Are Your Rate Levels Stale? Six Questions to Ask When Determining Growth and Profitability Goals

Congratulations! You just got that ever-elusive rate increase approved. And much like the insurance cycle that alternates between a soft market and a hard market, you’re likely now shifting your focus from profitability to growth. However, given the time lags built into filing for rate increases and the challenges associated with recent market conditions, those new rate levels may already be outdated.

You should continuously evaluate your book of business to monitor both macro and micro trends to facilitate your drive toward profitable growth. This blog delves into questions our actuarial consulting team recommends you should be asking yourself immediately after your new rate levels are released to ensure you’re meeting your targets relative to profitability and growth. Though we examine this issue through a homeowners insurance-specific lens, the principles apply to all lines of business.

GROWTH

What are your growth goals?

A growth analysis should start with identifying your target market and evaluating key performance indicators like year-over-year growth and real-time book composition evaluations. More important is to identify how your growth compares relative to competitors and whether you can access untapped markets to grow your customer base.

For example, demographic changes or quote activity may highlight that certain areas have an increasing percentage of new construction homes. Similarly, underserved markets, such as secondary/seasonal homes or properties with prior claims that have been fully mitigated, may be easily won given the limited competition stemming from recent market constriction. Either situation offers the opportunity to target customers unidentified by your competitors.

How do you measure whether you are meeting your growth goals?

Impacts to conversion rates and retention rates stemming from rate increases can be predicted by evaluating the elasticity of the market. While changes to policy counts may appear extreme, changes to premium tie better to profitability and could make rate proposals more palatable.

Also, monitoring rate change implementations ensures that rates released to a production environment align with those presented in an approved rate filing. Strategies like these ensure that rate adjustments drive long-term growth as expected and in a compliant and profitable manner.

How can you act to better meet your growth goals in the future?

Once you understand your target market and your competitors’ performance, you’re well-suited to identify customers to fuel growth. There may be distribution-specific nuances to consider to ensure your rate levels don’t appear artificially high or low, such as when and how you default to actual cash value or replacement cost coverage on a roof.

Analyses of the insurance market, competitor quoting platforms, and demographic data can help you identify how you can tailor your product offering to better grow and serve your customer base. Working with actuarial consulting experts like the team at Perr&Knight can help.

PROFITABILITY

What are your profitability goals?

A profitability analysis should start with a review of key performance indicators like loss ratios, expense ratios, and combined ratios. Even better is to benchmark these metrics against competitors to place your performance in an industry context. Once you understand how others in your same distribution channel, target market, and geographic footprint perform, you can better understand where you want to fit within the market and what profits are attainable.

How are you measuring whether you’re meeting your profitability objectives?

Actuarial indications should be supplemented with items like inflation indices and industry net trends to gauge how profitable the program is within the market. For example, replacement cost recalculations at renewal accurately recognize cost inflation of labor and materials for repairs. You can also segment your book of business to identify problem areas, such as exposure to homes with older roofs or significant fencing in wind-prone areas. Once identified, you can address these problems through improved pricing or underwriting to improve profitability.

How can you act to better generate more profits going forward?

You are not the only one taking action in this challenging market. Your company may be nonrenewing homes with prior water claims, while another is declining homes partially covered by trees.

Identifying competitor actions, anticipating the evolving customer base, and adjusting pricing or underwriting are vital to avoid scenarios of adverse selection that could undermine your profitability goals.

Consistent evaluation is key

Profitability and growth are metrics that must be placed within the context of the market and evaluated consistently, especially after the release of a product change. By identifying your goals and implementing data-based solutions to meet those goals, you can increase confidence in your performance, even in a challenging market like the current homeowners insurance industry.

Though this blog focused on homeowners insurance, the principles apply to all lines of business. The actuarial consulting experts at Perr&Knight can help you identify what questions you need to be asking, how to find answers to those questions, and how to act on those answers to ensure your rate levels are consistently up-to-date and to facilitate your drive toward profitable growth.

Contact Perr&Knight today to discuss how our experts can help your company achieve your growth and profitability goals.