Pricing strategy – choices and their meanings

Russell Hutchinson looks at insurance cover norms and offers some alternatives for consideration. 

Tuesday, April 28th 2020, 8:00AM

Russell Hutchinson

We do a lot of big-data pricing analysis for insurers yet pricing strategy remains stuck in some fairly narrow industry paradigms.

Broadly these are:

Rate-for-age pricing: in ordinary times this means cover cost for the average 40 year old rises at about five times the rate income increases.

This guarantees a fair portion of the lapse experience everyone is so worried about. It will be eye-watering for customers this year when most household income will take a big hit, and premiums will … rise by 8% to 15% again.

Price low and add on. We quote everyone as if they are in perfect health and then horrify that portion that are not. It takes the work of a skilled adviser to rescue the insurer from this trap.

Life pays for all: life insurance offers a big sum insured number for a relatively low premium.

It forms the basis for most cover packages partly because the profit on life is used to subsidise the provision of the living benefits attached. Sometimes explicitly, such as in the case of discounts for combinations of cover including life, and sometimes just implicitly.

You can then overlay on top of these paradigms a pricing strategy:

Against all these ideas we should set up some new ones for consideration; an intentional, customer-focused approach:

Although many insurers struggle to implement these strategies and break out of the pressure to conform to industry norms, you do not have to stay stuck with them.

Tags: insurance Opinion Russell Hutchinson

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