By Aaron Wright, Director, Strategy, Earnix
Pricing actuaries are trained to use data to mitigate risk but, in current times, they cannot rely solely on just their extensive mathematical abilities. With inflation, cut-throat competition for customers, and evolving circumstances like climate change creating increased market volatility, pricing models inevitably become out-of-date quickly. Pricing actuaries need to embrace innovation to make their organisations and pricing models agile and ready for the future. These are the top five challenges facing pricing actuaries in 2023.
Uncertainty about Future Claims Costs
Failure to align pricing with future costs means profitability troubles, especially during an inflationary economy. A turn-around in costs will come, and actuaries need to be ready. Failure to adapt quickly means falling behind competitors.
Actuaries must determine if their organisation can make rate changes rapidly. No matter which way they need to move prices, internal processes must be streamlined and hand-offs between systems should be eliminated to maximise company agility.
Any change in how insurers do business represents an enormous amount of data that will need to be incorporated and analysed. Reducing complexity with a combined pricing and rating solution across business operations such as Pricing and IT can help to refocus functions for the best value to the business.
To remain competitive, targeted rate adjustments need to be made at the segment level. There can be pressure to take a base rate quickly to achieve overall profitability. However, this can increase customer churn – typically losing the best performing segments first.
Actuaries look to segment books of business based on the best variables. This has become more complex with multi-channel consumers. Predictive models and simulation provide the analytics needed on the front end to intelligently craft rate changes with positive impact for both the insurer and their customers.
Coordination with Underwriting
Pricing and underwriting are the two biggest levers carriers use to meet customer needs and profitability KPIs. Underwriting acceptability guidelines and rules need to be in sync with pricing changes. This is best achieved when underwriting and pricing are in one coordinated process,breaking down silos, and sharing intelligence.
Company profitability struggles can limit budget and time spent on future innovation. However, even when budget isn’t available to implement innovation today, prioritised work must be done to prepare for changing economic cycles of tomorrow. For example, analysing new pricing sophistication from third party data sources and new target market expansions can improve combined ratios during turbulent times and position for accelerating success once budget pressures ease. Difficult times can be an incubator of great innovation.
Keeping Models Up-to-Date
Models are built on historical data assuming that it is a good proxy for the future. However, if there is a big change – COVID is a great example – actuaries have limited data to work from. This means predictive what-if scenario planning and not historical data must be used. The uncertainty of costs for future claims means actuaries must make calculated assumptions to determine pricing. As no prediction for the future will be perfect, economic uncertainty further exacerbates this potential for error. This makes it even more important to monitor results and adjust actuarial assumptions as more data becomes known. Artificial Intelligence (AI) can be used to dynamically monitor models and results, even recommending adjustments that could be automated in the system.
Successful pricing actuaries stay ahead by using data, IT and risk management to take a clear position in the complex field of pricing. Their efforts are bolstered when organisations deploy advanced analytical tools, efficient business processes and a complementary technological infrastructure. This enables actuaries to model highly complex pricing scenarios quickly, efficiently, and accurately, staying ahead of the competition.
This approach is critical to carriers’ success, resulting in strengthening customer loyalty while ensuring top-line business objectives for the organisation.