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:
Price to win – win everything, or just some segments, or maybe just some attention
Price to change behaviour – like reducing the cost of some wait periods, or benefit periods, or for a product like severity-based trauma
Price to signal quality – signal that we’re not cheap, that there is a high minimum, that there is a measure of exclusivity about this product or add-on
Pricing to package – this is an emerging norm. Starting with high policy fees and extending to multiple benefit discounts
Pricing for cost recovery – which has been the hallmark of much income protection pricing discounts
Against all these ideas we should set up some new ones for consideration; an intentional, customer-focused approach:
Age and stage – looks at pricing quite differently for age and life-stage. The combination of the real cost of cover relative to needs and income creates very, very, different answers for, say, two young professionals without kids, and the couple perhaps fifteen years later with three of them. The situation is significantly different another fifteen years later. Very few customers are retained for the whole cycle. Pricing is a factor in that expensive loss of customer loyalty
What is the price to income sweet spot? The cover people don’t buy never works for them. Pricing packages that are bought and kept is a form of ideal insurance planning
Economic shocks, at a macro level, and at the household level, are not a surprise. A three-month premium holiday is useful, but small. Suspending cover at a time when you probably need it more looks entirely the wrong approach. We’re paid to think long-term, why don’t we go back to building emergency funds into our products?
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.
