Insurance pricing has become expensive – but does it need to be?

When my car insurance renewal quote came through a few months ago and I saw it had shot up to more than double what I paid the previous, I took to LinkedIn hoping to spark a debate.  Luckily, the insurance industry was happy to oblige. Maybe my network was just humouring me, but 100 comments later, it feels safe to say that I’m not alone in thinking that something’s seems to have gone a little wrong and premium pricing has gotten out of hand.

So what can we do about it? Some things we can influence and others we cannot. A mentor once told me, worry more about the things that we can control and just keep an eye on the things we cannot control. The tools we use in-house is one of the things that we do have control over. In my view it’s time to get serious about how the insurance industry uses good tech to support new ways of thinking to reshape the existing pricing model and bring down the cost of premiums.

Insurance pricing is all wrong

One LinkedIn connection suggested I call my insurance provider to ask for an explanation for the astronomical increase to my premium. I’m not sure what I was expecting but I had a feeling as to how the conversation would play out. I was right.

They gave me three reasons: an increase in the cost of goods and services; an increase in the cost of medical care; and an increase in the cost of repairs. While these factors certainly have contributed to the increase in costs, they have not doubled, so why did the premium more than doubled? They made it very clear that my personal rating factors had nothing to do with it. I know my premium hike isn’t an isolated case. It’s the same story that’s been playing out in the news headlines for months now across the trade and consumer media.

Yes – it’s undoubtedly a tough environment for insurance businesses. Last year saw the worst underwriting performance in a decade according to EY data and 2024 isn’t looking any brighter. It’s costing insurers more than ever to fulfil claims and the increase in fraudulent claims isn’t helping matters.

But what concerns me about this economic storm is that the responsibility, and blame, for rising premiums is being shifted onto the policyholders and, I believe, some of these costs could be better managed.

Clearly, insurance pricing has become too expensive for many – but it doesn’t need to be.

Tech to help mitigate what’s beyond our control

Of course, braving economic headwinds are key to the survival of any insurance business. But while external economic and political factors are typically unpredictable, insurance leaders who are taking a truly adaptive and agile approach to their operations have greater control over determining business success and cultivating customer loyalty.

Take for example the surge in claims fraud which we know is a real issue for our sector. Although it’s an external factor, digital tools can mitigate the impact. There’s now a wealth of easy-to-use, cost-effective technologies available to address spurious claims.

Moving from modern legacy tech platforms to an agile core tech platform with an API-first approach gives insurance businesses the capability to quickly ‘plug in’ to an ecosystem of partners. These partners of amazing best-of-breed datasets and AI players can help identify fraud at first notification of loss with greater accuracy than before.

Time to turn insurance pricing on its head

Real control however, comes from insurance businesses thinking differently about what they own. For me, this represents how they deliberately turn their existing pricing structures on its head. It’s a bold move but those who take a considered approach with the right agile core tech underpinning their operational and pricing decisions are setting up for sustainable success.

The insurance industry is sometimes stuck in an old-fashioned system, never more exemplified than by the annual policy. But we know that consumer buying behaviours are changing and that the insurance market is going to become less and less predictable as the world moves to subscription-based services. It’s time to deconstruct the concept of the annual policy because the days of your comprehensive, straightforward annual policies are running out. Its not targeted, its not nuanced and the emerging buyers are not oblivious to this.

While there is industry acknowledgement of the critical role subscription-based policies will play in the future consumer landscape in 10 to 15 years’ time, my view is that this change will happen much faster than predicted. Without taking action now, insurance businesses will forever behind the curve of customer expectation, satisfaction and loyalty.

Time to be dynamic

As an industry, this means quickly figuring out how to start pricing for a variable risk pool that reflects usage-based or subscription-style policies. The big challenge though preventing this positive change of thinking and much-needed action is the fact that too many insurance businesses are stuck with old-fashioned system, encouraged by modern legacy tech providers.

These clunky, legacy platforms are unable to price dynamically with customer-centricity at the core because they work, instead, on a policy-centric approach. Industry thinking needs to switch to pricing for the customer based on genuine, personal, real-time customer analysis, rather than pricing based on a generic pool. Another area that drives up claims costs more than slow speed of response from insurers. The quicker they can collect, fix and return your vehicle, the lower the claims cost given how much of that amount will be made up on credit hire for a replacement vehicle.

Time to rethink how we do insurance

Thinking differently about how you operate your insurance business so that you can be much more flexible and agile, with the ability to act in real time to anticipate and meet the needs of your policyholders takes courage. But remember that the right core tech with access to an ecosystem of partners will support you and future-proof your decision-making. This great tech becomes an enabler, empowering you to proactively adapt to changing market forces.

Consumers are savvier than ever with clear expectations of how they want to be treated, how they want to interact with businesses and what they believe is a fair price. As things stand, the industry runs a real risk of pricing motorists off the roads unless transformative action is taken.

Now is the time to look at new ways of thinking when pricing premiums and critically how good tech provides the necessary digital capability to support a different approach. This is about agile, innovative, cost-effective tech that’s so much more than being able to sell more policies – it’s about improving the ability to offer a great customer experience, throughout the lifecycle of the policy and over the lifetime of the policyholder.

Remember that hoping for a different result while repeating the same action over and over again doesn’t result in meaningful change or a positive outcome. The time is now for insurance businesses and their tech partners to completely rethink how we do and price insurance – let’s not waste this opportunity.