Every (non Mutual) life insurer knows that after delivering for the customer, it’s vital to deliver to shareholders as well. Being able to consistently demonstrate growth and innovation is at the forefront of life insurers’ promise to their investors, but there’s an important element missing from the conversation: the ‘how.’
Business as usual has worked for the life insurance industry for decades, ensuring slow but typically consistent growth that makes life insurers a solid and safe investment. But if one digs into the average life insurer’s book, it becomes apparent that many of them aren’t sure how to pull key growth levers, or even what levers they can pull in the first place.
Understanding where real, attainable value lies within your inner workings is the first step to being able to tap into this and blow ‘business as usual’ out of the water, along with your shareholders. This understanding also means that you can tell your shareholders that not only have you delivered strong growth, but you know how to replicate the process in a systematic way that ensures continued growth in the future.
Let’s Take a Look at Pricing
The pricing process is the perfect example of where life insurers are unintentionally leaving value on the table. The reason this happens is because while most insurers recognize the direct link between pricing and sales performance, few have found an efficient way to put it into practice.
Pricing has a dramatic effect on a life insurer’s competitive standing, particularly if you know how to manipulate the pricing process to reflect your business objectives. It’s a process where, with the right analytics and tools in place, an insurer can move decisively and know, not hope, that when they bring a product to market it’s going to perform competitively.
There’s two key roadblocks standing between life insurers a completely optimized pricing process. The first is that most life insurers don’t understand the value they’re missing out on by not being strategic in their pricing exercises. The second is that the existing pricing process is outdated, forcing pricing teams to rely on inflexible tools and some degree of informed guesswork when running a pricing exercise.
But the pricing process doesn’t have to work this way.
Optimize Your Pricing Process, Optimize Your Pricing
The existing process a life insurer’s actuarial team relies on to run a pricing exercise has a number of drawbacks. It’s costly, time-consuming, inflexible, and, most importantly, doesn’t allow you to understand where the biggest opportunities lie.
Because they’re time-consuming and costly, and it’s difficult to pinpoint existing value in them, pricing exercises are typically only run a few times a year. In between these exercises, significant value gets left on the table as your price becomes outdated in the market. But what’s interesting, and significant, is that most life insurers don’t know how much money they’re missing out on, or how frequently to run these pricing exercises in order to make them worth it. While they understand how much money they’re making, it’s not always clear why, and it’s certainly unclear how they could tweak their pricing to make more.
It’s not just about the money. Pricing is a lever of growth, and regardless of what your business objectives are, it’s impossible to be strategic about pricing without the right analytical capabilities that demonstrate both what your opportune prices are, and how they will work for you. In order to do this, you need to be able to plot your efficient frontier.
It comes down to three simple questions: What is your strategic goal, what are your parameters, and how flexible are you within them? If you can’t accurately answer these questions, then you won’t be able to optimize your pricing, and you’re likely to miss important opportunities for growth.
The Efficient Frontier as a Lever for Growth
If a life insurer has the capability to plot its efficient frontier, then the power to be strategic about pricing is already within its grasp. Plotting an efficient frontier shows a life insurer how adjusting a price will affect performance in the market in accordance to its specific objectives - and the promises it made it shareholders.
To be able to see your efficient frontier means understanding the relationship between pricing, sales performance, and position in the market. It means having a clear understanding of what pricing elasticity means for your specific company and products and being able to act on that understanding decisively and with confidence.
Bringing the Results to Your Shareholders
Outside of life insurance, many industries have already recognized the power of optimized pricing, and actively use this knowledge to drive growth and value from their books. While life insurance may be more complex than many other industries, optimization doesn’t have to be. Life insurers have the level of data science capability, computing power, and data access required, it’s just not used in a way that paints a clear picture of customer behavior and policy value.
Gaining this pricing intelligence might require the right tools and analytic capability, but it certainly is worth it.
Pricing optimization means more than just the knowledge of how a price will perform in the market. It means recognizing pricing for what it is: a lever for growth. By knowing this, you eliminate all the guesswork from the pricing process, giving you the ability to make this process work for you and your investors.
It means being able to confidently tell your shareholders, “this quarter we increased Sales, VNB, and volume by X amount and we know the levers that will let us do it again.” This is the kind of promise that shareholders can count on with confidence because it demonstrates a clear objective and illustrates the steps that will meet that objective, time and time again. If pricing optimization can help you deliver this kind of promise to shareholders, why wouldn’t you do everything in your power to develop a pricing process that enables that?