Price optimisation no longer risky business for insurers

Improved cash resources and technology have combined to create a safer environment for South African insurers to use price optimisation techniques to maximise profit with reduced risk, says Rhys Collins, Financial Services Manager (Insurance), Computer Sciences Corporation`s Financial Services Group`s operations in South Africa.

In recent years, South Africa`s insurance industry has reported increasing profits and comfortable cash flows. This, says Collins, has created space for insurers to become innovative in developing ways to use technology to gain insight into client needs and choices.

"In less-competitive times many insurers were comfortably assured that their smart investment of premium income plus market savvy would earn sufficient dividends and interest to cover their costs and make respectable profits.

"The investment market - and shareholders` oversight - has become much tougher in the past two to three years, and insurers need to demonstrate that they can work smarter and increase profitability," says Collins.

Price optimisation and dynamic pricing - techniques that previously were too risky to implement widely - these are now viable for insurers to use to personalise their clients` cover. In turn this gives insurers a competitive edge to gain market share. European insurers have used these techniques to advantage for some time.

Price optimisation uses the insurers` and brokers` knowledge of the customer base to help predict likely behaviour in a given situation. This helps create price-elasticity curves on customer segments which can then be used in tandem with the company`s strategy to optimise the price for each customer.

It is a decision-support tool that gives insurers the confidence to be creative. It underscores the realisation that not all customers behave in the same way and that price elasticity curves are not linear functions, equal in all segments, in all situations and points-of-contact.

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These imperfections create opportunities for significant extra profit to insurers compared to the traditional actuarial rating approach. From a profit-generating point of view, the three main areas of imperfection arise because:

* Market prices do not always represent the correct underlying risks;
* Customers do not always behave in a price-rational way; and
* Customer behaviour differs between various points of contact.

Insurers can make the most of these opportunities by using dynamic pricing and price-optimisation techniques.

Collins says that price optimisation "can be hooked into all quotation processes on top of an existing solution. It receives the calculated risk-based price from the existing process and returns, in real-time, an optimised alternative price to the same process."

Dynamic pricing methodologies should also include an automatic recalibration function. The latest conversion rate information is analysed, market changes are identified and prices are automatically kept up to date. The automatic recalibration function is essential to the continued success of price optimisation and the delivery of the company`s customer strategy.

To support South African insurers` strategies to exploit the new tools available for dynamic pricing and price optimisation, CSC`s operation in South Africa has teamed up with Contemi which has, through its PriceBuilder.Net software, established its reputation with leading insurers in Europe.

Some of them have, through using this software, boosted profits by between 1.5% and 3.5% of gross written premium. This additional profit is in excess of that allowed for in the insurer`s risk premium. The tool is also used, in some cases, to maximise customer retention with great effect in a soft market.

In markets where competitor prices, distribution power and marketing campaigns create a dynamic marketplace, consistent success over time rests on the ability to quickly and correctly change prices to remain competitive.