Insurers face increasing pressure for transparent pricing, with calls for clarity and justification of premiums coming from management, agents, and customers alike. Transparency offers assurance and supports regulatory compliance. However, many insurers are now shifting towards data-driven pricing models that emphasise performance, customisation, and profitability over traditional transparency. Dynamic insurance pricing software provider Quantee explores the key reasons behind this evolving approach.
To understand why some insurers are easing transparency, it’s essential to consider the strategic advantages of prioritising sophisticated pricing models and performance outcomes. While compliance and fairness are non-negotiable, many insurers are discovering that advanced, data-driven models can yield significant business benefits. By shifting focus from transparency to precision and profitability, companies are better positioning themselves to respond to market demands and enhance their financial performance.
Insurers in the UK, Poland, and Greece have adopted such strategies, seeing reduced loss ratios and steady growth above market averages.
The aim here is not to disregard regulations or fair practices but to examine how more advanced pricing models can provide significant benefits, even if they are less straightforward.
Avoiding the “transparency trap”
One of the main challenges in pricing strategy is ensuring fair risk evaluation while driving profitability. Insurers often avoid complex models to maintain transparency, but this can hinder pricing effectiveness.
Research has shown that advanced approaches, such as machine learning models and price optimisation algorithms, can improve combined ratios by 2-4 percentage points and drive gross written premium (GWP) growth by up to 9.4%.
Companies that have adopted sophisticated pricing systems demonstrate that better performance may be achieved by balancing transparency and advanced modelling.
Do agents need to understand the exact pricing?
There is a common belief that agents and brokers should be able to explain pricing to clients in detail. However, not all agents require full access to the inner workings of complex models.
Insurers who have implemented less transparent yet more precise pricing models have found that agents can still convey a general understanding of pricing by focusing on the insurer’s assessment of risk based on policyholder data, object details, and claims history.
Those who took this approach trained agents to trust the quoted premiums and respond to customers confidently, ultimately improving both agent satisfaction and business performance.
Prioritising performance over transparency
Commercial insurers, especially publicly traded ones, need to generate returns for shareholders and maintain strong financial health.
When sophisticated pricing results in better outcomes, insurers may see little reason to prioritise transparency over profitability unless regulations demand it.
In a competitive landscape with tight margins, prioritising transparent pricing may not be feasible. For many insurers, the choice to prioritise more sophisticated pricing models stems from the need to differentiate and cater to higher-margin customer segments.
Guarding against competitors and fraudsters
Transparent pricing models may inadvertently expose sensitive pricing strategies to competitors, who can analyse premiums to replicate a company’s pricing methods.
For straightforward models, competitors can estimate pricing factors with minimal effort. By utilising complex models with additional data layers, insurers protect their algorithms, making it difficult for competitors to decipher or replicate pricing strategies.
Additionally, transparent pricing may inadvertently attract fraudsters who exploit simple models by manipulating data inputs to achieve lower premiums, resulting in increased fraud-related losses. Insurers with more sophisticated models reduce exposure to such vulnerabilities.
Balancing compliance with pricing sophistication
In certain jurisdictions, regulatory requirements for transparency may challenge the adoption of complex pricing models.
However, many insurers have found ways to enhance pricing sophistication while remaining compliant. By employing technologies that support price optimisation and presenting premiums within specified risk ranges, insurers align with transparency requirements without sacrificing accuracy.
This strategy has proven to be highly data-driven and compliant, allowing insurers to balance regulatory needs with advanced pricing.
Transparency vs performance
Insurers must ultimately decide how to position their pricing strategy. While transparent pricing holds significant appeal, more sophisticated, less transparent models can lead to better results and profitability.
The choice depends on each insurer’s priorities and willingness to embrace innovation while managing compliance requirements.
As evidenced by market trends, the benefits of reduced transparency in favour of improved business performance can offer a compelling advantage.
Read the full blog from Quantee here.
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