It is becoming harder to make money selling auto and home owners’ insurance, for retail property and casualty insurers, which purvey these financial products, are sacrificing profit for market share in an already saturated industry. At the same time, consumers are shopping around more, and new sales channels (such as the Internet) are further commoditizing products and increasing their price transparency.
But retail property and casualty insurers have one effective weapon: better pricing of policies. With a more sophisticated approach, a typical insurer can improve its combined ratio by 8 to 15 percent.1 Getting the pricing right seems so obvious that it is hard to understand why many insurers have either failed in their attempts to do so or largely neglected the issue. Obstacles lie in the way, however. Most property and casualty markets, particularly in emerging economies, are tightly regulated. Even in the United States, insurers must still submit rate plans to the regulator, allowing other companies to see what they are proposing and reducing their competitive edge.
In addition, some insurers lack the data for sophisticated pricing. It takes a portfolio of at least 200,000 to a million policies per product line (assuming access to reliable...