A new survey of insurance executives reveals a growing number of insurance companies are using enhanced analytics to understand customer buying behavior and are incorporating this understanding into the design and pricing of their products.

Earnix, a provider of integrated pricing and customer analytics solutions for insurance, released the results of its latest industry survey: 2013 North American Auto Insurance Pricing Benchmark Survey.

Larger insurers—with over $1 billion in gross written premium—are more likely to use advanced customer analytics in their pricing processes. Nearly half (48 percent) of that group use segment-level demand models to estimate the effect of rate changes. Conversely, most of the smaller insurers (62 percent) assume no change in customer demand as a result of rate change, an assumption that is far less accurate.

Additionally, the larger insurers lead the way in the use of price optimization, also known as scientific pricing. Price optimization is the use of mathematical algorithms to determine optimal values of rating factors to meet specific business goals while maintaining regulatory compliance. Close to three quarters (74 percent) of the insurers with over $1B GWP use mathematical algorithms to optimize their prices or plan to do so in the near future, compared to 52 percent of the smaller companies that use such methods.

Additional key findings include:

  • The top three challenges in the pricing process are:
    1. Effectively incorporating knowledge of customer price elasticity
    2. Getting and utilizing competitor data
    3. Predicting the business impact of new rates
  • Seventy-two percent of respondents consider competitor’s prices when setting their own prices. Other considerations include customer price elasticity, policy lifetime value, and the value of other policies in the customer’s portfolio.
  • The primary strategic goal influencing pricing changes over the past year was the drive for greater profitability, mentioned by 68 percent of survey respondents.

“We are pleased to share the findings of this survey with insurers in an effort to help them better understand industry pricing practices,” says Meryl Golden, Earnix’s general manager for North America operations. “The results signal that auto insurers recognize the potential benefits of advanced customer analytics for their bottom lines. Consequently, we anticipate continued uptick in the use of enhanced customer data by companies of all sizes in North America over the coming years.”

Earnix conducted the survey to uncover best practices in pricing used by North American insurance companies. Responses were collected from 73 executives and pricing professionals representing insurance companies that sell auto coverage in the United States and Canada.