As (re)insurers are faced with ever-evolving challenges and new forms of volatility, it’s more important than ever to have robust pricing systems and strategies in place. An inadequate or underdeveloped pricing system can not only impact insurers’ view of risk, but consequently prevent them from making the right decisions at the right time — which can ultimately hinder their long-term profitability and resiliency.
Navigating Volatility and Optimal Pricing
This is where the concept of “optimal pricing” comes into play. Ultimately, optimal pricing is about bringing out the key issues in pricing, and helping underwriters and managers make the right decisions on risk acceptance.
As seen during this year’s 1/1 and 4/1 renewals, the insurance industry has been faced by unexpected, and in some cases unprecedented, challenges such as COVID-19, widespread political instability and inflation.
With these sudden, significant changes, it’s crucial for insurers to have a keener view on optimal price, ensuring that they’re not taking on more risk than expected, or that they are not undercharging for that risk.
It’s here that being able to capture and process large quantities of data will be vital; the more data is (accurately) captured by the pricing system, the better underwriters are able to understand and manage their portfolios, which becomes particularly important in a volatile market.
The Impact of Technology
Pricing technology ranges widely in terms of both cost and complexity, from Excel spreadsheets to bespoke enterprise solutions.
As with any piece of technology, bigger does not necessarily mean better; however, insurers must regularly assess whether the pricing tools they have in place are truly helping them achieve optimal pricing and supporting their overall business’ needs.
The ability to react quickly to a changing environment is one aspect of pricing that shouldn’t be neglected, and that the right piece of pricing technology can significantly improve. Tools that are built in-house may be difficult to keep up to date, particularly when conditions change rapidly and unexpectedly.
In some cases, underwriters at the same organization may be working with very different pricing capabilities, meaning that not everyone will be looking at things on the same basis. On the other hand, a hardened system allows teams to not only adapt more quickly, but also consistently and at the same time to changing macroeconomic factors.
What is the Right Solution?
When it comes to pricing, there is no such thing as a “perfect solution” – every insurer has their unique set of specifications, so what may work for one may be disastrous for another. However, it’s important for insurers to understand where their pricing-related weaknesses lie–such as key man risk, data collection, speed–and adjust their pricing toolkit accordingly.
Whether it’s off-the-shelf software, or a custom-built system, the right pricing solution is one that takes into account an organization’s strengths and limitations, empowering underwriters rather than creating more difficulties.
While the technology aspect is important, it’s even more vital for insurers to get their pricing process right. While even the best pricing solution can fail without a robust process in place, a good pricing process can help avoid the pitfalls of less-than-ideal tools.
Organizations must consistently assess and evaluate their processes to ensure that they are still appropriate, both for their teams and for external challenges they may be facing.
Ultimately, both the process and the technology must work together to strengthen underwriting teams and move organizations closer to optimal pricing.
At Aon, we know how crucial it is that pricing solutions be tailored to our clients’ needs in order to help them navigate today’s challenging insurance landscape.
We developed Aon’s Pricing Platform with the aim of empowering inhouse teams through rich data capture, powerful customizability, and integration with existing workflows, helping them make quicker and better decisions.
If you’d like to learn more about Aon’s Pricing Platform, get in touch with James Gillespie at [email protected].