'It's not as simple as raising prices' warns Accenture partner
Insurers need to understand their books of business better and target price changes more carefully if they want to beat the cycle, according to Stephen Lathrope, a partner in the insurance practice at consulting firm Accenture.
In general, insurance companies are going through a difficult period. Rates are soft or softening in most lines, and investment results are depressed by low interest rates, and so cannot be used to prop up weaker underwriting results. While many firms have been easing the pain with reserve releases from prior years, this may not be sustainable for all.
Insurers are tackling the problem by raising rates in some lines of business – most notably personal and commercial motor. However, rate increases generally have a dampening effect on gross written premium. Lathrope believes insurers need to take a different tack if they are to grow profitably in today’s conditions.
“Some of the actions that have been taken have been somewhat broad-brush and they have been about shifting pricing in a particular sector,” Lathrope said. “It isn’t as simple as raising prices – you need to raise prices for the right risks, and that requires a level of granularity and understanding of what you are underwriting that is more sophisticated than people typically have today.”
Lathrope suggested that insurers need to perform more detailed analysis of risks. For example, a driver with a drink-driving conviction may look like a bad risk, but there is a chance they may drive more carefully in future, in addition to being readier to accept higher premiums.
“The challenge is to try to get to that level of micro-segmentation, which requires insurers to make much more dynamic use of the insight they get about individual customers or groups of risks,” Lathrope said. “To do really well in the market in the next few years, insurers need to bring their analytical capabilities and understanding of customers’ risks into how they market, select customers and price business.”