Solutions by Industry

Optimizing Policy Pricing: A Case Study

A leading North American insurance company used APT's Test & Learn™ Management System to optimize policy pricing.

  • The P&C provider analyzed its product line and realized that their pricing was not in-tune with customer risk levels.
  • Rather than simply rolling out the aggressive pricing and rating changes that strictly aligned pricing with risk, the company tested two versions – an aggressive version and a less radical set of changes.
  • Using APT's Test & Learn™ Management System, the insurer realized that the profit difference between the two pricing strategies was more than $100 million per year.
The Company:

A leading North American insurance company

The Challenge:

A leading P&C provider analyzed its product line and discovered that pricing was out of kilter with customer risk levels. Lower risk customers were paying more than their losses warranted, and higher risk customers were paying less. The company believed that better aligning customer pricing with customer risk would create a more resilient product line. The company’s best customers would pay less and therefore be less exposed to potential competitive pricing pressures, whereas more risky customers would pay more to cover the cost of their potential losses.

The company was concerned, however, that a wholesale change in its pricing structure might lead to unexpected reactions from the customer base. Rather than simply rolling out the aggressive pricing and rating changes that strictly aligned pricing with risk, the company tested two versions – an aggressive version and a less radical set of changes that accomplished some of the goals while conforming more closely to historical pricing and rating norms.

The Solution:

Using APT's Test & Learn for Policyholders™ software, sales and losses for customers on each of the new pricing strategies were compared to a scientifically matched control group of customers drawn from markets outside of the tests. The results of the test were clear and compelling.

In the aggressive plan, revenues fell sharply as customers who received significant price increases left the company for less expensive alternatives, and customers who were offered price decreases happily enjoyed them. While losses improved somewhat, these improvements were overwhelmed by the revenue loss in the customer base. In the less aggressive plan, the story was very different. Customers who were priced up less aggressively generally stayed with the company, and overall revenues increased significantly. Losses were unchanged, and, in aggregate, the program improved company profits.

The Results:

The system-wide profit difference between the two pricing strategies for the insurer was more than $100 million per year. The less aggressive version was rolled out.