – 6% points improvement in combined ratio.

Regulatory compliance: Underwriting authorities and syndicate markets are establishing more requirements and principles for conducting business in the specialty insurance market. Cutting-edge syndicates can get ahead of the market by implementing better infrastructure and planning for the future to avoid scrambling in the face of changing regulations. Next generation pricing software can enable insurers to drive better outcomes and stay compliant with changing regulations and guidance, allowing them to move forward with confidence.

Winning the talent war: Investing in next-gen pricing tools can be a key factor for insurers in winning the talent war and staying competitive in today’s market.The talent crisis is particularly acute for specialty insurers due to high demand and short supply of pricing actuaries and underwriters, combined with disruptions driven by digital adoption. Without an effective pricing platform, actuaries and underwriters are spending a significant amount of time on tasks such as gathering and manually keying customer data, rather than on their core actuarial and underwriting responsibilities. To win in the talent war, insurers must invest in next-generation pricing tools, processes, and strategies to optimise the underwriting workflow and create better, more efficient working conditions for employees and prospects.

Act now – or get left behind

Now more than ever, it is essential for insurers to prioritise pricing transformation as a critical digital transformation initiative. As the market evolves, insurers leveraging technology to analyse data and select the best risks will dominate the market. As pointed out in McKinsey’s Insurance 2030 – The impact of AI on the future of insurance, leveraging data and applying machine learning will enable insurers to enhance decision-making, drive greater productivity and ultimately write more profitable business.