Montoux’s founder and global CEO Klaas Stijnen is constantly speaking with life insurance executives and actuaries around the world. Klaas hears their thoughts on the future of life insurance, their strategies, their concerns - and talks to them about the ways technology like Montoux's can help them to succeed. One of the points that never fails to make a big impact is raising the concept of a life insurance company’s efficient frontier, and determining where their company sits relative to the frontier.
We wanted to write about the efficient frontier because it’s a simple concept, but difficult to execute well in life insurance, and honestly - it’s something that Montoux is very good at. It’s also something that, surprisingly, many life insurers don’t seem to do at all. Montoux’s platform uses this well known investment performance management concept to plot pricing optimization strategies along an efficient frontier, to better inform pricing decisions. Across all markets, life insurers are looking to maximize value and continually bring in new sales to grow market share - or avoid losing it. For life insurers, revenue, sales, and value always sit within their top metrics and KPIs, so being able to determine their efficient frontier can help both to hit targets.
The efficient frontier is an extremely useful decision making tool, and the majority of life insurance carriers that Klaas meets with have not considered this opportunity - while those who have simply don’t have the tools or resources available to model it effectively. With traditional pricing processes, life insurers are unable to know what tradeoffs they are facing in their pricing decisions. With existing tools they are unable to determine how far they are from the maximum, most efficient position, so will often opt to iterate with small cautious experiments based on competitive positioning to push sales while not losing (too much) margin. However, competitive position is often only a poor proxy for what the pricing changes will deliver. Pricing sensitivity is a black spot for life insurers.
In the absence of knowing what is optimal, pricing decisions will effectively come down to professional opinions - and whose is strongest. Advisors will often be telling sales executives to lower their prices, which can be at odds with actuaries’ current methods to fairly accurately predict margin (although often not so accurately predicting sales outcomes, an important aspect of the efficient frontier, another specialization of Montoux’s). Using the efficient frontier shows insurers clearly where they can make changes, and what the tradeoffs will be to focus on a specific growth target. Decisions become evidence-based and far more strategic - and the decision makers can return to company KPIs to determine the best decision.
A key question insurers often ask Klaas in return, is how can any company reap the benefits of this, if everyone starts using the same optimization methods? We share the widely held belief that the industry margins are too low compared to the desired optimal position from a strategic point of view. Klaas believes, supported by analysis, that most companies are under cutting themselves from where they ideally like to be from a strategic point of view.
A second opportunity, based on the efficient frontier, is to find out how the efficient frontier can raised to a higher and better place? The answer often lies in the wealth of data available but not used for the value optimization. The optimization functionality Montoux offers can of course be used in various way. Not only to move to the efficient frontier, but also how to improve the frontier.
Another question is whether a carrier can change where their efficient frontier is, and the answer is most commonly yes. They can lift it by considering pricing and having more flexible campaigns, and targeting specific, very price sensitive segments - or, the opposite. More detailed, intelligent tools like Montoux can tell you how changes like this can lift your efficient frontier, and in turn help you carry out that pricing faster.
Companies can accelerate their performance with far more confidence with more optimal pricing. The efficient frontier will often show an insurer can push up their sales as they have been in a suboptimal position - and do so without having to lower value, or vice versa, keeping all parties happy. Price optimization is one of the best ways to do better without having to compromise anything else. The efficient frontier is a simple concept which shows optimal pricing immediately and summarizes a lot of complexity.
In upcoming blogs we will continue to talk about the efficient frontier - and explore the key integrated building blocks which make finding it possible.