© 2009 Towers Perrin © 2011 Towers Watson. All rights reserved. 25-26 May 2011 Product and Pricing...

© 2009 Towers Perrin© 2011 Towers Watson. All rights reserved.

25-26 May 2011

Product and Pricing Innovation in a competitive MarketThe 3rd international Insurance Conference, Insurance Practitioners Association

Reproduction in whole or part of this material is strictly prohibited. They should not be relied on as a substitute for specific advice. Therefore, no responsibility for loss occasioned to any person as a result of acting or refraining from acting on the contents of or information contained in these notes can be accepted by Towers Watson.

© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.comPresentation6

2

Agenda

Pricing strategies

Product Innovation: the insurance telematic example

Conclusions


3

Competitive Landscape — Personal Auto

Rating Sophistication

Performance

Where is your company now? Where would you like to be in the future?

Source: Towers Watson, A.M. Best.

Tariff personalisation leads to higher profitability: an example for the US market. . .

AB

C

D

E

F

G

H

I


4

. . .enabling companies to understand which costumers create and destroy value. . .

Cumulative Value Expressed as

Percent of Total Portfolio Value

Percentage of Customers (Ranked from Highest to Lowest Value)

Roughly 15%of customers

contribute 100% of value

The worst 5% of customers destroy

40% of value

0%

20

40

60

80

100

120

140

160

180

200%

0% 20 40 60 80 100%

40% of customers contribute 180% of value

What if you could predict which policyholders will have losses, better than your competitors?

ILLUSTRATIVE


55

. . .a strategy that has paid off, Progressive advantage was gained using rating sophistication


6

What does rating sophistication means?

Costing is the traditional approach in personal lines insurance

But costing is only the first step in the pricing process Competitive positioning Market dynamics Constraints given by regulators and

distribution channels Customer Behaviour and lifetime events

Exploiting dynamics to enhance profitability and grow market share through making effective use of information in an integrated approach

Market prices (2)

Co

mp

etit

ion Elasticity of

demand (3)

Market share

ProfitabilityEconomic Cost (1)


7

Better costing will lead to better costumers

Underpriced: Easy to attract/retain, but unprofitable

Overpriced: Profitable, but hard to attract/retain

+ + + + +

COSTING

Impact of Mis-PricingActual Pricing vs. Indicated Rates

Percent of Business

Percent Departure from Indicated Rate

-25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25%

Company A (“sophisticated pricing”)

Company B(“traditional pricing”)


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. . .but costing is an inner focused exercise; you need to understand market dynamics and . . .

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 –49

50 –64

65 –69

70 –74

75 –79

80+0%

5%

10%

15%

20%

25%

30%

35%

Exposure distribution

Premium relative to market average

“Market average” rate factor

Rate Competitiveness by Age of DriverRelative to

MarketVehicle Distribution

MARKET PRICE

ILLUSTRATIVE


9

. . .integrate Costing, Market and Elasticity into a Price Optimization Approach….

Price

De

ma

nd

d

Competitor Prices

0

0 Profit maximizing pricePrice

Ex

pe

cte

d P

rofi

tPrice

Pro

fit

pe

r c

us

tom

er

Claims plus other costs

Profit/Cost Models

Elasticity Models

Price Optimization Models

X

PRICE OPTIMIZATION


10

An example of an innovative rating variable: Credit Scoring

Correlation between Credit Score e Loss Ratio in three of the main US companies

Fonte: Conning Survey, Towers Watson

9 out of 10 US major companies use this variable to discriminate the risk


11

Agenda

Pricing strategies

Product Innovation: the insurance telematic example

Conclusions


1212

Steps to complete solution

Define Goals

Legal & Regulatory

Technology

Marketing Plan

Collect & Analyze

Data

Use Results


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Telematics can discriminate risk 5 times better, a competitive advantage largely yet to be gained

Enabling Technologies

Better address significant market

segments

Decreasing cost of technology

Better technical profiling of

clients


14

As well as a unique opportunity to change the commodity perception of Motor Insurance into service

Insurers’ offering substantially undifferentiated

No major change in the market, from customer perspective, over last years (except for new distribution models such as Direct Companies and Aggregators)

Customer’s choice totally based on: Price

Relationship with the agent/broker


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. . .considering that customers live mobility in an extremely diverse way (when, where, how). . .

Frequency of use

Reasons for use

Mileage

Driving behaviour (day of week, time of day, speeding, hard braking and cornering,…)

Type of road

. . .


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. . .that technology is able to capture. . .

By “measuring” when-where-how-how much clients drive, technology can enable insurers to gain competitive advantage through: More effective risk selection and pricing

capabilities

Definition of a tailored offer by customer segments

Delivery of value-added services to clients

PAYD product will also have an effect on distribution, elasticity of demand

The key to success will be managing and analysing information, process and keeping up with the rapid change into technology


17

Insurers Enhance pricing accuracy

Attract favourable risks

Fight fraudulent claims

Costumers Reduce premiums

Demonstrate safe

Value-added services

And society Reduce accident response time

Establish fault to improve equity in settling claims

Reduce driving, pollution, traffic congestion and energy consumption

It is a win / win situation giving benefits to all players


18

Usage-Based Auto Insurance (UBI)

South AfricaHollardMiWay

Nedbank

AustraliaReal Insurance

JapanAIOI

CanadaAVIVA

AllstateAm. FamilyCSAAEsuranceGMACLiberty Mutual

MileMeterNationwidePlymouth

RockProgressiveThe HartfordTravelersState FarmSoCal AAAUnigard

USARoyal & Sun Coverbox Insure the Box AXAPolis DirectMAPFRE AVIVA WGV UniquaAllianz

Lloyd AdriaticAryehReale MutuaSaraUnipolGeneraliAryeh

Europe


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Evolution of Insurance Telematics market (1/5)Evolution path

Market share of players adopting the solution In Italy

“Pure discount” product

~70%

“Pay as you drive”

~25%

Value-added services for

clients

~20%

Pricing based on “driving

behavior and style”

0%

Insurance Telematics evolution


20

Telematics may partially, or fully, replace some other rating variables

Telematics directly measures driving behavior

Historically, insurers have used less direct factors to measure driving behavior, e.g.: Age Gender Marital status Credit

Statistically, the strongest rating plans include telematics data and traditional rating factors


21

Profitability structure for a Pay As You Drive productILLUSTRATIVE

Mileage

“Pure” technical ta

riffFloor

Top

Profit

Loss (antiselection)

“Pure” technical ta

riff

Tariff “applied”

Tariff “applied”

X % of portfolio (1-X) % of portfolio


22

Example of “Pay As You Drive” premium components

Floor

Including box rental fee

Initial payment according to

declared mileage

Complement based on actual

mileage

Total premium year 1

year 1 year 2

Floor Initial payment according to

declared mileage (or effective in

year 1)

Complement based on actual

mileage

Total premium year 2

Renewal discount

gathered in year 1

Discount gathered according to driving

patterns (β)

UW Term Renewal Term

α * Km actual

α * Km actual

Discount gathered according to driving

patterns (β)

ILLUSTRATIVE


23

Multivariate analysis: urban mileage percentage

Urban mileage percentage

Low Medium High

Exposure (based on mileage)

Pure premium

EXAMPLE

-50% / - 60%


24

Multivariate analysis: average trip mileage

Average trip mileage

<=3 >3 <=4 >4 <=5 >5 <=6 >6 <=7 >7 <=8 >8 <=9 >9 <=10 >10 <=11.5>11.5 <=13>13 <=14.5>14.5 <=17 >17 <=20 >20

Exposure (based on mileage)

Pure premium

EXAMPLE

+15 / + 20%


25

Conclusions

Personalisation and differentiation are key success factors for profitability in the insurance market

Telelematics represent an effective and efficient (as technology costs are decreasing ) way to personalise and differentiate

No major insurer can afford to stay out of Insurance Telematics in the short-mid term

Implementation and managing the change are key to success

FIRST MOVERS ADVANTAGE WILL BE SUBSTANTIAL


26

Alessandro SantoniSales and Practice Leader PC [email protected]

Background

Alessandro Santoni has spent over 15 years with Towers Watson, in 1997 he moved to London to work with the international team of Towers Watson, in July of 2000 he returned to Italy to continue his work in Rome and became principal in 2007.

His main areas of expertise include the review of claims reserves for insurance and reinsurance companies and setting of rates for personal lines. He has worked with several companies in Italy, Europe and the Middle East

Alessandro is signing actuary for Lloyds Syndicates and Appointed Actuary for Italian companies. He is also EMEA initiative leader for Reserving.

Relevant Experience/Specialisation

Alessandro has considerable expertise in the following areas:

Personal lines, reinsurance, London market and Lloyd’s syndicates reserving.

Customer segmentation.

Competitive pricing strategy.

Reinsurance pricing.

Mergers and acquisitions.

DFA analysis

Market entry studies.

Role at Towers Watson

Alessandro is Sales and Practice Leader PC for Italy.

Education and Credentials

Mr Santoni holds a degree in statistics and actuarial science from “La Sapienza” University in Rome.

Alessandro is co-author of a study on asbestos risk in Europe presented at Astin in 2000 and co-author of a study on personal line pricing presented at Astin in 2007, for this article he won the James Anderson Award. He has also published other articles in specialized journals in particular on Motor TPL , Pricing and reinsurance markets.

Mr Santoni is a fellow of the Italian Order of Actuaries and a fellow of the English Institute of Actuaries.

© 2009 Towers Perrin © 2011 Towers Watson. All rights reserved. 25-26 May 2011 Product and Pricing...

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Transcript of © 2009 Towers Perrin © 2011 Towers Watson. All rights reserved. 25-26 May 2011 Product and Pricing...