Tech Can Help Insurers Price PAYG Cover Accurately

This Opinion piece is by Richard Cooke, UK Business lead, Keepler Data Tech and it looks at how PAYG cover will become the default setting in a time of recession.

The cost-of-living crisis is already hitting consumers and businesses hard. Inflationary pressures have been intensified by the huge financial price tag attached to the pandemic, as well as the ongoing crisis in Ukraine. As a result, it has become harder to meet everyday costs. That includes insurance policies.

Indeed, we can already expect some clear changes in customer behaviour, both on the consumer and commercial side – for example, we will likely start to see significant cancellation of discretionary policies like pet and dental on the consumer side and cyber for SMEs.

We also expect to see levels of cover scaled back across some of the most common insurance policy areas, including motor and home insurance. As more of these policies come up for renewal, an uptick in switching providers and cancellations becomes ever more likely. And to highlight how serious the situation has become, the Financial Conduct Authority warned insurers in September about selling unnecessary add-ons and issuing unfair penalties for non-payments.

However, it’s not only consumers that will be hit, as insurers themselves need to brace for impact. As the cost-of-living crunch intensifies over the winter and into 2023, those companies which have been slow to modernise their underwriting processes and adopt new technologies to unlock new pricing models will suffer the most. This challenging landscape calls for agility among the insurance sector. According to McKinsey, insurance leaders responsible for 90% of the sector’s profit have two major things in common – underwriting excellence and pricing sophistication.

Their success relies on their ability to react quickly to unpredictable and life-altering situations, and those life-altering situations are being thrust upon society at regular intervals right now. Therefore, those providers that can be more flexible, both in terms of their offerings and their pricing, stand to benefit from the additional spending scrutiny from consumers and businesses.

Enter, Pay As You Go cover

Many are turning to Pay As You Go (PAYG) cover in response to these changing dynamics.

For instance, US insurtech firm Lemonade’s entrance into the UK market via its tie-up with Aviva is a good example of how traditional players are looking to benefit from an increasing appetite for on-demand and pay-as-you-go type insurance products.

Also commonly known as telematics insurance, PAYG cover uses an IoT-connected device to monitor aspects of customers’ driving, adjusting motor insurance premiums based on miles covered and how those miles are typically driven. Technology is a key enabler here, as it takes the guesswork out of PAYG insurance models. Premiums can be justified on several types of driving data, including braking and speed patterns.

PAYG is proving popular among customers because it offers a sense of personalisation and control over costs, rewarding those that drive less frequently and more responsibly. Indeed, pay-per-mile insurance is increasingly attractive to many who have been able to reduce their travel in light of changing working patterns brought about by the pandemic.

For insurers, the new stream of reliable data generated by telematic devices can be combined with external sources to create dynamic pricing models. These new data sets that update in real time offer up lots of possibilities for insurers including reducing risk on policies and attracting new customers with compelling offers.

Leveraging tech to overcome PAYG challenges

PAYG also presents challenges to insurers, not least around the enormous volumes of data being created by telematics devices.

Insurance companies need to securely ingest, process and store this information, something which requires a mature data governance framework and set of guardrails. Furthermore, to extract the greatest value out of the data available to them, firms need to instil close collaboration between infrastructure, data and business teams to draw up clear and financially sound use cases.

This challenge should also be viewed as an immense opportunity. Insurers should take inspiration from retailers using data to understand their customers. Implementing systems like unique customer identifiers to track interactions across multiple channels has enabled them to drive recommendation engines which reduce the cost of sale and increase the average basket size. There is no reason why the sector cannot leverage customer and external data to drive efficiencies in the underwriting process and create cross-sell opportunities that bring genuine value to customers.

Another challenge is transparency. Underwriting has traditionally been a closed shop and switching to PAYG models requires very accurate data capture and the ability to expose that data to the customer in a way they can consume.

Consumers are becoming increasingly data savvy: those organisations that can make customers feel better informed will have the opportunity to build and maintain trust by demonstrating the ways in which the customer can directly benefit from sharing their data. And once again, technology can be leveraged to make it happen. Today, there are many kinds of data visualisation solutions available off the shelf from public cloud providers – these can assist insurers in creating informative dashboards and reports, similar to those that consumers have become used to in other financial services realms in the open banking era.

Trending towards a more agile future

The fact that the sector is migrating towards on-demand, PAYG style insurance services is of little surprise, regardless of the current cost-of-living circumstances we find ourselves in.

Over the past decade, consumers have trended towards these types of spending patterns across a whole host of categories, from entertainment to food and drink. As insurers continue their efforts to underpin their operations and strategic decision making on data, we can expect to see the emergence of more services that enable them to gather data on customers.

Technology should allow insurance firms to successfully adopt new services by unlocking business agility, be they PAYG or otherwise.

To remain competitive, they need to reduce time-to-market for new products. This can only be achieved by being able to respond quickly to the next customer trend – trends, which, in this period of volatility, are coming and going at a rate of knots.

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About alastair walker 10205 Articles
20 years experience as a journalist and magazine editor. I'm your contact for press releases, events, news and commercial opportunities at Insurance-Edge.Net

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