Risk-Based Pricing: Understanding the dynamic value of the risk

Top performing auto insurance companies have improved their data-driven decision-making by leveraging better data. This better data not only helps drive continuous improvement, it’s also being used to implement more sophisticated, accurate pricing for both the insurer and the insured. “Better data” is a big, complex topic, so for today, we’re going to drill down into a key aspect: what “better data” is available for risk-based pricing, and why should all insurers be leveraging it?

To answer those questions, let’s first look at the changes that are driving the need for better data. There are two key changes that auto insurers need to take into account when it comes to the vehicles they cover.

Change 1: Vehicles are smarter.

• A vehicle now has the ability to defend itself. Through ADAS features and related added defense mechanisms, cars are better able to defend themselves from damage in spite of the driver.
• Vehicles are now able to “talk” directly to manufacturers and insurers. They can communicate location, mileage, operating conditions, need for maintenance, and so on.

Change 2: Vehicle values are more volatile.

• Historical patterns of vehicle values are broken and need a new reality-based focus. Like any other valuable object that gets insured, aligning it to current value in the market is required to manage risk.

In addition to vehicle changes, these market conditions need to be factored in to best understand risk and value. 

Conditions Influencing Risk

• Vehicles are getting smarter and have better technology patterns (i.e., the combinations of technologies like lane assist, adaptive cruise control, etc.).
• The rise of continuous underwriting is emerging where how much driving, driving quality, and active features on a vehicle that are ‘turned on’ in any moment are part of the new way of working.

Conditions Influencing Value

• The actual sales transactions of a vehicle can describe the value of replacing one similar to it. As is done with other insurable items like rings, houses, and artwork, this enables the price of insurance to be better aligned to the value of the insured item. This valuation capability replaces the need to cling to existing prediction methods which we find are now misfiring. The data upgrade we see here makes “just look it up” valuation a possibility.

Vehicle and market changes are sparking the need to rethink risk-based pricing strategies. Risk-based pricing accuracy requires new levels of analysis that take into account both the technology patterns that arise from individual features installed on vehicles that create ‘defensible space’ and a dynamic understanding of the value of a vehicle over time. Insurers that are combining this intelligence into their risk-based pricing strategy are better positioned to compete. At the end of the day, insurers can make more money being smarter about the cars they insure and lose more money being wrong about how much they’re worth.

We’re just scratching the surface on the breadth of better vehicle data that is now available to insurers to inform and improve their pricing and valuation strategies. If you’d like to discuss vehicle valuation data more in-depth, let’s connect.

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