General Insurance pricing practices where more advanced analytic techniques and non-risk based customer data is leveraged has been widely criticised resulting in an increased focused on regulating from a pricing and fairness perspective.

Over time the pricing of retail General Insurance products has become ever more sophisticated, leveraging the availability of new or expanding data sets and analytical capabilities. The underlying cost of insurance – the expected cost of claim and cost of service – has become somewhat disconnected from the ultimate price charged to customers. Many firms use “price optimisation” techniques and extensive data enrichment to incorporate behavioural characteristics of customers into prices, such as propensity to renew, in addition to reflecting variation in risk.

5 key areas to consider

Firms should be continuing to take steps to improve pricing practices with particular emphasis on:

The development of a clear pricing strategy

The pricing strategy should be considered within the overall customer strategy and regulatory expectations. A definition of value is required, with an associated risk appetite framework to enable ongoing monitoring of the extent to which the value offered to customers is understood. This needs Board oversight and challenge and must consider the business model implications of alternative approaches.

Consideration of fair pricing on different customer segments

Firms should have the ability to identify vulnerable customers and ensure that they are not exploiting such groups or customer inelasticity. Price optimisation algorithms need to be monitored to avoid unintended outcomes, for example where inelasticity is being exploited by accident. Pricing actions should be explicable and there should be visibility of these actions within in conduct risk reporting.

Fitness for purpose control cycle

The data used for pricing and its controls should be robust e.g. there should be a single source of the truth. Where price optimisation (or similar, e.g. machine learning) is used for quoting, a sufficiently robust control environment needs to be in place. The control environment needs to evolve to address key regulatory themes e.g. new business v renewal, closed product v comparable open products, etc.

Are value for money checks met?

Profit margins need to be considered against what “value for money” means for the firm e.g.

  • In aggregate?
  • Where cross-subsidy exists between customers, between products, or between core  products and add-ons?
  • For vulnerable segments?

How KPMG can help

With our combination of Actuarial, Regulatory and Risk expertise, KPMG is uniquely placed to support you.

We can work with you to:

Review your regulatory response

  • Support meeting the requirements of the ongoing thematic review
  • Reviewing your response to the Dear CEO letter in relation to pricing practices
  • Reviewing the impact of potential actions on your business model

Assess your plans in response to regulatory engagement

  • Ensuring you are interpreting current regulation appropriately
  • Providing insight into the CBI / Government agenda and how your peers are responding
  • Helping you identify regulatory themes “coming down the tracks” and ensuring your change plans are fit for purpose

Provide support with any of these issues

  • Review of the modelling environment including appropriateness and reasonableness of the data used, and review of the pricing models including appropriateness and justification of constraints
  • Ensure that Board focus is appropriate and is able to communicate with the regulator
  • Support pricing strategy development and evaluation
  • Review your pricing processes, controls and reporting

Get in touch

For further information on insurance pricing practices, contact John O'Donnell of our Insurance team - we'd be delighted to hear from you.

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