Price optimisation is on the rise in UK insurance, driven
by the insight that underwriters gain from big data. Yet it is
proving a divisive practice, with US regulators increasing banning
its use in personal lines markets.
The underwriting practice of 'price optimisation' has opened up
a debate about insurance pricing, with the insurance sector facing
calls for innovation, as well as accusations of unfairness.
Price optimisation involves the use of non-actuarial pricing
factors in setting premiums and in particular, the insight that
insurance firms can draw from big data about how much we are
prepared to pay for what they have to sell. It's referred to as the
price elasticity of demand.
Some people see price optimisation as innovative and customer
centric, and replacing underwriting judgement with evidence based
precision. Others see it as alienating, unfair and devaluing
insurance with its emphasis on price over cover.
Many US insurance state regulators have now banned price
optimisation in personal lines insurance, and the National
Association of Insurance Commissions has recommended that all state
regulators ban it as being unfairly discriminatory.
The Financial Conduct Authority has launched a market study into
the use of big data in retail general insurance. Will they follow
the US example and introduce a ban on price optimisation here? If
so, what steps can UK insurance firms take now to prepare for such
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