What is dynamic pricing and why is it so essential to the future of Insurance?
Two cars are driving down the motorway. Driver A is driving at 60 miles per hour. Driver B is driving at 65 miles per hour. Which is the most likely to make an insurance claim?
What if you knew other factors that impact risk: the number of cars on the road, the temperature inside and outside the car, the radio volume, when the car last had an MOT.
Suddenly your risk prediction becomes much more accurate. Perhaps the car driving faster is a lower risk because it was serviced yesterday or because the weather is good, something we can infer from the speed of the windscreen wipers. We think these additional factors should be priced in, as standard, in real time.
This is just one example of dynamic pricing. We believe that scenarios like this will change the face of insurance as risk models and big data collide over the next 10 years.
It’s time to use data to rethink risk
The way most policies are priced seems a bit antiquated to us. Limited information is taken about people to predict their risk. People with similar characteristics are put into groups to spread the risk. Roughly half of customers pay too little for their policy. Roughly half pay too much. It’s been done the same way for generations
We think we’ll all look back on these ‘old models’ as a time that we were blind to our customers’ lives. New models incorporating information about the live driving environment and contextual data will, over time, bring about the end of ‘blind pricing’. One day we will look back and ask ourselves, how did we ever price policies without dynamic pricing?
With dynamic pricing, who pays more?
Driver A doesn’t want to pay for Driver B’s reckless behaviour or his avoidable accidents, but he accepts that life remains unpredictable which is why we all need insurance.
Driver A also doesn’t want to pay when he is involved in an accident through no fault of his own. With more data, an insurer should be able to price more fairly after such a faultless accident.
We see a future, where Driver A’s contextual data predicts Driver A’s policy pricing, because it can be measured. This favours the more careful driver rather than the slowest or oldest driver.
Transparent dynamic pricing can even make people drive safer, nudging them to drive at safer times or in better weather conditions. Dynamic pricing also encourages drivers to make improvements to their vehicles to get their premiums down. Because pricing is done in real time, the reward is immediate.
The company that builds that platform and functions transparently will get Driver A’s business and loyalty. The one which doesn’t will be left at the side of the road.
At The Gateway we know this is all possible. By Miles, one of the companies we invested in, does pay-per-mile insurance. Other insurance types are also ripe for innovation. Those doing the innovation may not be coming from inside the industry. They may be coming from elsewhere. We welcome them.