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Could you please analyse the importance of considering customer engagement when pricing?

It is worth considering the market in which personal lines insurers operate. Whilst some companies such as LV= are still able to rely on a strong brand and good customer service to attract customers, this is becoming less of a factor to a larger proportion of the population. 70% of Motor and 55% of Home new business sales come from price comparison sites, and most often from the insurer or broker with the cheapest price. If you’re not in the top three then forget it. So you can see that customers are very interested in the price!
Increasingly, driven by recent media activity, new business v renewal pricing creates customer irritation with accusations that loyalty isn’t being rewarded. How this is handled can either drive customers away as they feel you are trying to take advantage or lead to improved retention. It’s worth noting that customers that churn often lead to the insurer bearing an acquisition cost on ‘repeat’ business. The introduction in April this year of the FCA requirement to show last year’s premium on renewal invites could lead to pressure on retention. Responses from our customers have been positive; they say they like the additional information.
The price charged also needs to make some sense to the customer. An issue that has cropped up historically in the market is mileage. Some insurers would charge more for very low mileage, say 1,000 miles per annum, than a quote for 5,000 miles per annum. There may be actuarial evidence to support this, but to the customer it doesn’t make sense – ‘if I drive less surely I’m less of a risk?’ This inevitably leads to customer gaming and a corruption of data (whilst not really being a mis-declaration).

Could you please highlight the key strategic pillars employed by LV=  to price products in personal lines?

Ultimately LV= and other insurers need to make their required return on capital. It would be of little surprise that the main drivers for this are:
• Underwriting costs (i.e. loss ratio)
• Acquisition costs
• Expenses
Underwriting costs form the largest constituent and so receive a lot of focus. We at LV= believe that it is appropriate to charge customers a price reflective of our view of the risk being presented to us and the costs that we are likely to incur in administering the policy. Consequently we invest in our analytical capabilities and continually look to improve.
The ability to derive revenue from a customer will also be a consideration. For example if we can cross sell a second policy, the customer will benefit from multi-product discounts.

What are the lessons learned from the introduction and acceptance of price-comparison websites for selling personal lines insurance?

With the advent of price comparison websites we’ve seen a shift in how customers shop around and also the increasing importance of price in attracting business. As already mentioned, they are now the main channel through which customers take out a new policy. Given their advertising spend and convenience to the customer there is little likelihood in the near future of that changing.
Historically an insurer’s prices were set by a mixture of underwriters and actuaries. Price comparison sites highlighted any weaknesses in your rating structure. Consequently an insurer could end up pricing too high and not making any sales or have inadequate pricing and so make significant losses. This has led to increased focus on analytics, in particular the creation and growth of pricing departments who have developed the require expertise. To some extent this had already started earlier with the growth of direct insurers, price comparison websites helped accelerate the process.
With price being king, appearing as high up the screen becomes ever more important. Lower prices can be achieved by: simply cutting rates which will impact profit; or reducing the cover sold under the base product in order to fund a lower price. With the latter additional cover can be sold as an AddOn, such as courtesy car cover or foreign use. PCWs though change their presentation style, for example they allow you to filter by a specific requirement and this can impact sales.

What would you like to achieve by attending the Pricing in Personal Lines Insurance?

I’d like to get an understanding of people’s views of the issues affecting personal lines pricing, and indeed what they believe those issues are.