The Increased Demand for Change Functions for Pricing System Upgrades in Insurance

The insurance industry is undergoing significant transformation, fuelled by embracing technological advancements to drive efficiencies and changing market demands. One of the critical areas experiencing this transformation shift is around pricing and the pricing systems, which are fundamental to underwriting and profitability. The demand for upgrades in pricing systems is placing increased pressure on change functions within insurance companies, necessitating strategic and operational adjustments to stay competitive and compliant.

Drivers of Demand for Pricing System Upgrades

1. Efficiencies through adopting technological advancements

AI and Machine Learning: Insurers are increasingly adopting AI and machine learning to enhance their pricing accuracy and efficiency. These technologies allow for more sophisticated risk assessment and dynamic pricing models that can adapt to real-time data. AI's capability to process vast quantities of data quickly and accurately is transforming the pricing landscape, making it essential for insurers to upgrade their systems to leverage these capabilities​​​.

Cloud Computing: The shift to cloud-based systems is another significant driver. Cloud platforms offer scalability, flexibility, and cost-efficiency, enabling insurers to implement complex pricing algorithms and manage data more effectively. Cloud technology also facilitates better integration with other systems and improves disaster recovery capabilities​.

2. Regulatory changes

Transparency and Fair Pricing in the UK: In response to increased regulatory scrutiny, the UK's Financial Conduct Authority (FCA) has implemented new rules aimed at ensuring fair pricing practices in the insurance sector. This includes measures to prevent price walking practices, where prices for existing customers are increased upon renewal in comparison to new customers. These regulatory changes are compelling insurers to overhaul their pricing strategies and systems to ensure transparency and fairness, thereby necessitating upgrades to their existing pricing systems.

Risk-Based Capital Requirements: Regulatory frameworks continue to evolve to include more rigorous risk-based capital requirements under the Solvency II directive, adapted for the UK market post-Brexit. Insurers require sophisticated pricing systems capable of accurately modelling and managing their risk exposures to ensure they maintain adequate capital reserves in compliance with these regulations.

3. Market competition

Embedded Insurance: The rise of embedded insurance, where coverage is integrated into other products and services, is reshaping the competitive landscape. Insurers must upgrade their pricing systems to support seamless integration with third-party platforms and to offer real-time, personalised pricing at the point of sale​.

Consumer Expectations: Modern consumers demand transparency, flexibility, and real-time interaction. To meet these expectations, insurers need advanced pricing systems that can deliver instant quotes, adjust premiums based on usage or behaviour, and provide personalised pricing options​.

Challenges Faced by Change Functions

1. Integration with Legacy Systems: Many insurers still operate on legacy systems, including reliance on spreadsheets, that are not designed to handle modern pricing algorithms or integrate with new technologies. Upgrading these systems or replacing them altogether poses significant technical and operational challenges. Change functions must manage these transitions carefully to avoid disruptions in service and data integrity​.
2. Data Management and Quality: Effective pricing relies on accurate, high-quality data. Insurers must ensure their data management practices are robust enough to support advanced analytics and AI applications. This includes cleansing existing data, establishing strong data governance policies, and integrating diverse data sources into a unified system​.
3. Talent and Skills Gap: Implementing and managing advanced pricing systems requires specialised data science, AI, and cloud computing skills. Insurers face the challenge of recruiting and retaining talent with these capabilities. Additionally, they must invest in training existing employees to adapt to new technologies and processes​.
4. Cost and Resource Allocation: Upgrading pricing systems is a significant investment. Insurers must allocate sufficient resources while balancing other operational priorities. This includes the cost of new technologies and the potential downtime and productivity loss during the transition period.

Strategies for Effective Implementation

1. Phased Implementation: Adopting a phased approach to system upgrades can help manage risks and ensure smoother transitions. By gradually integrating new technologies and processes, insurers can address issues incrementally and maintain business continuity.
2. Cross-Functional Collaboration: Successful implementation requires collaboration across various functions, including IT, finance, underwriting, and customer service. Change functions must facilitate communication and coordination among these departments to ensure alignment and efficiency.
3. Leveraging External Expertise: Partnering with technology vendors and consulting firms can provide the expertise and support needed to navigate complex upgrades. These partners can offer insights into best practices, new trends, and innovative solutions tailored to the insurer's specific needs.
4. Focus on Customer Experience: Upgrading pricing systems should ultimately enhance the customer experience. Insurers should prioritise features that improve transparency, speed, and personalisation, ensuring the new systems meet or exceed customer expectations.

Take a Strategic Approach to Ensure Success

Technological advancements, regulatory changes, and competitive pressures propel the insurance industry's demand for pricing system upgrades. Change functions are crucial in managing these upgrades, ensuring that insurers can leverage new technologies, and simplify processes while maintaining compliance and operational efficiency.

By adopting strategic implementation approaches, fostering collaboration, and focusing on customer-centric improvements, insurers can successfully navigate the complexities of pricing system upgrades and position themselves for long-term success.

For expert advice on any of the topics discussed in this blog, contact Brighter Consultancy.

Citations

Deloitte: 2024 global insurance outlook
PWC: Next in insurance: Strategic industry trends in 2024
BCG: Price Transparency in US Health Care Demands Swift Action
AON: Q1 2024: Global Insurance Market Overview