Insurers must effectively adapt to new technological, market, and consumer complexities with better, more dynamic pricing if they want to maintain competitive advantage in the insurance industry. Here’s why:
- There is increased price and value transparency. A fast-growing collection of price and feature-comparison websites empowers consumers to compare and contrast hundreds of insurance products by price, value, and benefits. These sites are also educating consumers on how to more effectively match a product choice with their unique needs and willingness to pay, as are insurance brokers.
- Consumers are more informed and sophisticated. As prices have become more transparent, consumers are increasingly open to new propositions based on different variables—such as security, mobility, and different types of coverage—and these propositions require new, dynamic pricing structures.
- Regulations are putting pressure on profitability. New regulations, including Solvency II, require insurers to maintain higher capital levels without decreasing overall returns, and to do that, insurers must either reduce costs or increase pricing.
- New entrants are bringing focused, superior propositions. The insurance industry is diversifying, with e-commerce, automotive OEMs, retailers, and other nontraditional players offering new, innovative business models and products.
- New technology disruptors are enabling new pricing models. Big data, the Internet of Things, and predictive data analysis tools are giving insurance companies an advanced and broad ability to design usage-based and other innovative pricing models; draw data from new, external sources and estimate risk or consumer willingness to pay, buy, or churn more accurately; and more accurately identify—during the underwriting phase—those applicants likely to commit fraud.
Insurers that do not recognize these factors and fail to pursue and adopt new pricing models will end up playing a guessing game, which will further diminish their pricing capabilities. Those insurers will quickly lose competitive edge to rivals that better understand what is driving their clients’ needs and willingness to pay—and as such are able to design more attractive propositions at lower prices or at higher margin at the same prices.
Further, those insurers who continue to rely solely on a traditional actuarial model with a cost-based perspective and a limited set of risk differentiators will eventually end up with a larger pool of relatively riskier and less profitable clients. This will negatively impact profitability and, ultimately, market share.