30 September 2016

Leveraging advanced analytics and software

- price optimisation in the life industry

© 2016 Willis Towers Watson. All rights reserved.

Neil Chapman

Brand value

Strategic pricingCustomer

demand

What is price optimisation?

© 2016 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 2

Retail price vs cost plus

Competitive pricing

Broadly: any movement away from a technical price is price optimisation and it happens all the time…

© 2016 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 3

Underlying assumptions

Investment yields

Expenses

Mortality

Lapse risk

Tax

Basic customer data

Age, (sex), premium / pot size, postcode, health

Distribution channel

c250k segments to price!

Competitor data from portals

Precise competitor quotes six months ago

Average of top five last month

Average ranking across c.100 segments

yesterday

Interpolation Cost plus

Customer

demand

Retail

price

What is price optimisation?

Retail price vs cost plus in life insurance

Demand modelling

Price

De

man

d

External

and internal

data

What is price optimisation?

© 2016 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 4

“Adjusting prices away from a cost-plus basis to better achieve business objectives”

Co

nd

uct

ceilin

g

Pro

fit floo

r

Conversion

rate

Profit per

policy

Expected

profit

Constraints

Premium

Risk modelling

What is price optimisation?

© 2016 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 5

“Adjusting prices away from a cost-plus basis to better achieve business objectives”

Risk modelling Demand modelling

Price

De

man

d

External

and internal

data

Exp

ecte

d p

rofit

Conversion rate

Portfolio level

Distribution channels

Rate delivery

Price decisions

Administration systems

What is price optimisation?

© 2016 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 6

Price optimisation is a tool

Exp

ecte

d p

rofit

Conversion rate

Current prices

Price optimisation is a tool for the efficient allocation of profit

Profitability can be increased, however…

… conversion can be increased for the

same level of profitability

We may choose not to select an optimal

price but to have greater understanding

of the options

Price optimisation is not profit maximisation!

What is price optimisation?

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Customer centricity

Sophisticated pricing allows for customer relationship

value to be reflected in pricing decisions

1 2 3 4 5

Year

Customer relationship value

Expected value Potential value

Why now?

© 2016 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 8

.

.

Economic

Challenges

Shareholder

Demand Cash

Generation

Increased

Competition

Pressure on NB

Volumes/

Margins

Regulatory

Pressure for

Transparency

Pressure on

Expense Base

Customer

centricity

Changingbusiness models

DigitalisationNew

business

efficiency

Market

pressures

Strategic

reactions

Key

result area

New

business

pricing

Key

component

The ‘arms race’ of analytic techniques – learning from P&C

© 2016 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

P&

C

Price

Delivery

Price

Assessment

Risk

Modelling

Demand

Modelling

2010+

Real-time

optimisation

9

1990 - 1999 2000 - 2009 2010+

1990s

GLMs in claim analysis2000s

GLMs in retention

& elasticity

analysis

2005-2010

Price

optimisation

2015+

Price

optimisation

Lif

e

2005+

GLMs in mortality

analysis

2010+

GLMs in retention

analysis

Future developments

Future developments

© 2016 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 11

Where are we headed?

Further

acceptanceA digital platform

A rapid pricing

cycleFurther adoption

Greater discussions

on the implication of

price optimisation

and customer

fairness

Price optimisation

to become more

mainstream

More companies to

adopt and establish

the process as BAU

More tailored prices

reflecting individual

information

A change in

prospective sales

channels

A focus on

increased data

assets and granular

analytics

More responsive

management and

business

information

A quicker response

to market

movements

Implementation of

pricing changes

within minutes

Spread of use of

techniques across

the protection and

annuity markets

Questions