The growing importance of dynamic pricing and rating in insurance

On June 20, 2016, CGI held a roundtable discussion on dynamic rating and pricing in the insurance industry that involved nearly all major Dutch insurers. The starting point of the evening was a presentation from a pricing executive at a large European retail company who shared his company’s journey to dynamic pricing. Pricing is highly developed in the retail sector and often is strategically positioned within an organization directly under the CEO. From this position, pricing can be optimized to maximize sales and margins. This is in contrast to the traditional cost-plus approach to pricing in the insurance industry.

Dynamic pricing

Rather than looking internally at the cost of a product and basing its commercial price on that cost, dynamic pricing involves looking at the retail market to assess what a customer is willing to pay and what the competition is doing. Pricing based on customer value, competitor pricing and any seasonable variables makes it possible to achieve higher sales and margins.

The overall conclusions of the discussion in terms of dynamic pricing were threefold: 1) the insurance industry can learn a lot from the retail sector, 2) Dutch insurers are exploring dynamic pricing but are behind foreign peers, and 3) dynamic pricing is a capability that every insurer should invest in.

Dynamic rating

In addition to dynamic pricing, dynamic rating also was discussed. Rating is about determining the cost of an insurance policy based on the underlying risk. A few years ago, the actuarial model used to assess risk was adapted once every few years. Today, it is updated at least annually and sometimes even more frequently. It is now much easier to use external data sources to improve the actuarial model. Sensoring and Internet of Things, for example, provide significant insight about an insured object. In addition, modern actuarial science provides a better understanding of the risks based on data. As a result, modern actuarial models are becoming more predictive, rather than after-the-fact.

Execution of dynamic models

The roundtable discussion also focused on the challenges of legacy environments in moving to dynamic pricing and rating. Given that most insurers still have a lot of legacy infrastructure, dynamic pricing and rating, while still attractive, would be difficult to implement. In many of today’s environments, it often takes months before an actuarial model adjustment can be made using current IT systems. To effectively implement dynamic models, the current IT landscape needs to be reshaped.

It was an inspiring evening with many strategic ideas exchanged. The discussion provided valuable insight into the importance and challenges of dynamic pricing and rating. Leading insurers are exploring and investing in each, and to keep up, others need to act now. CGI is helping to lead the discussion and transition, and we invite you to contact us to learn more. Feel free to reach out to me directly, or contact info@cgi.com. We would welcome a one-on-one discussion with your organization.