August 14, 2019
Pricing Right in Life Insurance
The problem with the life insurance pricing process boils down to how intensely manual it is. Excel is great, but it isn't flexible enough.
Life insurance might be the slowest vertical to adopt new technology, but it is not immune to changes that are affecting the industry. The market is changing, demanding insurance that’s easier to purchase, more personalized and tailored in a way it never has been before. A 2018 study by MarketWatch showed over 40% of Americans own no form of life insurance, making competition for this uninsured population fierce.
The life insurers that find a way to evolve in meaningful ways will have an edge over the competition when it comes to customer acquisition and retention. Life insurers might consider adjusting how they engage the customer, such as through digital servicing and customer engagement that goes beyond a simple yearly bill. What’s clear to forward-thinking insurers is how pricing transformation presents a massive opportunity to stimulate growth in this regard.
How the pricing process affects the sales process and customer experience
Typically, pricing is only considered when a life insurer’s actuarial team is due to run a pricing exercise. The exercise generates a price that suits the insurer’s goals, it goes out to market and pricing is forgotten until the next exercise. However, the consequences to this approach can lead to carriers going to market with sub-optimal rates.
See also: How to Resuscitate Life Insurance
Price’s significance doesn’t diminish between pricing exercises. The market changes constantly, but the average life insurer’s pricing processes aren’t designed to keep up.
How the pricing process exists today, and why it’s not working
The problem with the life insurance pricing process boils down to how intensely manual it is.
The standard pricing process used by most life insurers consists of an actuarial system and good old Excel. The actuarial system works as a projection system, modeling calculations and assumptions to deliver a price that incorporates strategic objectives. Excel works as a Swiss Army knife, incorporating policyholder and competitive data, as well as analyzing the results of the actuarial system.
Life insurers’ actuarial teams run these two systems separately in a manual process, taking one set of goals/constraints set by the insurer and deriving the best price based on that specific setting. This is where the problem occurs.
While this current system does work and has done so for a long time, it is sub-optimal, especially in a market as competitive as today’s.
Remember that one set of goals/constraints that helps determine the sweet spot, the ideal price, for the market today? A life insurer can see exactly what price it needs at that specific moment, but no further. The system pinpoints one spot on a graph but can’t draw the trajectory it’s on.
This trajectory has a name: the efficient frontier. Whenever an insurer creates a price with the traditional process, it’s typically landing below the efficient frontier right off the bat, although the insurer might not necessarily realize this. The inability to see beyond the specific price this process creates also means an insurer’s ability to adjust based on strategic objectives may be limited.
With the right pricing tool, a life insurer has the opportunity to see its entire range of possible prices based on the company’s financial goals, each slightly different depending on the constraints/goals. It’s the great “what if” scenario, except it’s every “what if” scenario all at once, clearly laid out for an insurer to analyze. The efficient frontier is the optimal pricing range depending on an insurer’s objectives; without it, it’s impossible to see the forest for the trees.
How pricing transformation benefits a life insurer
There isn’t a real downside. While some transformations or implementations can take years and millions to achieve, investing in the right pricing software, philosophy and process generates a significant ROI for insurers and quickly affects market position.
A flexible system that shows a variety of pricing strategies an insurer can take to maximize sales, margin or competitive position constantly enables experimentation to ensure pricing reflects the market, competitor pricing and consumer attitudes. Such a system even allows for the evaluation of an insurer’s strategic goals, and whether those are optimized for success in the market.
All this can be achieved with minimal resources with the right pricing tool. Not only does it automate an intensely manual process, but it delivers more insights and flexibility and frees your actuarial team to focus on adding further value, with complex product pricing or long-term pricing strategy.
The efficient frontier is the difference between having the perfect price 70% of the time and 100% of the time. Why not hit the bull’s eye every time your product goes to market?