Achieving the right balance between speed and thoroughness in pricing decisions is one of the challenges insurers face in organising their pricing function. Especially in competitive markets, there is the desire to move quickly in response to changes in the market, whilst at the same time wanting to have a detailed understanding to enable well informed decisions. The tension arising from the time it necessarily takes to collect and analyse data on the impact of any changes.

Agile and Analytical characterise the two extremes.

Agile Approach

This is based upon the premise that good pricing is about the ability to respond quickly to changes in market conditions. So its characteristics are:

• Tracking key sales and performance measures
• Responding quickly to evidence of changes in performance
• Pricing decisions devolved within business
• Tending to make many small changes
• Viewing price changes as experiments with a strong feedback loop

Analytical Approach

This is based upon the premise that good pricing is built upon a detailed understanding of costs and other factors. So its characteristics are;

• Undertaking detailed analyses and modelling of detailed data
• Project approach with typically several months elapsed time
• Pricing decision centralised to senior executives
• Infrequent changes to price
• Viewing Pricing as "one-shot" at setting right prices

Achieving the Balance

Both these extremes have their merits and disadvantages.

The Agile approach works best when the business is already performing close to expectation. Then monitoring performance and making small tactical changes to keep the business on track is an appropriate process.  However, the Agile approach can result in yo-yo pricing as the business responds to what is nothing more than random variation in performance. On the other hand the Analytical approach runs the risk of being left behind by market changes due to the long elapsed time to delivery new prices.

In practice insurers pricing processes balance these two extremes and reflect the market context and their own capabilities. Not surprisingly it is UK motor insurance that has the greatest need to achieve a balance. The dynamic, competitive and price sensitive nature of the market creates a requirement to be Agile. Yet the complexity of pricing structures and trends in claims patterns mean that a detailed Analytical view of the business is also required. Many insurers tackle this need to have a balance by spliting their Pricing team. A Retail team operating in an Agile way and making tactical price changes and a Technical Team following a more Analytical way and responsible for building and maintaining the detailed pricing models.