Pricing and Professionalism

In an era where data-driven insights are revolutionising the insurance industry, actuaries are tasked with not only navigating the intricacies of pricing models but also upholding the highest standards of professionalism.

At the 2024 All Actuaries Summit, the Working Group for Professional Support in Pricing presented a Paper and set of principles that sparked a broad-range discussion amongst the concurrent attendees. This positive reception led to the organisation of an Insights Session to further explore these principles in a different forum.

Facilitators Colin Priest and Peter Baker

Attracting a large audience both in-person and online, the purpose of the Insights Session was to provide more context and bring the principles to life through two case studies, facilitated by Colin Priest and Peter Baker.

Providing context for the Working Group's principles, Colin opened the discussion by highlighting two elements of the Code of Conduct relevant to insurance pricing practices that may have attracted critical media attention:

• the expectation that members observe the Code in the public interest and have due regard to those stakeholders "whose interests may be affected"; and
• the obligation of members to respond to non-compliance by others before any harm is caused, "even though that may have serious implications".

Case study 1: Navigating gender, technology and migration in motor insurance pricing

Colin's hypothetical general insurance case study centred on a technical pricing actuary responsible for the pricing of a motor insurance portfolio. The actuary had undertaken some analysis which revealed that there were higher profit margins for female drivers, electric vehicles and postcodes with greater proportions of migrants.

Challenging the audience, Colin asked if they could identify any professionalism issues that may arise from these results based on a technical pricing perspective.

It became clear that the market pricing actuary applied optimisation models and price elasticity analysis which produced commercial premiums with higher margins for elderly customers and loyal customers, as well as the groups identified by the technical pricing actuary. Again, the audience were invited to discuss what actions, if any, that the technical pricing actuary might take in these circumstances.

Unpacking the pricing dilemma

The wide-ranging discussion that ensued raised some fascinating observations.

Participants were interested in differentiating what one should do from what one can do, as well as differentiating the role of the technical actuary compared with responsibility for the actual prices charged.

There were also thought-provoking queries about:

• the concept of a "right price"
• the inevitability of cross subsidies in practice; and
• the consideration of "capacity to pay".

Many participants felt that it was important to "speak up" and there was some thought given as to who to escalate to and how that might take place. To further unpack the pricing dilemma, attendees were shown the below table that may be useful for actuaries when considering a pricing process. 

Case study 2: Genetic testing and anti-selection in life insurance pricing

Peter Baker presented a hypothetical life insurance case study which centred on a pricing actuary attempting to respond to apparent anti-selective claims experience related to the thresholds for disclosing genetic test results at the underwriting stage.

Peter invited the audience to propose some options for repricing and to reflect on the fairness of those options. In this case study, Peter asked the audience how they would respond if the industry moratorium limits were doubled for new business.

There was a provocative discussion about the nature of genetic testing compared with other underwriting diagnostics and the potential behaviour of customers - both rational and irrational.

There was also reflection on the nature of industry regulation compared with individual company actions and the societal effects. At the same time, there were pragmatic reminders that a company must guard against anti-selection to stay in business.

Key takeaways: Upholding professionalism in the face of pricing challenges

From a professionalism perspective, the key theme that emerged was that the actuary in both scenarios had an obligation to reflect on their impact on customers.

However, an intriguing tension emerged around the natural inclination of some participants to prioritise their company's interest over those of other stakeholders. One wonders whether this relates to the reality of their role (and how to garner internal support) and whether this is inconsistent with the Code of Conduct ?

Members can catch-up on this Insights Session via our Past Events webpage.