Fractal Analytics Blog

Price Elasticity in the U.S. Insurance Market

Price Elasticity in the U.S. Insurance Market

By Deepak Ramanathan
April 3, 2013

Today, pricing in the US insurance industry is cost plus. The cost of doing business (or loss cost) is estimated at a micro segment level. The expenses and the margin are added to the loss cost to arrive at a final premium. Getting the price segmentation right is key to success and the industry has spent decades trying to perfect this.

The question is where is the next wave of innovation going to come from? It could be from:

  1. Better techniques: Actuaries and statisticians have largely used GLM based techniques to estimate loss cost. There is potential to extract more information out of the same data by using new non parametric techniques (such as Random Forest, Gradient Boosting) that have recently emerged.
  2. Richer data: There are potential new data sources that can complement what we already know about the insured.
  3. Going beyond cost-plus pricing: We believe this is the next big thing and it has the potential to increase top-line by 3%-5% while remaining loss neutral. Pricing in insurance must move from a traditional cost plus approach to incorporate two important components:

i)     Price Elasticity

ii)    Customer Lifetime value

Fractal has demonstrated an innovative way to incorporate price elasticity into pricing plans even within the U.S. regulatory scenario, and it has released a three-part video series that discusses how. By taking a slightly more scientific approach, insurers can get more out of elasticity without changing their rating structure, without adding any new variables into their ROC while still treating the loss cost model as the central theme of their pricing.

Learn more about this innovative approach to price elasticity in the video series. Stay tuned for upcoming videos…

Part 1: Squeezing Price Elasticity into the Pricing Matrix: Introduction


Part 2: Squeezing Price Elasticity into the Pricing Matrix: Analytics Components


Part 3: Squeezing Price Elasticity into the Pricing Matrix: Impact

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