In this edition of the ‘Virtual Summit Shorts’ series, Chrystal Ung summarises key take-outs and Q&A from the insurance-focussed session titled ‘Framework for Determining Marketable Price of Retail Insurance’, presented by Mudit Gupta.
In the most traditional sense, insurance pricing should consider the insurer’s need for profitability, growth, good risk selection, and predictability of financial outcomes. However, as Mudit learned early in his career, the reality is that premiums are not solely based on the work of actuaries, meticulously analysing historical claims data and applying strategic risk loadings.
To arrive at the market premium, there is a large component of price setting that is dependent on customer needs and behaviours. The complexity of these dynamics necessitate judgement and requires actuaries to think beyond traditional value measures.
Mudit asked some questions, which insurers need to address around customer needs. We list a few below and they span across the whole value chain for the customer.
- Are customers having a good experience during sale and policy ownership?
- Are customers receiving appropriate information and advice?
- Are premiums affordable relative to a customer’s disposable income?
- Are customers being treated fairly with respect to how they have been risk rated? With the growing prevalence of big data, is data being used in a fair and ethical way?
- Are claims being resolved in a fair and timely manner?
- Are products providing value for money?
Mudit shared a framework used in the UK that posed several questions aimed to deal with of the idea of fairness:
- Who is harmed by price discrimination? Does it affect wealthier consumers, e.g. time poor and cash rich, or more vulnerable consumers, e.g. low income or old age. Is one more fair than the other?
- How significant is the price discrimination? Does that price discrimination translate to differences in expected profit margins?
- What proportion of customers have been severely harmed or severely benefitted?
- Is the price discrimination transparent and based on behaviours that are easily changed, or is it discriminating based on hidden and intrinsic characteristics?
- Is the product/service essential?
- Does society view the price discrimination as egregious/socially unfair?
With this framework, Mudit walked through some ways through which we can allow for customer needs in insurance pricing:
- We need to develop quantitative and qualitative measures that capture the value provided to customers and incorporate them into the feedback stage of the control cycle. Loss ratios are a good starting point, is there information that better captures customer value? Are there segments recording super-profits? Have there been an increase in premium queries following the latest price change?
- We need prioritise communication of changes in the premium rates to customers, particularly when renewal premiums are significantly higher than their current premiums. A balance between, not overwhelming the customer with detailed technical information and providing transparency is required to promote the customers trust that ensures incentives between insurers and customers are aligned.
- We need to demonstrate caution when dealing with big data, noting the risks to explainability of rates, customer privacy, and exploitation of vulnerable segments.
- We need to be aware and show leadership in communication of the trade-offs being made between profitability vs. affordability, profitability vs. value for money, and risk selection vs. customer experience.
Mudit’s session shone a light on the importance of our role beyond building accurate and reliable models, encouraging us all to give greater weight to the customer stakeholder group. While there can be commercial benefits to reflecting customer needs in pricing, I appreciated the thoughtful reminder to consider the people our products serve.
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