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© 2009 Towers Perrin © 2011 Towers Watson. All rights reserved. 25-26 May 2011 Product and Pricing Innovation in a competitive Market The 3rd international.

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Presentation on theme: "© 2009 Towers Perrin © 2011 Towers Watson. All rights reserved. 25-26 May 2011 Product and Pricing Innovation in a competitive Market The 3rd international."— Presentation transcript:

1 © 2009 Towers Perrin © 2011 Towers Watson. All rights reserved May 2011 Product and Pricing Innovation in a competitive Market The 3rd international Insurance Conference, Insurance Practitioners Association Reproduction in whole or part of this material is strictly prohibited. They should not be relied on as a substitute for specific advice. Therefore, no responsibility for loss occasioned to any person as a result of acting or refraining from acting on the contents of or information contained in these notes can be accepted by Towers Watson.

2 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation6 2 Agenda Pricing strategies Product Innovation: the insurance telematic example Conclusions

3 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation6 3 Competitive Landscape — Personal Auto Rating Sophistication Performance Where is your company now? Where would you like to be in the future? Source: Towers Watson, A.M. Best. Tariff personalisation leads to higher profitability: an example for the US market... A B C D E F G H I

4 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation6 4...enabling companies to understand which costumers create and destroy value... Cumulative Value Expressed as Percent of Total Portfolio Value Percentage of Customers (Ranked from Highest to Lowest Value) Roughly 15% of customers contribute 100% of value The worst 5% of customers destroy 40% of value 0% % 0% % 40% of customers contribute 180% of value What if you could predict which policyholders will have losses, better than your competitors? ILLUSTRATIVE

5 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation a strategy that has paid off, Progressive advantage was gained using rating sophistication

6 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation6 6 What does rating sophistication means? Costing is the traditional approach in personal lines insurance But costing is only the first step in the pricing process Competitive positioning Market dynamics Constraints given by regulators and distribution channels Customer Behaviour and lifetime events Exploiting dynamics to enhance profitability and grow market share through making effective use of information in an integrated approach Market prices (2) Competition Elasticity of demand (3) Market share Profitability Economic Cost (1)

7 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation6 7 Better costing will lead to better costumers Underpriced: Easy to attract/retain, but unprofitable Overpriced: Profitable, but hard to attract/retain COSTING Impact of Mis-Pricing Actual Pricing vs. Indicated Rates Percent of Business Percent Departure from Indicated Rate -25%-20%-15%-10%-5%0%5%10%15%20%25% Company A (“sophisticated pricing”) Company B (“traditional pricing”)

8 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation6 8...but costing is an inner focused exercise; you need to understand market dynamics and... Rate Competitiveness by Age of Driver Relative to Market Vehicle Distribution MARKET PRICE ILLUSTRATIVE

9 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation6 9...integrate Costing, Market and Elasticity into a Price Optimization Approach…. Price Demand d Competitor Prices 0 0 Profit maximizing price Price Expected Profit Price Profit per customer Claims plus other costs Profit/Cost Models Elasticity Models Price Optimization Models X PRICE OPTIMIZATION

10 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation6 10 An example of an innovative rating variable: Credit Scoring Correlation between Credit Score e Loss Ratio in three of the main US companies Fonte: Conning Survey, Towers Watson 9 out of 10 US major companies use this variable to discriminate the risk

11 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation6 11 Agenda Pricing strategies Product Innovation: the insurance telematic example Conclusions

12 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation6 12 Steps to complete solution Define Goals Legal & Regulatory Technology Marketing Plan Collect & Analyze Data Use Results

13 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation6 13 Telematics can discriminate risk 5 times better, a competitive advantage largely yet to be gained Enabling Technologies Better address significant market segments Decreasing cost of technology Better technical profiling of clients

14 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation6 14 As well as a unique opportunity to change the commodity perception of Motor Insurance into service Insurers’ offering substantially undifferentiated No major change in the market, from customer perspective, over last years (except for new distribution models such as Direct Companies and Aggregators) Customer’s choice totally based on: Price Relationship with the agent/broker

15 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation considering that customers live mobility in an extremely diverse way (when, where, how)... Frequency of use Reasons for use Mileage Driving behaviour (day of week, time of day, speeding, hard braking and cornering,…) Type of road...

16 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation that technology is able to capture... By “measuring” when-where-how-how much clients drive, technology can enable insurers to gain competitive advantage through: More effective risk selection and pricing capabilities Definition of a tailored offer by customer segments Delivery of value-added services to clients PAYD product will also have an effect on distribution, elasticity of demand The key to success will be managing and analysing information, process and keeping up with the rapid change into technology

17 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation6 17 Insurers Enhance pricing accuracy Attract favourable risks Fight fraudulent claims Costumers Reduce premiums Demonstrate safe Value-added services And society Reduce accident response time Establish fault to improve equity in settling claims Reduce driving, pollution, traffic congestion and energy consumption It is a win / win situation giving benefits to all players

18 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation6 18 Usage-Based Auto Insurance (UBI) South Africa Hollard MiWay Nedbank Australia Real Insurance Japan AIOI Canada AVIVA Allstate Am. Family CSAA Esurance GMAC Liberty Mutual MileMeter Nationwide Plymouth Rock Progressive The Hartford Travelers State Farm SoCal AAA Unigard USA Royal & Sun Coverbox Insure the Box AXA Polis Direct MAPFRE AVIVA WGV Uniqua Allianz Lloyd Adriatic Aryeh Reale Mutua Sara Unipol Generali Aryeh Europe

19 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation6 19 Evolution of Insurance Telematics market (1/5) Evolution path Market share of players adopting the solution In Italy “Pure discount” product ~70% “Pay as you drive” ~25% Value-added services for clients ~20% Pricing based on “driving behavior and style” 0% Insurance Telematics evolution

20 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation6 20 Telematics may partially, or fully, replace some other rating variables Telematics directly measures driving behavior Historically, insurers have used less direct factors to measure driving behavior, e.g.: Age Gender Marital status Credit Statistically, the strongest rating plans include telematics data and traditional rating factors

21 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation6 21 Profitability structure for a Pay As You Drive product ILLUSTRATIVE Mileage “Pure” technical tariff Floor Top Profit Loss (antiselection) “Pure” technical tariff Tariff “applied” X % of portfolio(1-X) % of portfolio

22 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation6 22 Example of “Pay As You Drive” premium components Floor Including box rental fee Initial payment according to declared mileage Complement based on actual mileage Total premium year 1 year 1year 2 FloorInitial payment according to declared mileage (or effective in year 1) Complement based on actual mileage Total premium year 2 Renewal discount gathered in year 1 Discount gathered according to driving patterns (β) UWTermRenewalTerm α * Km actual Discount gathered according to driving patterns (β) ILLUSTRATIVE

23 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation6 23 Multivariate analysis: urban mileage percentage Urban mileage percentage LowMediumHigh Exposure (based on mileage) Pure premium EXAMPLE -50% / - 60%

24 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation6 24 Multivariate analysis: average trip mileage Average trip mileage <=3>3 <=4>4 <=5>5 <=6>6 <=7>7 <=8>8 <=9>9 <=10>10 <=11.5>11.5 <=13>13 <=14.5>14.5 <=17>17 <=20>20 Exposure (based on mileage) Pure premium EXAMPLE +15 / + 20%

25 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation6 25 Conclusions Personalisation and differentiation are key success factors for profitability in the insurance market Telelematics represent an effective and efficient (as technology costs are decreasing ) way to personalise and differentiate No major insurer can afford to stay out of Insurance Telematics in the short-mid term Implementation and managing the change are key to success FIRST MOVERS ADVANTAGE WILL BE SUBSTANTIAL

26 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com Presentation6 26 Alessandro Santoni Sales and Practice Leader PC Italy Background Alessandro Santoni has spent over 15 years with Towers Watson, in 1997 he moved to London to work with the international team of Towers Watson, in July of 2000 he returned to Italy to continue his work in Rome and became principal in His main areas of expertise include the review of claims reserves for insurance and reinsurance companies and setting of rates for personal lines. He has worked with several companies in Italy, Europe and the Middle East Alessandro is signing actuary for Lloyds Syndicates and Appointed Actuary for Italian companies. He is also EMEA initiative leader for Reserving. Relevant Experience/Specialisation Alessandro has considerable expertise in the following areas: Personal lines, reinsurance, London market and Lloyd’s syndicates reserving. Customer segmentation. Competitive pricing strategy. Reinsurance pricing. Mergers and acquisitions. DFA analysis Market entry studies. Role at Towers Watson Alessandro is Sales and Practice Leader PC for Italy. Education and Credentials Mr Santoni holds a degree in statistics and actuarial science from “La Sapienza” University in Rome. Alessandro is co-author of a study on asbestos risk in Europe presented at Astin in 2000 and co-author of a study on personal line pricing presented at Astin in 2007, for this article he won the James Anderson Award. He has also published other articles in specialized journals in particular on Motor TPL, Pricing and reinsurance markets. Mr Santoni is a fellow of the Italian Order of Actuaries and a fellow of the English Institute of Actuaries.


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