Additional Nuggets from the Celent Pricing Optimization Webinar

The recent  pricing optimization webinar with Celent’s senior insurance analyst Nicolas Michellod has generated a great amount of interest among European insurers and others.  Nicolas and Celent have been kind enough to allow us to post here a quick recap of some of the key questions addressed in this webinar.

For a complete coverage of the presentation, a recording of the webinar is now available.

Q: Do you see more of the insurance business going direct across Europe, and if so what do you see as the impact of such a trend on the importance of price optimization?

Nicolas Michellod: I think the adoption of online insurance is just a matter of time in the European markets where it has not really taken off yet.  If you look at Switzerland, for instance, it is one of the countries where the density of access to the Internet is one of the highest, so I think it is just a matter of time before online insurance becomes widely adopted in this country the same way it has been in the Netherlands and UK.

I want to emphasize that the use of price optimization is not limited to online insurance, and there are many companies that use it as a back-office function. But once they adopt online insurance, price optimization becomes a must, so these companies will be forced to invest in real-time price optimization.

In the more competitive markets, price optimization is essentially a must for survival. If we are talking about an online insurance company that wants to quickly capture market share in a less mature market, implementing price optimization would provide a better understanding the market and a clear advantage over the competition.

Q: You are describing price optimization as a revolution in progress.  Can you explain what you mean?

Nicolas Michellod: For decades, insurers have used a cost-centric approach to define insurance product prices.

The question we have here is can insurers do things differently? Are there better ways to do things that will bring more value to the insurance business and also to the clients?

With price optimization, more elements are taken into consideration. We can describe these using the four key steps of price optimization.

The first step is analysis and segmentation. Customer data allows insurers to analyze and identify segments through modeling of customer behavior, claim propensity, and the market environment.

The second step is defining strategies and scenarios that integrate the models to predict volume and prices, identify the best prices, and measure the impact of price changes to find the optimal tradeoff between supply and demand.

Third step is execution, which includes running simulations and comparing the results with the objectives of the scenarios defined.

Finally, and this is a key aspect, is the closed-loop for monitoring and recalibration of the models. Any pricing strategy that is judged to be optimal at some time will sooner or later lose its validity. Based on data collected from the market, new constraints and parameters can be identified to trigger the necessary recalibration.

I think it’s very important to understand that this is a big change from what insurance companies have been doing in the past, which is why we call it a revolution in progress.

Insurers can actually join this revolution in two steps. The first step is implementing price optimization techniques within the back-office systems, while the second steps is a real-time approach that automatically gathers data from the front-end system and optimizing online prices.

Q: How can companies gain competitive advantage by using price optimization?

Nicolas Michellod: I think it is very important for an insurance company to understand the benefits of price optimization.

The first benefit is shorter time to implement new tariffs.  The closed-loop process of testing and price optimization enables new pricing models to be generated within hours.  There is no need to rework the price scheme as long as the parameters influencing the models do not change.

The use of sophisticated techniques to optimize pricing is a second great benefit.  Price optimization leverages sophisticated methods such as strategy models and scenario simulation to improve underwriting results. Using these methods helps insurers refine their pricing techniques and better comprehend the logic behind parameters and factors influencing price calculation.

Thirdly, with price optimization, insurers can make full use of their data.  The insurance industry is well-known for having a broad set of quantitative data, but sometimes fails to use it efficiently.  Price optimization helps insurers maximize the use of data to refine pricing models and strategies.

Finally, price optimization helps capture the market behavior at no additional cost.  Through live field testing, insurers are able to capture useful information about customers’ behavior directly from the market.  Price optimization tools allow insurance companies to obtain free of charge what in the past they had to pay marketing and research agencies to provide.  And I work for a research firm, so I know that

Q: What are some of the key success factors for companies that implement price optimization?

Nicolas Michellod: I think there are key factors for price optimization success in terms of project and staffing.

The first key to success is the team working on the price optimization project within the insurance firm. Price optimization is new to most insurers. It represents an important business enabler, especially during these times of crisis where insurers have to find growth opportunities in a soft and difficult market. I believe it is essential that insurers build a dedicated team working exclusively on this subject. The goal of such a team would be to review how pricing can be improved and how the company could leverage existing technologies to apply more sophisticated pricing models.

The second aspect is mixing multi-functional and multi-skilled resources. Each function has unique background and interests. Having a multi-disciplinary team helps the insurer avoid outcomes that are biased by such considerations.

A third and very important aspect is IT expertise. Some IT vendors specialize in predictive analytics and price optimization. They have acquired the knowledge and expertise to understand all the factors that can make a price optimization program successful. They combine IT and business capabilities that help support not only the insurer’s IT staff but also its business team and specifically the mathematicians and actuaries.

Last but not least is promoting the spirit of innovation. I see the implementation of price optimization as a matter of innovation within the company, because talking about price optimization is re-thinking the whole business. With the emergence of business and IT tools, insurers have been able to refine their analysis and the enumeration of certain risk elements. But the biggest value these tools have brought to the industry is the democratization of risk evaluation principles. We are now in an era where specific teams are built within insurance companies to ask questions that have never been asked before and then build models that include dynamic parameters to improve pricing. That’s why it’s very important to understand that implementing price optimization should be done with a spirit of innovation and with tight cooperation among different types of people within the organization.

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