Insurers should prioritise improving the coverage and accuracy of their pricing models as competitive pressures increase the risk of underwriting losses, according to Hymans Robertson.
The pensions and financial services consultancy said insurers need stronger tools to assess the sufficiency of premiums across their entire portfolios, warning that improved pricing accuracy could also offer a strategic advantage, particularly in commercial lines and the London market.
Hymans Robertson said firms should review their existing pricing capabilities and the quality of management information provided to senior management and boards, setting out a clear improvement plan that focuses initially on straightforward enhancements.
According to the consultancy, incremental improvements carry fewer risks than large-scale transformation projects and can allow insurers to address weaknesses in their pricing processes more quickly.
Strengthening pricing models can provide more forward-looking insight into which lines of business are most likely to fall short of targeted returns on capital. Enhanced models may also help insurers identify segments of their portfolios that are contributing disproportionate losses.
KEY QUESTIONS
Hymans Robertson said insurers should be asking a series of key questions when assessing their pricing frameworks, including where they are earning below required risk-adjusted returns, which parts of the book are generating the greatest losses, why profitability may have deteriorated and what underwriting or pricing actions should be taken to protect future performance.
Krish Kistnassamy, head of general insurance at Hymans Robertson, said: “In many lines, premium rates are softening at a faster rate than expected with a lack of transparency on terms and conditions.
“Recent years of excellent profitability tend to sow the seeds of their own destruction. In our view, investing in pricing yields long term results to underwriting profitability while reducing the risk of unexpected losses.”
“To safely navigate a softer market, insightful management information on sufficiency of premiums and risk adjusted rate changes, keeping track of Terms and Conditions across the book, and drilled down portfolio analysis is a must.
“This is underpinned by good quality pricing models across the portfolio.”
Hymans Robertson said that improving pricing accuracy and the quality of management information could help insurers respond more effectively to changing market conditions while protecting long-term underwriting performance.
