Pricing Methodology Series 1 - Sophisticated Pricing Builds Competitive Products

Authored by Jihyun Kim, Global Sales Executive RNA Analytics

Sophisticated Pricing Builds Competitive Products

If an insurance company were compared to a car, insurance-product pricing would be its engine — for the driving force behind an insurer’s growth originates from its products. Yet these vitally important pricing functions appear to be going through hard times of late. The changes in the accounting and capital regimes that took full effect three years ago (the introduction of IFRS 17 and K-ICS) point in a desirable direction, encouraging insurers to make decisions that account for profitability and capital management. But their sensitivity to the assumption levels underlying financial metrics, together with the substantial volatility that comes with movements in market indicators, has a chilling effect on pricing. At the same time, the sales environment is far from easy.

Market saturation of demand and a sales landscape dominated by distribution channels place enormous pressure on securing product profitability and managing risk. Nevertheless, despite this doubly challenging environment, the insurer’s engine must find product-development opportunities that will drive profitable growth. It must neither price at a loss simply to promote sales, nor reflexively avoid developing products with genuine sales potential merely because profitability is hard to secure.

So how should insurers break through? The answer lies in advancing pricing methodologies and raising the level of analysis. In an industry where opportunities are currently limited, the competitiveness of a pricing function that uses sophisticated analysis to find whatever narrow openings exist will make the difference — driving the company’s revenue growth and an improved financial position through successful product development.

In short, advancing pricing is not merely an intellectual pastime for actuaries; it becomes a core lever for value creation at the insurer. To that end, across the three follow-up articles to come, I propose the following three methodologies that will drive pricing to victory:

1] Shareholder-perspective pricing

2] Nested Scenario modeling

3] Enterprise-perspective pricing

Today’s fierce insurance environment demands an equally fierce and proactive strategic response in pricing. A capable pricing function will lead product strategy to victory. A true contest of pricing capability — one that will separate the winners from the eliminated in the competition of product development — is about to unfold.