Here we will show why Inamon is so important for the insurance company as well as the end customer, when we look at price differentiation.

What is it?

Price differentiation is where you look at the risk you are taking and setting the price accordingly. It is not a new thing, as without it, the price would be the same for all cars and drivers, and we all know that this is not the case.

Price differentiation rates on a large number of criteria divided into two groups:

• Profile of the insured person and object, e.g. type of car, age of driver, immobiliser, post code etc.
• Cover required, e.g. Comprehensive or Third party fire and theft, Legal protection, Break down, Courtesy car etc.

A more granular example is a home policy where a customer may have an option to be covered for Freezer Content. Those without a freezer don't need that cover, and even if they do have a freezer, they may not want the cover. The customer may want the cover, but may want to decide how much it should cover. If you fill your freezer with lobsters and fillet steaks, you need more cover than if you just keep a few pizzas. You get the gist!

Many insurance companies offer free included cover of some kind. It isn't free and often just a sign that they can't price differentiate in their IT-systems.

Price differentiation can be seen in other industries such as airlines, where some carriers charge for what you get, e.g. bags in hull, food on board, priority boarding etc. Previously you would pay for a service whether you wanted it or needed it.

The internet has created new opportunities for micro level unbundling with computer based price calculations and where the customer has the option of selecting exactly what is required, not buying a "one size fits all" product.

Below is an illustration of the impact on the insurance company when using price differentiation and just as importantly when not using it. 

From the illustration above we can draw the following conclusions:

• Customers will migrate to the company with the lowest price
• Customers with a low risk will move to insurance companies with high price differentiation
• Customers with a high risk will move to insurance companies with low price differentiation
• Insurance companies with high price differentiation will attract the good risks
• Insurance companies with low price differentiation will attract the bad risks
• Insurance companies with low price differentiation will be threatened in the long run, as they continue to increase prices to cover their highest risks.
• Insurance companies with high price differentiation will have better profitability and can continue to win business.
• In other words, use price differentiation and prosper or don't use it and get punished.

How Inamon can help?

At initial sale it is of course important that the customer can buy exactly the required cover, and Inamon is perfectly geared to that. The more the customer can visualise of the selected cover, e.g. via slide-selection, the quicker the customer will understand the available cover range and remember what the policy covers in the end.

To actively select the cover levels makes it much more transparent than having to find the limits in the terms and conditions.

If the customer is buying a "one size fits all" product, it is not likely that any changes to circumstances will require changes to the policy, but if the customer buys a tailor made product, it is very likely that changes to circumstances will require changes to the policy.

This is where the self-service facilities of Inamon are so important. The more price differentiation is used for a product, the more changes to the cover is required when circumstances changes. The more changes to the policy required, the more sense it makes for the insurance company and the customer to use self-service.

Amendments via call centres are costly, but self-service is free and a win/win situation for customers and insurance companies.

An example of a change is when the customer buys a specified item on holiday, e.g. a watch, and may only be covered when the item is registered on the policy. The customer will have access to the account and can update the policy accordingly, there and then.

Conclusion

There is an accelerating trend towards more precise pricing for risk, based on increasingly detailed personal information and where the customer is only charged according to the risk they represent.

Price has always been an important differentiator in the mass market, but the rise of aggregators has made comprehensive price comparison easy.

With margins under severe pressure, accurate pricing for risk represents the principal strategy whereby insurers can hold onto market share without seeing their profitability diminish to a low level.

IT systems are essential in this process and must satisfy the business goals of enabling granular rating as well as easy adjustment of cover and circumstances.

Inamon does this better than any other solution.