The number of auto insurers that use analytics to understand customer buying behavior and incorporate that knowledge into the design and pricing of insurance products is growing, according to “2013 North America Auto Insurance Pricing Benchmark Survey,” from Earnix, a vendor of pricing and customer analytics solutions for banking and insurance. Results are based on responses from 73 executives and pricing professionals from insurers that sell auto coverage in the United States and Canada.

Almost half (48 percent) of large companies, those with more than $1B gross written premium (GWP), use segment-level demand models to estimate the effect of rate changes, Earnix said. Most smaller insurers (62 percent) assume no change in customer demand as a result of rate changes, which is far less accurate, Earnix said.

Large insurers also are more likely to use price optimization, which Earnix defined as using mathematical algorithms to determine optimal values of rating factors to meet certain business goals and constraints, such as maximizing profitability while achieving a specified percentage of policy growth, Earnix said. Almost three-quarters (74 percent) of large insurers use algorithms to optimize their prices or plan to in the near future, compared to 52 percent of smaller insurers currently using those methods.

“The results signal that auto insurers recognize the potential benefits of advanced customer analytics for their bottom lines,” said Meryl Golden, Earnix’s general manager for North America operations. “Consequently, we anticipate a continued uptick in the use of enhanced customer data by companies of all sizes in North America over the coming years.”

In the pricing process, Earnix said the top three challenges are:

- Effectively incorporating knowledge of customer price elasticity

- Getting and utilizing competitor data

- Predicting the business impact of new rates

Other highlights from the report include:

- When setting prices, 72 percent said they consider competitor’s prices, 55 percent said they consider customer price elasticity, 40 percent said they consider policy lifetime value, and 34 percent said they consider the value of other policies in the customer’s portfolio.

- The desire for greater profitability was the primary goal influencing pricing changes, as mentioned by 68 percent of survey respondents; 19 percent said new customer acquisition was the primary strategic driver and 8 percent said adopting a consistent product design across the country.

- The most common reason for rate changes was changes in loss cost (62 percent), followed by competition (16 percent) and new product design (14 percent); 8 percent said “other.”

- More than half, 57 percent, said they differentiate between new and renewal prices.

- “The size of the company marks the way the overall effect of a rate change is estimated,” Earnix said. The majority, 46 percent, said they take 1 to 2 months to implement new rates after filing approval; 18 percent take less and 35 percent said they take 3 to 6 months to implement new rates.

- Almost three-quarters (75 percent) said they have a set schedule for rate changes.

- More than half, 58 percent, change rates once per year and 38 percent said they make changes twice per year.

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