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Carving your way to that precision pricing model

October 24, 2017

 

I'd love to say pricing is simple.

 

But the complexity and variety of commercial lines policies creates significant challenges.

 

Pricing doesn't have to be this complex though.

 

What is the aim of pricing?

Pricing essentially needs to meet two competing needs:

 

1 -  To create a premium which covers the cost of the risk transferred, covers operational expenses and provides a reasonable return on the capital at risk.

 

2 - To be set at such a level to entice customers to buy your policy.

 

So to satisfy part 1, just take all your potential insureds, estimate all the costs and divide it equally between them all.

 

To satisfy part 2, reduce the price until you get an acceptable bite from the insured and win the customer.

 

Ah, but if I reduce the premium I'll miss my profit targets!  So pricing becomes complex.  It becomes complex because you need to segment the portfolio in a way which allows you to understand the cost of risk transfer at a granular level. 

 

And then you need to track those commercial discounts to win business.  But don't try and get to the perfect model straight away!

 

"Building a pricing model is like creating an Ice Sculpture"

 

Once you've taken delivery of your block of ice, you can begin.  

 

Start up the chain saw, and carve off big chunks to form the outline. 

 

Next, grab a chisel and begin to create some detail.  But its not refined.  You cannot see the hair yet, but you will see where the eye will be, the shape of the hooves and other larger details.

 

Finally, like a precision surgeon , you pull out your scalpel and create those finer details.  It's those details which bring the Ice Sculpture to life.

 

And building a pricing model is exactly the same process.  Start off with the broad outline, refine and refine again.  

 

One final tip. Remember what you are trying to craft.  The difference between a Unicorn and a Horse is one poorly aimed chisel strike.

 

If you'd like to know more about building and refining pricing models, please contact us.

 

 

 

 

 

 

 

 

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