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Winning the Pricing War Against Industry Giants: Offensive Strategies for Regional Insurers

Chris Hurst
Towers Perrin
chris.hurst@towersperrin.com, 314-719-5846

Klayton Southwood
Towers Perrin
klayton.southwood@towersperrin.com, 309-828-8351 

Gone are the days of pricing personal auto insurance using only "traditional" rating variables such as driver age, gender, marital status and vehicle use. More than a decade ago, Progressive Insurance led the charge in applying more complex, multivariate analysis techniques to analyze data and develop more sophisticated rating plans.

Most national carriers and many larger regional carriers have since adopted these techniques. Leading carriers are now applying multivariate analysis to many property and casualty personal and commercial lines.

A tale of two markets 

The 10 leading personal auto carriers have been steadily increasing market share at the expense of the rest of the market. Between 1997 and 2007, the market leaders increased direct written premium by 50%, while the rest of the market increased premium by only 27%.

The leading carriers have increased written premium by 8% in the last five years, while the remaining carriers' written premium has decreased slightly. Some experts believe that much of the leading carriers' growth is a direct result of increasingly segmented rating plans that have allowed them to expand their underwriting scope and attract the most profitable business. 

To be sure, marketplace success doesn't always hinge on pricing sophistication. Some carriers have achieved stronger performance by leveraging unique competitive advantages such as advertising or niche marketing, agent relations, technology and claims service. However, carriers with the most advanced rating plans have typically seen the best results in both market share growth and underwriting experience.

Winning strategies for the rest of the market

The challenge many companies face is how to implement a more competitive approach to pricing without the data and/or resources to support sophisticated predictive modeling and competitive intelligence functions.

Regional carriers can assess the sophistication of their current rating plan and identify competitive pricing gaps through Competitive Market Analysis (CMA). Exhibit 1 compares the advantages and disadvantages of two effective approaches: Qualitative Rating Plan Analysis and Quantitative Rating Plan Analysis. 

• Qualitative Rating Plan Analysis. For most carriers, Qualitative Rating Plan Analysis can be a useful starting point in assessing the competitiveness of the current rating plan and identifying any possible adverse selection exposures.
  
  This method works by benchmarking aspects of a carrier's individual rating variables—number of price points, the interaction of a specific variable with others and the range of rating relativities—against those of several direct competitors and leading carriers. Qualitative analysis clarifies the key strengths and weaknesses among rating plans without computing sample premiums for a large number of risks.   
   
• Quantitative Rating Plan Analysis. While qualitative analysis identifies potential conditions for adverse selection, it does not assess how a company's "on-the-street" prices by segment compare to the industry. 
  
  Quantitative Rating Plan Analysis relies on batch rating tools to calculate premiums for several competitors for either the in-force book of business or a group of theoretical target risks. While this approach also has significant challenges, it gives a much more complete picture of the effectiveness of the company's current rating plan.

For carriers that need a more competitive rating plan, the next step is to determine the specifics of the new plan. There are several options if the company's historical loss data lacks credibility and/or stability. Some straightforward, but potentially less advantageous, options include copying either the entire pricing structure or certain components of a leading carrier or adopting an industry benchmark rating plan such as ISO.

A better approach: Competitive Market Modeling 

Competitive Market Modeling (CMM) is an option that eliminates many disadvantages of more traditional approaches by using market premiums to build a sophisticated predictive model. Rather than developing a predictive model based on internal loss cost data, which might not be an option for smaller carriers, CMM is based on current premiums by individual segment for key competitors. Optimal rating factors are determined using the "market" premiums generated by the quantitative analysis. 

CMM allows an insurer with insufficient internal data to leverage the modeling work of several leading companies at once and create a cutting-edge rating plan optimized for its own book of business. Even carriers with sufficient loss data to do some internal pricing analyses can use the results of a quantitative analysis or CMM as a competitive benchmark when selecting proposed rating factors.

Regional insurers: Act now

Although leading carriers have grown market share at the expense of the rest of the industry—and continue to introduce new approaches to keep them ahead—the remaining insurers do have options. To ensure a competitive position in the current environment, regional insurers can benefit from having a strong sense of their strengths and weaknesses and how their pricing structure compares to that of their leading competitors.

Armed with that knowledge, regional carriers can develop new rating plans that leverage the work of insurers with more resources and data. Insurers who move first will have a distinct advantage. 

For more information, contact Chris Hurst, 314-719-5846, chris.hurst@towersperrin.com or Klayton Southwood, 309-828-8351, klayton.southwood@towersperrin.com.

Towers Perrin is a global professional services firm that helps organizations improve performance through effective people, risk and financial management. The firm provides innovative solutions in human capital strategy, program design and management, and in risk and capital management, insurance and reinsurance intermediary services and actuarial consulting. Towers Perrin has offices and alliance partners in the world's major markets. More information is available at www.towersperrin.com.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.