The Australian Securities & Investments Commission claims that pricing failures are all over the insurance industry. For insurance companies, developing a pricing strategy is a complex process that involves careful consideration and evaluation of various factors. Insurance companies look at factors such as an applicant’s age, health, occupation, credit score and driving record. Companies then evaluate these risks to determine how much to charge for coverage.


 >Download Now: Free PDF A Capability Framework for Pricing Teams


The problem is though, insurance companies’ over-reliance and mismanagement of mathematical models and complex algorithms often lead to pricing failures. While software may be predesigned to maximise profit, it may not adhere to financial regulations and reflect the value these companies promise to offer their clients. This can lead to the business not being able to remain competitive or profitable. 


In this article, we are going to discuss how insurance companies can enhance their pricing strategy. First, we go over a recent pricing conflict in the insurance industry. Following that, we explain why setting the proper prices in this business is complicated and difficult. Then, we provide recommendations on how insurance companies can offer more value to their clients while also adhering to regulations through pricing optimisation. We argue that all insurance companies should begin strengthening their pricing systems to ensure they keep their promises to their clients.


At Taylor Wells, we believe that a better pricing strategy is critical for insurance businesses to attract and retain clients. By the end, you will learn value-based and customer-focused approaches that insurance companies may utilise to maintain solid branding and profitability.



Customer-Focused Insurance Pricing Strategy To Increase Sales  


Insurance businesses are no strangers to controversy. Over the years, they have been embroiled in all sorts of debates, from accusations of mismanagement and fraudulent practices to allegations of price gouging. While the industry has made strides in addressing these issues, there is still much work to be done to ensure fairness and transparency in business practices.


The insurance industry has recently faced an issue where pricing algorithms were utilised to limit the discounts provided to customers.


Insurance Australia Limited (IAL) has admitted breaching the law after the Federal Court found that the business employed a pricing algorithm that capped the discounts renewing clients could get; ensuring their premiums did not go lower than a predetermined price point. 


The problem here is that the promised discounts were not passed on and clients spent more in premiums than they had been told. The pricing mechanism affected 600,000 clients, and IAL has already been fined $40 million.


According to ASIC, pricing issues are an industry-wide problem. ASIC is advising all general insurers to get rid of needless pricing complexity and improve their systems, procedures, and controls to ensure they deliver on their pricing promises.



How do insurance companies price their offers? Why is it difficult?


Insurance companies decide how they price their offers through a multi-step process that involves actuarial analysis, underwriting, loss ratio analysis, market conditions, pricing strategies, profit margin considerations, and compliance with regulatory requirements. This process is complex and not easy to get right due to several reasons.


Assessing risk accurately is crucial for insurance pricing. Actuaries analyse vast amounts of data and use statistical models to estimate the likelihood and cost of potential claims. However, predicting the future is inherently uncertain, and there are numerous factors that can impact the frequency and severity of claims.


Pricing decisions are influenced by market conditions, including competition, regulatory changes, and economic trends. Market dynamics can be unpredictable, and insurance companies must navigate these factors while remaining profitable. Failure to adjust pricing to reflect changing market conditions can result in financial losses or loss of market share.


Insurance pricing is also influenced by customer behaviour and perception. Factors such as consumer preferences, buying habits, and customer expectations play a role in determining pricing strategies. Thus, insurance companies must carefully analyse these behavioural factors to remain relevant in the market.


Discussion On How An Insurance Business Can Optimise Its Pricing Strategy


Given the complexity and the numerous factors involved, insurance companies face challenges in building a pricing strategy. They must continually refine their models, adapt to evolving risks, monitor market conditions, and ensure compliance with regulations.


insurance pricing strategy


How can an insurance company improve its pricing strategy? 


Striking the right balance between risk assessment, profitability, affordability, and market dynamics requires a careful and ongoing evaluation of multiple variables.


1. Customer Segmentation


Implement customer segmentation strategies to better understand the diverse needs and preferences of policyholders. By segmenting customers based on their risk profiles, demographics, and behaviours, insurers can tailor pricing strategies and coverage options to meet specific customer segments’ needs. This customer-centric approach ensures that pricing aligns with the perceived value of the insurance products and enhances customer satisfaction.


2. Value-Based Insurance Pricing Strategy


Shift from a purely cost-based pricing model to a value-based pricing approach. Instead of solely considering internal costs and risk assessments, assess the value proposition of the insurance products from the customer’s perspective. Evaluate the benefits, coverage features, customer service, and overall value provided by the insurance offerings. Align pricing with the perceived value and differentiate pricing based on the unique value proposition for each customer segment.



3. Customer Engagement and Feedback


Foster regular customer engagement and seek feedback to gain insights into their expectations, pain points, and satisfaction levels. Conduct surveys, interviews, and focus groups to understand customer perceptions of pricing and their willingness to pay. This feedback can inform pricing decisions and help insurance companies design pricing structures that resonate with customers, ultimately improving customer loyalty and retention.


4. Transparent Pricing Communication


Enhance transparency in pricing by clearly communicating the factors and rationale behind the pricing decisions to customers. Provide easily understandable explanations of the pricing components, such as risk factors, coverage levels, and discounts. Transparency builds trust, reduces customer concerns about hidden costs, and allows customers to make informed decisions. Clear pricing communication also helps customers understand the value they are receiving for their premiums.


5. Continuous Monitoring and Adaptation


Continuously monitor the market dynamics, customer needs, and regulations to adapt pricing strategies accordingly. Regularly evaluate pricing performance metrics, such as customer satisfaction, customer retention, and profitability. Use market research, data analytics, and competitive intelligence to identify pricing opportunities, adjust pricing structures, and optimise pricing decisions. This iterative approach ensures that pricing systems remain responsive to evolving customer expectations and market conditions.



Implications Of Insurance Pricing Strategy To Customer Relationship Management Plan


Adopting value-based pricing, customer segmentation, transparent communication, customer engagement, and continuous monitoring, can help insurance companies streamline and improve their pricing systems to better meet customer needs, enhance customer satisfaction, and drive business growth.


Insurance companies benefit from optimising their pricing strategy.


Optimising pricing strategy in the short term yields financial gains, customer acquisition, and operational efficiency, while in the long term, it establishes a foundation for long-term success, customer loyalty, market differentiation, risk management, and adaptability to changing market conditions.


Our findings show that with the right set-up and pricing team in place, incremental earnings gains can begin to occur in less than 12 weeks. After 6 months, the team can capture at least 1.0-3.25% more margin using better price management processes. After 9-12 months, businesses often generate between 7-11% additional margin each year as they identify more complex and previously unrealised opportunities, efficiencies, and risks.


Boosting commercial capability for insurance companies also provides both short-term and long-term benefits.


Short-term benefits include improved sales and revenue through effective marketing and distribution strategies, enhanced customer acquisition through targeted campaigns and improved sales processes, increased operational efficiency through streamlined workflows and improved sales tools, and improved customer satisfaction through enhanced customer service and responsiveness.


Long-term benefits include sustainable business growth through a robust sales pipeline and customer retention strategies, improved market competitiveness through strong distribution networks and effective partnerships, enhanced customer loyalty through personalised experiences and tailored solutions, and improved brand reputation through a customer-centric approach.


Our findings show that when a business builds and embeds commercial capability across the business; bolstering its internal pricing skills and capabilities to build a sustainable pricing system, it can generate at least 3-10% additional margin each year while protecting hard-earned revenue and volume. This is at least a 30-60% profit improvement straight to the bottom line.


〉〉〉 Get Your FREE Pricing Audit  〉〉〉


Bottom Line


Insurance companies must optimise their pricing systems to bridge the gap between the value they promise and the value they deliver to their clients. Adopting a customer-focused approach means placing the policyholder at the centre of pricing decisions. Insurance companies must leverage data analytics and customer insights to segment their customer base and offer personalised pricing options.


By shifting towards a value-based approach, insurers can move beyond traditional cost-based pricing models and focus on the outcomes and benefits their customers seek. This involves understanding customers’ needs, preferences, and risk profiles, and designing pricing systems that align with these factors. This customer-centric approach not only enhances customer satisfaction but also strengthens the insurer’s position in the market, fostering long-term success and profitability.


For a comprehensive view of building a great pricing team to prevent loss in revenue, Download a complimentary whitepaper on A Capability Framework for Pricing Teams.

Are you a business in need of help aligning your pricing strategy, people and operations to deliver an immediate impact on profit?

If so, please call (+61) 2 9000 1115.

You can also email us at if you have any further questions.

Make your pricing world-class!