Accurate pricing is the lifeline for profitable business insurance. Thanks to emerging technologies like AI, IoT and blockchain, insurers now have unparalleled ability to assess risk and determine pricing. This is revolutionizing business insurance, paving the way for highly customized, competitive pricing.
Why Pricing Matters in Business Insurance
In the $200 billion global commercial insurance industry, pricing is paramount. Even small differences can have an outsized impact on market share and bottom lines.
For insurers, inaccurate pricing can completely undermine viability. Underpricing risks losing money on policies. Overpricing loses market share to rivals with competitive pricing.
Meanwhile, businesses want the best prices and value for their premiums. Their needs also vary greatly, from wanting broker interaction to self-service options. But price remains the top priority.
Getting pricing right is a complex balancing act for insurers, but technology is tipped to be the biggest game changer yet.
3 Cutting Edge Technologies Enhancing Pricing
Emergent technologies are handing insurers unparalleled capability to price risks accurately, even on an individual basis.
1. AI and Machine Learning
AI and ML allow insurers to leverage vast datasets, identifying correlations and patterns to price policies based on highly customized risk levels.
By crunching more data than humans ever could, these algorithms are eerily effective at predicting potential claims. This protects against underpricing while allowing insurers to offer ultra competitive pricing within appropriate risk levels.
One example is Zurich Insurance, which uses AI modeling to assess risk factors like credit scores, crime rates, foot traffic and sales. This enables pricing tailored to individual businesses across its portfolio of 425,000 SME customers.
2. Internet of Things (IoT)
Interconnected smart gadgets and appliances provide a wealth of real-time data about environments and equipment. This is a boon for commercial pricing.
Insurers can adjust pricing based on predictive analytics of sensor data. Usage-based insurance via IoT devices even allows pricing based exactly on utilization and risk exposure.
Allianz offers usage-based insurance for commercial trucking fleets using IoT connections. Insurance costs flex according to real-time driving behaviours like speeding, hard braking or late night trips. This balances pricing accuracy with incentives for the client to minimize risks.
3. Blockchain
Blockchain ledger technology provides transparent and tamper-proof means to share data between insurers and clients. This improves risk visibility for more accurate pricing.
Smart contracts – self-executing code stored on blockchain – are also increasingly being used, especially for parametric insurance. These pay out automatically if a trigger event occurs, like crop damage due to rainfall measured on a weather station. This allows very customized pricing of niche risks.
Case Study: Insurer Cuts Business Insurance Pricing By 10%
One major European insurer leveraged the IoT and data analytics to improve risk assessment, reducing loss ratios by 12% to 15%.
This enabled the company to cut insurance pricing by 10% for a segment of 100,000 SME customers, while still maintaining profitability from improved risk segmentation.
Competitors had to scramble to match these reduced premiums to retain market share. But few had risk models capable of preventing losses from such sharp price cuts.
This exemplifies how technology-driven pricing can be a competitive advantage allowing insurers to increase market share.
Challenges in Implementation
Despite the immense potential, effectively leveraging these pricing innovations has some key challenges:
- Data Complexity: Tapping IoT ecosystems and preparing data for analytics contains lots of intricacies.
- Legacy Systems: Integrating new pricing models into legacy IT systems is generally difficult and time consuming.
- Changing Mindsets: Insurers relying on traditional actuarial approaches may discount data-based underwriting.
Insurers must carefully validate new risk models against existing practices, and gradually phase-in adoption across portfolio segments.
Investing to overcome these hurdles is imperative to stay competitive. Falling behind in pricing innovation risks getting left behind in the market.
Further Innovations on the Horizon
Beyond the technologies discussed, we are seeing continued insurance pricing innovation:
- Parametric insurance using smart contracts pays out automatically based on a triggering event, allowing risk pricing tailored to specific parameters.
- Peer-to-peer models can disrupt pricing by allowing groups to pool risks amongst themselves.
- Usage-based pricing leverages IoT connectivity to tie premiums directly to utilization and risk factors.
These emerging models are expanding the boundaries of commercial insurance pricing.
Key Takeaways for Business Insurance Buyers
For buyers of business insurance, these technologies are bringing more choice at ever improving prices. But there are also important implications:
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Shop Around: Don‘t automatically renew your incumbent policy. Regularly benchmark alternatives to access latest pricing.
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Consider Parametric Insurance: These specialized offerings can provide complementary pricing aligned to niche risks.
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Track Your Risk Metrics: Leverage IoT connections to control exposures which insurers will use to determine pricing.
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Demand Data Transparency: Make sure insurers provide risk models, loss histories and other data to justify renewals.
Technology is undoubtedly shifting the balance of power towards buyers in the commercial insurance pricing equation. Businesses must stay savvy to capitalize on this transformation.
Future Outlook Promises Further Competitive Pricing
Insurers are only just beginning to tap these potent pricing capabilities. As technology, data and analytical prowess continues improving, we can expect even more refined risk assessment and competitive pricing across nearly all segments of commercial insurance.
For the insurance industry, this will require massive technology investments and fundamental changes in operations. But the potential efficiency gains, pricing improvements and customer centricity are too large to ignore.
In coming years, carriers failing to overhaul pricing models risk losing out to disruptive rivals remaking the sector. For smart insurers and insurance buyers, it is an opportunity to be seized.