If you don’t have complete confidence with how you are pricing insurance policies today, it will likely cost you more than the premium you are missing out on. A lot more. Too many insurers are adopting much more sophisticated approaches to pricing and leaving their competitors in the dust.
If you are incorrectly pricing the risks you are writing today, you are vulnerable to a competitor stealing your best business. If a new or existing competitor introduces more aggressive pricing for the good risks, that’s a warning sign that they also know when it’s time to walk away from bad business – leaving you to write those worse performing policies at unprofitable rates. It’s called adverse selection. This actually happened to Farm Bureau Financial Services. Watch how they turned it around in just six months.
There are a couple of scenarios we see often that illustrate why adverse selection occurs. First is getting it wrong on pricing insurance policies relative to the risk you are taking on. Sometimes, we see an insurer’s loss ratio deteriorate simply because they are writing risks that have a much higher potential of blowing up. They literally don’t have the tools necessary to know they are taking on risks that are going to perform worse than average.
You can resolve this problem if you have a systematic way to identify riskier business. By rank ordering policies 1-10, with 1 being the best performing and 10 the worst performing policies, we see how this plays out. If a carrier writes a lot of business in the 8-10 range AND they get enough rate, or price, to cover the high likelihood of losses – they will do okay. But, what we see quite often is that carriers writing these policies apply rates appropriate for policies in the 4-6 range or 1-3 range.
That spells trouble.
And this leads us to the second scenario we see happening more often, and that’s when an insurer with more sophisticated strategies for pricing insurance policies knows more about the market and individual policies than the other competitors. Insurers who leverage advanced data are able to steal business at impressive profit margins. They get very aggressive on pricing insurance policies with the best performance, know how to get an adequate price for the riskier business, and have the confidence to walk away and let other carriers take on poor risks at inadequate prices.
With this backdrop, that’s why we stress that you must have complete confidence in how you price insurance policies. Because if you don’t, you are running a risky underwriting operation. Today’s competitors are just too savvy. We worked with a regional insurer who discovered they were vulnerable to the competition – to the tune of over 12 loss ratio points. Watch how they protected their market share and improved underwriting profits.