How insurers can adapt their pricing to high inflation

Blog -- 03 March 2023

Author: Rich Smith, Chief Product Officer

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Right data, right time, right price

As the cost of goods, materials, and services increase, an insurer’s ability to charge the right price at the right time is critical to protect their balance sheets against escalating claims, seize competitive opportunities, provide appropriate levels of cover for insureds, and preserve valuable relationships. 

McKinsey & Company outlined five ways companies can ‘ADAPT’ to protect margins in a high inflation environment. All are highly applicable to insurers and highlight the critical role of data and analytics in enabling good decision-making and agile responses.

McKinsey’s ADAPT framework can be summarised as follows: 

  • Adjust discounting and promotions, and maximise non-pricing levers (managing pricing proactively with a focus on total customer and product profitability rather than just cost changes); 
  • Develop the art and science of price change (tailoring price changes to the individual customer rather than eroding trust through insensitive broad changes); 
  • Accelerate decision making tenfold (acting quickly and repeatedly based on market reactions); 
  • Plan options beyond pricing to reduce costs (adjusting product design in response to elevated servicing costs); 
  • Track execution relentlessly (capturing value through performance management data and insights). 

The value of real-time data

From a technical perspective, accurate risk pricing is clearly critical. In a period of rapid cost inflation this calls for variables like materials and rebuild values to be fed directly into pricing models in as close to real-time as possible. Relying on snapshots of risk valuations and exposures from brokers and claims teams, exposes the insurer to information that becomes unfit for purpose very quickly in a fast-moving environment. 

As well as ensuring business is written at the right price, protecting clients from underinsurance is also key as this can be a serious problem in a high inflation environment. Inflation provisions (whereby insurers add specific clauses designed to protect the policy holder against inflation within the policy period) can help protect the customer from uncertainty whilst also adding premium to the book. However, there is no substitute for getting the price right in the first place. 

Monitoring performance in real-time is also key. There is nothing worse than insisting on a rate increase for longer than you have to as this could result in losing great business for no reason. Insurers therefore have to capture live performance management information and feed this back into the pricing workflow, ensuring they can track the progress of any price changes as they hit the market, and respond accordingly.

Optimised decision-making

In a hard market, there will inevitably be rate increase targets which have to be met, however, the application of these increases can and should vary based on risk appetite. As an underwriter, you have to be willing to lose business you can’t write at the right price, whilst ensuring you remain flexible enough to concede on a price if the wider business strategy or client relationship justifies it. 

The right data and analytics capabilities enable insurers to tailor pricing to individual risks, smartly deploy rate increases on the accounts that need them most, and avoid them where they might do more harm than good - such as in an otherwise strongly performing client portfolio, for example. You win some and lose some in underwriting, but data and analytics combined with human judgement enable you to play this to your advantage.

Maintaining relationships

Another key consideration in an inflationary environment is relationship management. No-one likes nasty surprises, so keeping brokers and clients informed of what price increases could be coming is important to maintaining healthy relationships. It also increases the likelihood they will accept the negotiated rate. To get ahead of the conversation you need to know your target price, informed by good data and intelligent analysis, as well as have a deep understanding of the individual risk. 

This is particularly important when it comes to renewals; knowing the risk before it is presented enables the insurer to have conversations in advance and price the risk more strategically, taking into consideration overall portfolio performance or broker relationships before a decision is made on the rate increase, for example. 

The tools to adapt

So what does an insurer need in place to successfully manage all these moving parts? Firstly, the right data flowing into its decision-making process. Secondly, analytics equipping underwriters with the key metrics and insights they need to make smart decisions. Thirdly, a rating and pricing system that enables this to be managed in one place, equipping underwriters with the insights and agility to respond to today’s complex pricing environment.