By using the GLM and the impact analysis it generated, the company was able to gain a pricing advantage of up to 15% when going head-to-head with competitors on popular product packages.
In contrast to a system that required insurers to use unified premium guidelines and price their policies at similar rates, the new regulatory regime in the host country—typical of the deregulation now taking place throughout the region—will give companies significant freedom to differentiate among customers and price their products accordingly. Like most insurers in the region, this P&C company had previously assessed risk with a simple methodology that did not take the interdependency of variables into account, thus limiting the degree of granularity in customer risk profiles.
Using existing policy and vehicle data, BCG input 20-plus variables—including two that the company had never before used: postal code and purchasing power (the latter obtainable from commercially available data sets)—into a generalized linear model (GLM). The GLM (which is simply a method for analyzing the interdependency and impact of multiple variables) was then run to predict risk and cost from the frequency and seriousness of claims associated with individual customers.
The impact analysis showed where there were opportunities to lower premiums for what the model identified as lower-risk customers and to increase them for higher-risk ones. BCG set up a data team to create visualizations of the impact analysis generated by the GLM, to help the actuaries communicate the findings to management effectively.
In addition to developing and implementing the GLM to produce the impact analysis, BCG used the results of the analysis to design new product packages—including policies customizable for individual customers—for the company to test in the market. We used the GLM and competitor data to see whether the company’s pricing is in line with the market. We also worked closely with the data team to embed GLM capabilities in the organization for making future pricing decisions.
With its new pricing model, the company has acquired a true understanding of the risk cost associated with individual customers, agents, and business partners.
By using the GLM and the impact analysis it generated, the company was able to gain a pricing advantage of up to 15% when going head-to-head with competitors on popular product packages.
This insurer also achieved a 3% uplift in gross written premiums from acting on the results of the impact analysis.
