Is pricing agility challenging mutual values?
A revolution in data management is driving change in the way for-profit insurers are pricing risk, throwing down a challenge to the values of the mutual sector. Is now the time for Mutuals to revisit their own approach to pricing?
A revolution in for-profit pricing
An ever accelerating ability to cheaply store and manage electronic data is driving a revolution in the way for-profit insurers are thinking about pricing. Many insurers’ pricing methods have developed from simple claims models to complex peril based models overlaid with highly refined customer profiles. As competition continues to ramp up in markets far and wide, for-profit insurers are looking to gain volume while remaining profitable, leading to a substantial upturn in the level of pricing investment – in terms of both budgets and talent.
With both insurers and intermediaries using technology to gain more up-to-the-minute information on sales, attention is turning to pricing agility. While more regulated markets may have a lag of many months or years between the developments of the pricing structure to delivery, insurers operating in less regulated and more dynamic markets are realising the benefits that can be achieved by being able to adjust prices within days or hours.
A different view from the Mutual sector
Mutual Insurers have long held a different view of pricing to the for-profit market, considering price as a method of maintaining fairness between members, consistent with providing cover for the risk pool at the lowest sustainable price over time. In most fields, Mutual Insurers have faced periodic attempts to undercut their pricing by “look-alikes” claiming to offer comparable product. The very success of Mutuals has served as a magnet that attracts price-driven attention from for-profit competition at times in the insurance cycle if not continually. It is ironic that in some cases this comes from the very same insurers that had originally abandoned or neglected to serve the customers they now covet.
Changes in information technology and the more recent revolution in for-profit pricing that it is driving are a harbinger of a more secular change. As for-profit insurers implement more data-led, agile and aggressive pricing, they will increasingly have the ability to “cherry pick” preferred risks by focusing on price, leaving behind those risks more likely to suffer a claim. With no responsibility to consider the profitability and sustainability of a Mutual Insurer’s membership as a whole, this has the potential to unbalance the pool of risks and may even challenge the long-term future of the Mutual.
What can Mutuals do?
Whilst helping stakeholders understand the benefits of mutuality that extend well beyond pricing is always valuable, this is unlikely to be enough to sustain this sort of attack. This is therefore an appropriate moment for Mutual Insurers to step back and consider whether their historical pricing philosophy and processes remain fit for purpose and, especially in the case of those that have operated unitary pricing models, to consider a more nuanced approach.
There is much to be said for implementing an infrastructure supporting a more agile pricing environment. A robust framework to evaluate current rate performance, analyse the impact of any proposed changes and provide detailed reporting to support pricing reviews is the backbone to such an environment. The ability to quickly deploy rate changes when needed, without excessive involvement from IT professionals, will not only provide a first line of defence against pricing pressures, but should provide efficiency savings as it renders aspects of historic rate deployment processes redundant. Willis Towers Watson is at the forefront of these developments, involved in many projects across the insurance sector aimed at delivering agile pricing, underpinned by marketing leading pricing software Radar and Emblem.
Whilst new technology undoubtedly represents a significant existential threat risk to the Mutual Sector, exploration of new technology and the benefits of mutuality that extend beyond price offer a solution.
Markets in Asia are at different stages in a process of moving away from historical tariff systems. For most agile pricing is simply a must-have. With legacy systems in place, developing a modern pricing architecture is often difficult. Consequently, a number of insurers are undertaking high profile IT projects to completely change their level of pricing sophistication.
. While initially, movements away from historical tariffs may be limited, we expect that leading insurers will choose systems that allow them to stay at the forefront of the market for the next ten
In many states pricing agility is constrained by the regulatory approval process. However, rapid deployment and low-cost development processes are still relevant. The agility within these systems will still allow product leads to move rates from development to production-ready deployments without incurring the cost associated with mirroring changes in a legacy system.
Within Western Europe, rapid and agile pricing is a requirement for business. In the UK many change prices weekly, if not daily. Larger insurance groups are seeking to take the established practices and benefits that they yield and deploy them across other territories in which they operate.
As markets become more competitive, there is an increasing need to supplement traditional underwriter-led pricing with modern pricing techniques. Having an eye on the future and investing in agile systems will be key to controlling future IT spending while keeping prices competitive.