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HOW DO YOU ADAPT YOUR INSURANCE PRICING STRATEGY IN THE FACE OF INCREASED PRICE COMPETITION?

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By Ketil Kristensen, Senior Advisor, Insurance, SAS

 

Many countries in Europe have in previous years experienced increased price competition for general insurance products. Especially in Southern Europe, the competition has been very fierce, fuelled by online price comparison websites. In Spain, Portugal and Greece, there has been a substantial drop in average premiums for products like motor, home and health insurance. This poses a real threat to the profitability of property and casualty insurers.

While some insurance products are highly specialised and almost impossible to compare, most common products have increasingly become commodities. Consumers can now easily compare them online.

When comparing insurance policy prices and details becomes as effortless as getting quotes for airline tickets or hotel accommodation on price comparison sites, more insurance companies will eventually enter the market. And thus price competition will increase.

 

Preparing for a price war

Once the price war starts, there is no way to avoid it. And insurers need to meet their competitors head-on.

To win a price war, insurers need to be meticulous when they set the premium levels. They might also need to rethink the definition of “profit” when they are making pricing strategies for the future. In a market where premium levels are volatile and the competitive situation may change rapidly, insurers also need the capability to evaluate potential future scenarios in a short period of time.

 

Setting the premiums right

In the fast-paced digital era, customers expect insurance prices to be easily available online. They will make inquiries for insurance covers for their cars or homes on price comparison websites and expect the prices to be available immediately. From an insurer’s point of view, the premium customers will see on their screens when comparing insurance policy prices is the sum of the insurer’s technical premium and the commercial loading.

The technical premium represents the break-even price that the insurance company would charge for the policy if it had no costs and no desire to make a profit. Commercial loading represents the sum of the insurance company’s costs and the profit it expects to make on the policy. Technical pricing is the subject of many actuarial textbooks. But as machine learning algorithms make their way into actuarial departments, we will need to rewrite those books. Modern pricing techniques that include machine learning algorithms are a notable improvement compared to traditional models. If applied properly, ML models will result in more accurate technical pricing given the same data.

But what about commercial loading? How much profit should the insurer aim for?

Every one of us has a different tolerance for how much we would pay for, e.g., a car insurance policy. Some customers don’t consider price to that important. Others will try to search for a better deal elsewhere, regardless of how much time the process would take. Most customers are somewhere in between.

Being able to price the insurance products analytically based on the “willingness to pay” is, for many actuaries, seen as the holy grail of insurance pricing.

 

Personalised premiums

Most insurers already do personal pricing to some extent today. For example, they give different discounts to policyholders with equal risk. However, there is often a great potential to do segmentation and price calculations in a more analytical manner. Ideally, insurers would like to set the premiums as high as possible, but not so high that customers move their policies to another insurer.

On the other side, insurers would like to move customers away from their competitors by offering low premiums – but not too low. The insurer must first determine the price sensitivity of insurance customers and then price each insurance policy so that it maximises the profit for the insurer.

Insurers that can quickly reoptimise changing prices in the online market will also quickly identify customers that are at risk for churn. They can then perform the appropriate actions to prevent this from happening.

 

Rethinking ‘profitability’

When insurers think “profit,” they usually mean the income statement for next year. This is about to change. The concept of Customer Lifetime Value (CLV) is becoming more and more common in the insurance industry. And many insurers are now refining their pricing strategy based on a maximisation of the CLV of all its customers, thus not focusing solely on the profit definition in the income statement. The CLV of an insurance customer is the net present value of this customer for the insurer, where behavioural effects like renewal, cancellation and cross-selling of other insurance products are considered for the entire lifetime of the customer.

To accurately compute CLV for a customer, the insurer will need data that describes the behavioural patterns of the customer. Most insurance companies have quite a lot of such data available – the problem is usually that it is not adequately structured. In practice, to quantitively identify the customer lifetime value, insurers need to integrate both actuarial and customer behaviour models. Once a system for this is in place, insurance companies will have a strong quantitative foundation to compute the customer lifetime value of their policyholders.

 

Competitive insurance pricing

When a customer determines where to buy insurance, the price is the most important factor. Thus, to stay competitive and still run a profitable business, insurers need to set their premium levels just right. The evolution of price comparison websites – which provide real-time quotes on competitor prices and increased access to data that contains information about the customer’s insurance risk – has made the actuary’s job of calculating the premium more complicated.

Over the years, SAS has worked together with insurers to ensure that strong system support is in place to compute premium levels down to an individual policy level. These pricing systems have been put through the test in some of the most competitive insurance markets in Europe. They have turned out to be a valuable strategic tool for insurers to balance the desire for profit against the desire for market share. And maybe most important of all, they have enabled these insurance companies to effectively join the price war, fight it and still make a profit.

 

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From compliance to the metaverse: Investment trends to look out for during the year ahead

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By Rami Cassis, Founder and CEO of Parabellum Investments

 

In the investment world, the old saying, knowledge is power, has never been more pertinent. As any investor will testify, it is essential to retain an in-depth, and up to date, understanding of news, predictions and trends that specifically relates to his or her specific area of interest.

This is particularly true for investors in the financial sector.

We all know just how quickly the sector can change beyond recognition. The demands of consumers are forever changing, new technology is always waiting in the wings to re-write the financial status quo and the next big digital company is constantly looking to increase its market share. There is always a new trend to look out for.

As we move into a brand-new year and prepare to face the opportunities – and challenges – that doubtless lie ahead, these are some of the trends that are likely to develop during the next 12 months.

 

Personal banking conversations

In its Tech Trends 2021: A financial services perspective Deloitte states that today’s pioneering companies are using advanced digital technologies, virtualized data, and cobots to transform supply chain cost centres into customer-focused, value-driving networks, based around a personal experience.

The concept of personal banking provides a perfect example of how the financial services sector has evolved to deliver digital personal banking.

Before the digital banking revolution, personal banking involved a visit to a high street branch to sit down with a personal banker in the flesh. This personal banker would be the customer-facing, end point of a complex supply-chain, involving training centres, degree courses, carbon-emitting journeys into work – the list goes on.

Compare this to the current version of personal banking. Digital financial services firms such as Monzo have revolutionised banking thanks to sophisticated analytics and a personalised interface. The big banks are now catching up, offering their own versions of ‘modern’ banking insights for the everyday user, and furnishing them with the latest online, smartphone-powered gadgets to enable them to manage their money 24/7, wherever they might be in the world.

However, even this is now becoming somewhat stale, with many financial services providers still seeing personalization simply in terms of personalized messages. Instead, the next chapter will involve smart banks understanding that good personalization requires personalized conversations, not just messages.

Enterprise software is one of the specific investment interests of Parabellum Investments. One of our portfolio companies is ieDigital, a specialist UK financial technology provider. The team from ieDigital and Parabellum Investments analyses the latest developments in business technology regularly.

We understand the importance of pushing digital boundaries. Indeed, one eye should constantly be scanning the horizon to identify the digital tools that the customers of tomorrow will expect. The interpretation of digital transformation is specific to each organisation and translating technology into practical business outcomes requires the focused specialism the combined IE Digital & Parabellum Investments team is qualified to deliver.

We understand – and see daily – the pressure that banks are coming under to deliver an ever more personal service, and see the ability to deliver these personal conversations is one of the trends to watch during the next 12 months.

 

The metaverse

The word ‘metaverse’, is defined in the Oxford English Dictionary as a “virtual-reality space in which users can interact with a computer-generated environment and other users”.

When Facebook changed its name to Meta in 2021 it may have come as a surprise to many of the platform’s users, but it was a major moment in the company’s history. It signalled Mark Zuckerberg’s ambitions for his business; to be the leader in the development of the metaverse.

Indeed, the future of the metaverse is looking sophisticated and bright. With giants like Facebook and Microsoft introducing metaverse elements into the fabric of their business models, it’s a concept that cannot be ignored, and one which is likely to expand rapidly throughout the next 12 months.

Returning to the financial services sector as an example, in a blog post titled Metaverse, the end of banking digital transformation?, CoinYuppie speculates that the metaverse will change banking in a number of ways including:

  • Identify verification. In the metaverse, identity verification will be performed via VR glasses and Metaverse sensor devices which contain a security chip.
  • Real-time creation of financial products. In the meta universe, virtual product managers use gestures to drag and drop the entire process of digital product manufacturing.
  • Games and attractions become a source of bank traffic. You can open branches on Mount Everest, in the Tarim Basin, on the Kunlun Mountains, or in Jiuzhaigou. The bank will combine these magnificent landmarks to fully personalize its branches and display its products.

This is just the financial services sector. Just imagine the opportunities for other industries – and the tools that will be needed to deliver them.

People are likely to need virtual-reality headsets, for example, together with related components such as sensors, as virtual-reality technology becomes intrinsically linked with the metaverse world.

 

Compliance

Another key trend to look out for as we move into 2022 and beyond is how companies deal with their compliance issues.

In the wake of the global Covid pandemic, we are seeing a much-increased hybrid working model, with a large proportion of the workforce now based at home. This creates a logistical headache for compliance teams, who must now ensure that sensitive data and company secrets remain just that, despite a workforce now using multiple digital platforms, messaging systems, mobile phones and landlines.

Cloud-based archive systems that can capture multi modal communications are likely to become essential for companies to remain compliant.

 

Alternative currencies

Cryptocurrencies are likely to retain their position as one of the most talked about developments in the world of alternative currencies.

As an example, Bitcoin has risen nearly 70% since the start of 2021, driving the entire crypto market to a combined $2 trillion in value. However, heightened regulatory scrutiny and intense price fluctuations have somewhat dampened bitcoin’s prospects in recent months.

Despite this, we are likely to see banks increasingly looking at offering mainstream crypto services. We have already seen the start of this, with the first major crypto company going public with the debut of Coinbase in April, increased participation from Wall Street banks like Goldman Sachs, and the approval of the first U.S. exchange-traded fund linked to bitcoin.

 

Conclusion

We all know how quickly the financial sector changes. If you happen to be reading this just a few months after it was written, several of my points might now be in the mainstream – or they might be completely obsolete.

The fact is that unless an investor possesses superhuman powers, it is impossible to identify, with 100 per cent accuracy, what the next big investment trend is. All we can do is use our experience, insights, and up-to-date sector knowledge to predict what the next big trends are likely to be.

 

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How Crypto Traders Can Avoid Unexpected Expenses

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Have you been dabbling in cryptocurrency in 2021? Are you still relatively new to the world of crypto and feeling your way around? While crypto can prove to be quite lucrative, it can also spark a lot of unexpected expenses if you aren’t careful and don’t use the proper tips. We’ve got four essential ways tips crypto traders can use to avoid unexpected expenses moving forward, making sure your experience with crypto is as positive as possible.

 

Make Sure You’re Working with a Strategy

When you get into cryptocurrency, it’s wise to look at it as you would any other type of investment. This means you have a plan and a goal of what you want to achieve. You also need to ask yourself how much of a risk you are willing to take. The answer will be different for each person, so don’t feel pressured to keep up with others. In general, cryptocurrency trading is seen as a high-risk activity, so you need to accept that going into it.

 

Diversification Can Help Limit Expenses

Any financial investment expert will tell you that diversification is an excellent way to balance your options and hopefully prevent any massive losses – or unexpected expenses. You can use this approach with cryptocurrency and make sure you’re diversifying.

 

Understand the Tax Laws and How They Apply to Crypto Investments

Did you know that you may be subject to paying taxes on your crypto assets? It’s something that isn’t always discussed, nor do all investors realise that this is the case. Cryptocurrency tax UK can be confusing and not something you want to glaze over.

Because you may face some crypto tax issues, it’s worth it to work with a company like Hodge Bakshi, which is a group of chartered tax advisors and chartered accountants. They are well versed in how individuals are taxed, what the code says, asset pools, capital gains tax and more. They can guide you through the process so there is no chance of an unpleasant surprise.

 

Keep An Eye Open for Cryptocurrency Scams

Unfortunately, scams are now popping up all over the place and if you get caught up in one, it can end up costing you money. There are business and investment cryptocurrency scams to be on the watch for. A popular one is where you are told to get others involved, like a rewards programme. So, the more people you manage to recruit into the programme, the more money you will make. This should be a huge red flag; you don’t want to get involved in any of these.

Another popular scam is the promise to convert your bitcoin to cash, which can result in you losing your money. Remember the saying – if it’s too good to be true, then it probably is. In other words, be sceptical and don’t get pulled into anything.

While it’s impossible to anticipate every possible scenario, these tips can help you to avoid unexpected expenses or at least limit their negative effects.

 

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