Is Price Optimization a Dirty Word?
Monique Hesseling | October 07, 2014
There seems to be a misperception about what price optimization really is, largely driven by publicized assumptions that it will only serve the best interests of the company and hurt the consumer. Basically, price optimization boils down to applying analytics to available information in order to develop more quantitative and targeted pricing policies and processes.
Price optimization is used extensively in many industries. The benefits and rewards to both the companies and the customers are plenty, with the customer rewards being highly visible. Through the use of price optimization, retailers are able to present highly personalized and appealing offers to their customers based on past shopping and buying patterns coupled with predictions of customer wants and needs. They are able to keep their best customers informed of sales and special offers that are of real value to them.
The travel industry uses price optimization to manage profitability and, equipped with insights that give them the ability to fine-tune the metrics, they are able to offer very attractive options to travelers. Capacity that would otherwise have gone unused attracts happy customers and often brings them back.
For the insurance industry, it is important to understand that price optimization does not replace risk-based pricing; rather it is the next level of sophistication for risk-based pricing. With price optimization, insurers are able to explore and investigate product options, and then find an optimal balance point among all options and constraints within complicated rating orders and large sets of data. This makes it possible to construct and present more appealing, more targeted product and service offerings. It means that personalized offerings can be shaped to meet personalized needs. The laws of large numbers can be optimized for the individual situation.
Today, price optimization is being used most often by insurers that want to increase the sophistication of their pricing in personal lines, in many cases, those that are trying to innovate and capitalize on the next wave of analytics. The goal is to improve the bottom line and increase market share by using newly available types of analytics, models, tools, and methods. These insurers don't see price optimization as an independent exercise; they view it as a key part of the business's journey to the next level of maturity.
Recognizing that rate changes and the resulting customer reactions have an immediate and significant tie to new business and renewals, and understanding that informed consumers expect offers that meet their personalized requirements, insurers see this as a journey that is essential for profitable growth in personal lines.
While price optimization is most closely associated with personal lines, it is only a matter of time before the principles involved are applied to commercial risk pricing, especially for the smaller- and middle-market cases. As the comfort level increases and experience with the insights and tools matures, price optimization will likely become a significant aspect of the collaboration and negotiation process for mid-market and even large, complex cases.
The business benefits of price optimization are undeniable. Improved insights give insurers greater ability to achieve specific financial objectives for growth and profit. Fortified with intelligence, including a better understanding of customer demand and buying behaviors by segment, business decisions and tradeoffs can be made based on agreed-upon metrics rather than emotion and historical understandings that sometimes have a tendency to morph over the years.
While the benefits are clear, the reality is that price optimization is a complex endeavor. It involves deep analytics, advanced business intelligence, and ready access to complete and accurate data. Many companies have spent and are still spending lots of time and resource building sophisticated models of loss cost, expenses, and customer demand, incorporating competitive position and market data. Price optimization brings them all together, aligning to specific business goals and the regulatory framework, enabling companies to clearly understand the trade-offs between various pricing strategies.
The extent of the use of price optimization in the insurance industry is small in terms of the number of companies that have implemented or are piloting price optimization. It is, however, important to note that price optimization is being adopted by the largest insurance companies—those that have the most market share—so the portion of the business that is presently being impacted is significant. It won’t be long before a large percentage of the premiums being written will be based on rates developed by using advanced analytics capabilities that involve price optimization.
In many insurance companies, there are both real and perceived hurdles that impede progress in price optimization. Project capacity is limited and price optimization does not always make the list of top priority efforts. For some insurers there is an inherent cultural resistance to change, particularly when today's models have been delivering growth. Price optimization is complex; it requires special skills, including deep experience in predictive modeling and advanced analytics. Price optimization involves a transformation of the entire pricing process. But, the insurers that are embracing and implementing price optimization are finding ways to overcome these challenges. In fact, when the executive team, R&D, and product team understand the benefits, it happens.
Obviously, most national insurers have the volume of data that is necessary to get pricing optimization right, but they can also be burdened with an overwhelming amount of data that originates from multiple sources and isn’t always clean and consistent. In contrast, it is not unusual for regional insurers to think they don't have enough data. The reality is that most insurers do have more than enough data to build and use customer demand models. Price optimization will work for more insurers than one might expect. Now is the time to lay the ground work for competing effectively in the long run.
To contact Monique Hesseling for additional information about SMA's research and insights around price optimization in insurance, email her at email@example.com or call 856-470-8905.
- Electronic Chat with Jeroen Morrenhof
- Legacy Systems Are Dead. Really? Don't Count On It.
- Now Accepting Nominations for the 2019 ITA Bridge Awards
- It's time to register for ITA LIVE!
- Registration is Now Open for ITA LIVE 2019!
- What to Expect from a Digital Experience Platform Implementation
- ITA Pro Magazine September Edition is Now Available
- It's National IT Professionals Day
- Save the Date for ITA-LIVE 2019
- OneShield Software and UrbanStat Work Together to Improve Real-Time Analytics and Risk Decision-Making
- ITA LIVE 2019 - SAVE THE DATE!
- Insurance Technology Association Announces New Editor-in-Chief
- August 2018 Edition ITA Pro Magazine is Now Available
- Enterprise Architecture in an Agile World
- Top 10 Tips for Securing Your Mobile Devices and Sensitive Client Data
- Industry Insight: 4 Global Insurance Trends in Digital, Data, Content Services and Security
- Diving Deeper into Prioritizing Your Strategic Digital investments
- Why Content Rules
- How Mass Personalization Will Open the Small Business Benefits Market
- At Year End 2017, Will Your Organization Be Protected from Cyber Risks?
- Do Insurance Bots Dream of Mitigating Risk?
- Conditioned to Respond
- Managing & Mobilizing Insurance Data in a Connected World
- Race to the Finish Line
- New Tools, New Opportunities in Claims
- ITA LIVE: Reaching Insurance Industry Crossroads
- Advice to Insurance IT Leaders: Keep Your Eye on the Ball
- New Date, Venue for ITA LIVE 2017
- Guidewire Makes Major Push to Small and Midtier Market by Acquiring ISCS
- Insurance Disruption is Happening Right Now
- Insurity Adds Strategic Investment Partner, General Atlantic
- Beyond Transformation: The Convergence of Finance, Risk, and Actuarial Functions
- The Rapid Evolution of Consumer Protection Regulation
- Talent Hunt: Finding, Attracting, Retaining Top People
- Insurers Flexing Their Distribution Models
- Technology Driving Disruption in Insurance
- Fear of ‘Next Bubble’ Challenges Life, Annuity Carriers
- Technology Allows Commercial Lines Insurers to Stand Out
- Single Sign-on Viewed as Biggest Tech Challenge for Agencies
- ISCS Observes 20th Anniversary; Scurto Predicts Major Changes Ahead
- Policyholders and Their First Impressions
- Progressive Making Progress on the UBI Front
- High and Dry: Insurers Search for Disaster Recovery Plans
- Insurers Sign The (Un)Dotted Line
- Reflections of a Retired Insurance CIO
- Mobile Device Management Just One Answer to BYOD Issue
- Lessons from GEICO and Progressive on Winning the Critical Buying Stage
- You Are a Target for a Cyber Attack
- Web-based Systems are the Next Evolution in Claims Technology
- Gaining a “Wow” Experience from Web Users
- Time to Shift from Business/IT Alignment to Business/IT Alliance
- Healthcare Insurers Changing to Consumer Model
- Organization is the Key for Selecting Software Vendors
- Analysts Expound on the Needs of the Mid-tier Insurance Market
- Finding the Cure for Obamacare’s Website
- New Software Solutions Benefit Insurers on the Inside and Outside
- Products, Market Impede Investment in Systems for Life Insurers
- Combatting Cyber Threats: Predict, Prevent, Persist
- The Future of Telematics Heads Beyond Insurance
- The Shame in Cyber Security Lapses
- Building Policy Administration Systems for the Future
- Insurers Look Into The Eyes of Their Policyholders
- It’s a New Dawn for the ITA
INSURANCE IT NEWS
- Crawford Technologies Announces Release of ePresentment Gateway for Box
- New Study of More than 100 Insurers Finds Success Among Early Adopters of Emerging Tech, Says Novarica
- Anshuman Purohit Assumes Senior Technology Leadership Role at CastleBay Companies
- AVYST Welcomes Kitty Ambers as Chief Growth Officer
- Agero Strengthens Executive Team with Bill Gerraughty as Chief Financial Officer
- Electronic Chat with Jeroen Morrenhof
- 2019 Global Insurance Accelerator Cohort Reflects Evolution of InsurTech
- Nearly 50% of US Insurers Are Enhancing Security Capabilities Across the Board, Says Novarica
The Email Chat is a regular feature of the ITA Pro magazine and website. We send a series of questions to an insurance IT leader in search of thought-provoking responses on important issues facing the insurance industry.
ITA LIVE 2019
The tide is up! It's time to register for ITA LIVE 2019, our annual educational and networking conference! Our theme is "The InsurTech Revolution: Cutting Through the Hype." and we'll be bringing in a torrent of industry thought leaders, amazing insight and wonderful perspectives on the world of insurtech and its impact on the insurance landscape.
ITA LIVE 2019 will present real-life examples of true startup technologies that are helping insurers gain real advantage -- and a competitive edge -- in the marketplace. We’ll highlight the more successful InsurTech partnerships, while offering case studies that demonstrate exciting innovation and cutting-edge techniques impacting all aspects of the insurance ecosystem.
Ride the wave to LIVE 2019. Sign up today! We look forward to seeing you in May, 2019!
BLOGS AND COLUMNS
You have surely heard it said that small businesses are the growth engine for America. Today, the phrase has a special ring to it for benefits... READ MORE
With stagnant growth and lingering low interest rates, the life insurance industry faces a challenging future... READ MORE
Finding insurance carriers willing to write commercial lines risks has always been a challenge for producers... READ MORE
As Guidewire Software prepares for the start of Connections, its 11th annual user conference that begins on Nov. 2, Brian Desmond, chief marketing... READ MORE