Pricing is a crucial component of the insurance industry. Particularly in today’s volatile landscape, accurate pricing can not only help insurers better understand risk, but also make the right decisions, address new challenges, and seize valuable opportunities.With the advancement of data collection techniques, exponential growth of available data and developments in pricing models, actuaries can now achieve more comprehensive and accurate pricing than ever before. However, this doesn’t mean that the pricing process has become completely error-proof. In fact, it’s more important than ever for insurers to understand where problems can arise and how they can be mitigated.
When it comes to both carriers and reinsurers, one common issue arises in terms of which data is captured by the pricing system. While capturing information on business that is written is fairly straightforward, what’s often lacking from pricing processes is the information on business that may have been looked at, but ultimately not written.
While this data may seem inconsequential, omitting it results in businesses having an incomplete picture of the market. On the other hand, capturing everything - written or not - can give organizations a better understanding of where they stand and what steps they can take to increase the new business that they write.
The right pricing solution will enable all of this additional data capture and analytics.
Key Man Risk
While key man risk is not exclusive to pricing–in fact, it’s something that businesses should be aware of across all their processes–it is absolutely a common issue within pricing teams. Particularly with pricing processes that are more complex and involved, there are many instances where only a single team member fully understands the process from end to end, including how to troubleshoot any potential issues.
Having a single individual owning a process carries a significant risk: When this team member is unavailable or leaves the organization entirely, that knowledge also leaves with them.
Having a well-defined, recorded process can help avoid this issue. If the organization uses a third-party pricing solution, they can also rely on the vendor to provide any additional training or support needed.
The Problem With Spreadsheets
Often, an organization’s pricing process will depend heavily on spreadsheets. And while tools like Excel may certainly have their place in a pricing process, they can also be particularly prone to many pricing-specific issues.
Data capture can already pose a challenge to organizations, even with more advanced pricing software in place– but when pricing actuaries are manually keying data into spreadsheets, the risk of making an error in the data itself increases exponentially.
And if these errors are not immediately identified and corrected, they may result in organizations getting a very different picture compared to the reality.
Having the right pricing tool not only eliminates this, but it also means that less time and manpower is taken up by data entry – a task that could easily be automated, while utilizing underwriters’ skills and expertise for more strategy-focused work.
Limiting the pricing process to Excel can also severely limit insurers’ understanding of their portfolio as a whole, particularly when dealing with markets they may not have much knowledge or experience in. On the other hand, the right pricing tool can provide crucial additional context and data that can help underwriters better understand the market they are writing for and adjust their approach accordingly.
Mitigating Pricing Errors
Of course, there is a natural uncertainty inherent in the pricing of risk. However, this doesn’t excuse erroneous decisions taken during pricing.
A combination of the right process and the right tools can help mitigate many of the pitfalls discussed in this article, while also streamlining the pricing process and freeing up valuable time and resources. There is no one-size-fits all in terms of pricing systems, so it’s essential for organizations to fully assess their pricing needs and choose a system that is tailored to their requirements, whether it’s an in-house build or a third-party solution.
We’ve developed Aon’s Pricing Platform with clients’ needs in mind. With rich data capture and powerful customizability, our platform empowers businesses to make faster, better decisions.
If you’d like to learn more about Aon’s Pricing Platform, get in touch with James Gillespie at [email protected].