Let’s face it: It’s been a challenging few years for the insurance industry. Still reeling from the after-effects of the COVID-19 pandemic, many executives are still concerned about uncertain macroeconomic conditions such as ongoing inflation, rising interest rates, high replacement costs, and low gross written premium (GWP) growth.
In our new industry research report, “Insurance Operations in a Changing Industry,” respondents felt strongly that “changes to the macroeconomic environment” would have the most impact on their company. For example, 35% of C-suite insurance executives believe that these macroeconomic factors are the most significant trends driving change, and in turn, influencing their strategies going forward.
Additionally, 28% of C-suite executives reported that they are now focused on “dealing with macroeconomic factors,” making this a higher priority than other initiatives such as workforce dynamics, internal collaboration, and even personalization.
Their concerns are well founded since these adverse economic conditions can lead to less demand, rate increases, new cost pressures, increased competition, more regulation, and the need to explore new business models to react to changing market dynamics.
They also emphasize the need for new ways of thinking as we find ourselves in the last quarter of 2023, especially since many carriers have reported declines in revenue growth, core earnings, and other key metrics. Clearly they need to get back on track quickly.
Challenging times call for new measures
Yet the question remains: How can they specifically do this? And how can they do this fast enough to produce meaningful results quickly?
We believe there are three ways insurance carriers can achieve these goals during adverse macroeconomic conditions, and in doing so, differentiate themselves from competitors who won’t be able to pivot as quickly.
1. Improve scenario testing to devise better strategies.
Insurance carriers should look to develop new pricing and rating strategies, understand their impact in the market, fine-tune them, and then quickly deploy them.
This may depend on each carrier’s use of pricing and rating engines – as well as other innovative technology – yet if carriers can improve their ability to test many new scenarios and put them into action quickly, they stand to gain much better results in the short-term future.
2. Embrace new modeling innovations and techniques.
Imagine an insurer who believes it needs to increase prices by 10% in order to address rising inflation. This insurer could apply a flat 10% to its entire portfolio, yet such an approach doesn’t use enough intelligence to model demand or risk as accurately as may be needed. For example:
If the insurer under prices, it may not achieve its target, and it may also attact/retain the wrong types of customers and increase risk.
Yet if the carrier makes the mistake of overpricing – a likely outcome from applying a 10% increase – the insurer could lose price-sensitive customers. Not only does this turnover make it hard for the insurer to meet its profitability goals, but it can be devastating for customer lifetime value going forward.
In both cases, the insurer attempted to gain the net effect of a 10% increase, but in reality, it may only see a 4-5% increase, all while generating less-than-desired outcomes such as retaining the wrong types of customers while losing good customers.
Machine learning models and advanced analytical capabilities can give insurers a more precise way to implement these strategies and spread the need to achieve the 10% increase in a highly targeted way for both demand and risk.
In the case of customer lifetime value, most insurers lack the tools needed to take a long-term view and make ideal decisions especially in uncertain markets. But with the right tools, they can improve their ability to look further into the future to model scenarios to affect lifetime value and make the best decisions to influence the right strategies.
3. Take advantage of technology.
For example, with a complete, end-to-end pricing and rating solution, insurers eliminate past restrictions caused by internal inefficiencies and gain a new way to implement new strategies.
For example, consider that many insurers still have rating and pricing models that take anywhere from three to six months to update. These insurers face a high number of internal handoffs – further introducing the chance of errors or risk – and also generally need IT development assistance to make even the smallest changes.
These processes clearly restrict their overall agility and make it extremely difficult for insurers to get new offers to market fast enough, especially if they’re trying to course correct for the rest of 2023.
A better solution is an approach like Earnix, a leading insurance technology platform that can be implemented in as little as 10 weeks. From there, insurers can implement various strategies – without the need for IT’s active involvement – and put them in production in time to influence real results.
Despite ongoing economic concerns, insurers need to take action, and if they do it now using past approaches, it could be too reactive and too simplistic. Instead, effective technology enables them to operate with the maximum amount of intelligence and do it in a controlled, confident way that is going to have the impact – and results – they require.
To help insurance executives understand new changes in the insurance industry, Earnix partnered with the Market Strategy Group, LLC to conduct a comprehensive independent research survey. Our report, “Insurance Operations in a Changing Industry” summarizes key findings to show how other insurers are thinking about and reacting to so much change.