Premium calculation & comprehensive pricing process

First of all, it should be remembered that defining an underwriting and risk selection strategy upstream is an indispensable prerequisite and at least as important as producing tariffs.
Being able to simulate the impact of your decisions and control the transition from pure premium to commercial tariff requires the integration of many additional elements that will lead to a real governance of tariffs, a major competitive advantage!

This stage includes the extraction of internal data, of course, but also external or market data, the preparation of the data (merging of files, processing of missing data, creation of new data, definition of homogeneous segments, definition of large claims, etc.), the analysis of the data (one-way and two-ways analysis, coherence and consistency of the data) and an optional complementary sequence of pre-selection of variables using machine learning techniques when the mass of data is too large.

When talking about non-life insurance pricing, the manager often thinks about the final price that will be offered on the market (the commercial premium), whereas the actuary focuses first on modeling the underlying risk and the pure premium.
Once these models have been built, they need to be validated, the various KPIs (pseudo R squared, Gini coefficient, etc.) need to be analysed, and their consistency over time checked.
This work can be complemented by the development of Geographical Risk Models, vehicle classification, comparisons with past models, etc. Once the pure premiums have been validated, it is then necessary to make a few adjustments (to the perimeter or IBNR for example).

After this stage, the commercial premium can be calculated by integrating various analyses: comparison with the current tariff, conversion analysis (price elasticity, retention analysis, analysis of commercial discounts, calculation of customer value with possible multi-branch analysis, analysis of competitiveness and finally, tariff optimisation).

This stage, which is carried out with the various stakeholders in the underwriting process, includes validation of the work as a whole, production startup, monitoring and the study of the impact on the commercial rate, which may lead to a new iteration. The challenge of pricing is therefore less about producing a black box tariff than it is about monitoring portfolios and tariffs to gain the major competitive advantage of true tariff governance.

An efficient pricing process is not just about producing a GLM model. It starts well before, with the definition of an underwriting and risk selection strategy, and extends beyond, with an iterative validation phase involving all stakeholders. This comprehensive tariff governance is what constitutes a lasting competitive advantage.

This second challenge illustrates why pricing must be treated as an integrated process, rather than a series of isolated technical tasks. The full ebook describes the six key pricing challenges, along with the practical recommendations to address them.