Profitable Price Wars

by David West

Do you know which insurance company sells the lowest-priced car insurance for your neighborhood? How about homeowners insurance? If you do, then you are among the one-third of consumers who are highly sensitive to the pricing of personal lines policies. For these consumers, a difference of as little as $50 is enough to cause them to change insurance companies.

To many people, personal insurance has become a commodity. Consequently, insurance companies have very few ways to differentiate their policies from those offered by their competitors. Insurance coverage is nearly identical from company to company. Insurers differentiate themselves based on a few options such as accident forgiveness, their reputations for service and strength and, most often, price.

Unfortunately for insurers, personal insurance carries tight margins, so price wars only lead to unprofitability. Nevertheless, there are insurers who provide price quotes via the Internet for not only their own products, but for their competitors’ products as well. For these insurers, the only bad risk is an under-priced risk. They have succeeded in creating rate structures that they believe are significantly more accurate than their competitor’s rate structures. Because of this accuracy, they know that the lower rates charged by a competitor will guarantee a loss on the overall performance of that rating segment. Not only do these companies gain a competitive advantage through their service, but in the event that their price is higher, they send potentially unprofitable business to the competition. Ultimately, this will force the competitor to raise prices.

Achieving profits
Insurers achieve profitable price differentiation in two ways. First, because of inevitable inflationary changes to the factors that influence insurers’ costs, timely, more frequent rate revisions enable them to make appropriate adjustments. Insurers who produce rate revisions more frequently are less likely to operate with outdated, inaccurate rates. Timely responses to changing trends ensure that rates never fall behind. This may mean that price increases put an insurer’s rates higher than those of the competition. However, all insurers must focus on charging an accurate price. They cannot make up losses from under-priced risks through sales volume.

The second method of price differentiation is to craft more granular rate structures. The insurer who creates a sub-segment of an existing rate classification first will garner the most profitable portion of that segment. The challenge comes from the identification of innovative pricing characteristics before the competition identifies them.

A lack of data presents a significant obstacle to this second method of price differentiation. To innovate, actuaries often need information about their company’s policyholders that simply is not stored. In many cases, the information was provided on the original application or was available through third party sources, but because it was not used for rating purposes at the time, it was not retained. Knowing what information to retain is crucial.

The SAS® solution
To aid insurers in their quest for more accurate rates, SAS created SAS Ratemaking for Insurance. This solution bundles SAS software, architecture, data management and industry-specific intellectual property into a product focused on enabling insurers to create more accurate rates more rapidly.

As one of 11 components of the SAS Insurance Intelligence Solutions, SAS Ratemaking for Insurance integrates with the Insurance Intelligence Architecture. The architecture provides a logical and physical data model designed to organize insurance data, thereby enabling faster and more effective analysis. This architecture provides a road map for the creation of the detailed data store and supporting analytical base tables. It also includes predefined ETL processes and data management software that significantly reduce implementation time. Most importantly, the data model is highly flexible, allowing the easy addition of key items that enhance an insurer’s competitive position.

SAS Ratemaking for Insurance simplifies the creation of innovative rate structures. By providing access to the most advanced analytic techniques, including generalized linear models and neural networks, users create highly accurate pricing models. The award-winning SAS Enterprise Miner™ interface enables analysts to document and share projects and update existing models by simply rerunning project flows. The interface enables rapid modification to models through simple point-and-click controls.

No ratemaking solution would be complete without loss development analysis, and the SAS Ratemaking for Insurance solution provides a variety of techniques for the creation and analysis of loss development triangles. The solution facilitates the rapid creation of triangles using a wide array of dimensions. The more granular analysis of loss development gives insurers one more way to ensure pricing accuracy.

Rate structures that insurers have used for decades will no longer provide them with the competitive advantage they seek. SAS Ratemaking for Insurance gives insurers the ability to create profitable, more accurate rates in less time – ultimately giving them a competitive advantage.