27/10/2016
Price Optimisation:
A case study of new pricing techniques
Alan Clarkson, Royal London
Alastair Black, Willis Towers Watson
4 November 2016
Agenda
• What is price optimisation?
• Price optimisation in the life market – benefits and practicalities
• Conclusions and questions
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What is price optimisation?
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What is price optimisation?
• Any movement away from a “technical” price is price optimisation, and it
happens all the time:
Brand value
Customer
demand
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Competitive
pricing
Strategic pricing
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Price optimisation in insurance
Insurance is different!
• Customers are used to providing lots of information
• Fewer “physical” constraints
• …. but stronger TCF requirements
Use of customer demand to set prices
• Analyse the likelihood of different segments to purchase
• … and use this as a quantitative input
• Traditionally done only at a very high level
• Separate “risk” and “demand and elasticity” components
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Risk modelling
• The underlying cost of providing the insurance policy
• Covering commission, benefits, expenses, cost of capital
• Typical cashflow model, with assumptions
• Nothing new!
• But an opportunity to improve risk modelling
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Demand and elasticity modelling
Demand – assess probability of sale
• As a function of different factors
• Uses historical quote data
Demand
• At a granular level
• GLMs typically used
Elasticity
Price
• Randomised price trials can be used
• Alternatives are available
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Pricing constraints
• Consider overall objectives
• Essential to work through all criteria possible affecting prices:
–Distribution agreements
–Existing quote delivery systems
–High-level pricing principles
• Use as quantitative constraints on rate decision-making
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Pricing decision
Probability
Expected
of purchase
profit
Profit per
policy sold
Conduct
ceiling
Profit floor
Premium
• Price chosen at granular level, to maximise overall objectives
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Current use of price optimisation
GI
• Well entrenched in UK motor market
• Also used in other markets
• Lots of factors, very competitive market, rapid repricing,
• Move to real time price optimisation
Life
• Most applicable to annuity and protection products
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Price optimisation in the Life market
Benefits and practicalities
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The Protection Market
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Life & Sickness
Advised Channel
Flat Market
Price Is Important
“Standard” Price
Other Factors
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Opportunity for life insurers?
Key Reasons used in GI
Opportunities in Life
Risk Factors
Risk Factors
Aggregators
Aggregators
Term of Contracts
Regulatory Pressure
Volume of Data
Flat Market
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Overview of Price Optimisation Model
Elasticity
Risk (profit) Model
Demand Model
Price Selection
KPIs
Price tables
Constraints
Price engine
Focus on “Demand Model” and “Price Selection”
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Demand Model: what to optimise?
App
Conversion
Sales
Opportunities
“Standard” Price
Win
Conversion
Business
Won
Application
v
Underwritten Price
An Application conversion rate could be an appropriate measure to optimise
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Demand Model: What Market Data is Relevant?
Research
All Quotes
(Market)
Duplicate
Quotes
Filtering process
Linking Sales Opportunities and Applications allows
you to calculate an Application conversion rate at a
granular level
Similar
Quotes
Sales
Opportunities
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Rejected Sales
Opportunities
Applications
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Demand Model: Checking Data
Number of quotes split by age
Consistency of quote data
Changes over time
Linking to Applications
20
25
30
35
40
45
Age
50
55
60
65
You’d need to decide when the data is good enough? How to handle unfiltered data?
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Demand Model: Calculating Elasticity
Theory
Random Price Tests
Only Change Price
Practice
Restricted Price Test
Other Changes
Price Changes
Competitor Data
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Overview of Price Optimisation Model
Elasticity
Risk (profit) Model
Demand Model
Price Selection
KPIs
Price tables
Constraints
Price engine
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Price Selection: Fairness
Optimal Price
Customer Value
What is the maximum profit on a customer?
What is the maximum difference between customers with similar risk?
What is the approach to cross subsidies?
Regulator
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Price Selection: Governance & Wider Business
Cost+
Demand Driven
Price Sign Off
Delegated Authority
Phased Approach
Adviser Relationships
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Sales Teams
Operational Capacity
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Conclusions
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Price optimisation has arrived in Life insurance!
• Well proven techniques that add significant business value
• Additional challenges in Life insurance
• Enhanced understanding of customers
• Already being used in the market
• Will become a necessity to compete
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Questions
Comments
The views expressed in this presentation are those of invited contributors and not necessarily those of the IFoA. The IFoA do not endorse any of the views
stated, nor any claims or representations made in this presentation and accept no responsibility or liability to any person for loss or damage suffered as a
consequence of their placing reliance upon any view, claim or representation made in this presentation.
The information and expressions of opinion contained in this publication are not intended to be a comprehensive study, nor to provide actuarial advice or advice
of any nature and should not be treated as a substitute for specific advice concerning individual situations. On no account may any part of this presentation be
reproduced without the written permission of authors.
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