Key learnings from the Motor Insurance Pricing in Saudi Arabia

Prior to the pandemic, Saudi Arabia’s motor insurance market saw a period of significant discounts, driven by a decrease in car usage and the influence of online aggregators. This strategy, while seemingly beneficial with declining loss ratios, proved unsustainable. As claim frequencies rebounded to pre-pandemic levels by late 2020, the market witnessed a sharp reversal. The result? A drastic rise in the loss ratio and a significant decline in underwriting profits for insurers.

The world of motor insurance pricing is constantly evolving, and keeping pace with market shifts can be a challenge. This is where innovative initiatives like the addactis® Pricing Game come into play. This game is a unique platform for actuarial professionals to collaborate and tackle real-world pricing issues in a competitive setting.

Let’s delve into the recent edition of the Pricing Game held in Saudi Arabia, where participants grappled with the unique dynamics of the country’s motor insurance market.

The 2022 edition of the Pricing Game mirrored this scenario. Participants were tasked with correcting pricing inefficiencies for a block of third-party liability business written in 2020, facing financial pressures in 2021 and Q1 2022. The goal: develop pricing strategies that would ensure profitability while maintaining customer retention.

Nine teams participated, each tackling the challenge with a unique approach. Some teams prioritized maximizing profitability, potentially at the risk of customer churn. Others opted for a more balanced strategy, aiming for higher retention even if it meant sacrificing some profitability.

The competition unfolded in two stages:

1. Technical Pricing with Generalized Linear Models (GLMs): teams used GLMs to calculate technical premiums based on risk factors.
2. Commercial Price Definition with Simulation: teams simulated different pricing scenarios to define commercially viable pricing strategies.

The final results showcased the diverse approaches to achieving optimal pricing. The winning team, “Beta“, achieved a balance between profitability and retention.
Their winning strategy involved:

• Tailored Geographical Segmentation: Focusing pricing adjustments on specific regions based on risk profiles.
• Refined Pricing by Vehicle Type: Implementing differential pricing based on vehicle characteristics.
• Effective Commercial Strategies: Exploring various commercial options to maximize profitability.

While some teams like “Alpha” and “GlmOne” achieved the highest model accuracy through meticulous factor grouping and forecast assumptions, these approaches didn’t translate to top profitability rankings. This highlights a critical lesson: model accuracy alone isn’t enough.

The Pricing Game serves as a valuable learning experience for the Saudi Arabian motor insurance market. Here are some key takeaways:

• Importance of Multivariate Models: while essential for accurate risk assessment, these models need to be complemented by commercial strategies.
• Focus on Business Goals: actuarial techniques should be used to achieve specific company objectives, like profitability or market share targets.
• Evolving Market Landscape: price increases are inevitable to address the current situation. Online aggregators will continue to shape market dynamics, pushing insurers towards more advanced pricing techniques.

A special thanks to all the participants of this Pricing Game and our partner Badri Management Consultancy, as well as the team from The Actuary Magazine!

Want to delve deeper into the insights gleaned from the Addactis Pricing Game? Our very own expert, Juan Ignacio de Oyarbide, recently penned a detailed article in The Actuary Magazine*, exploring the key learnings from this edition.

The article delves into the challenges faced by insurers, the diverse strategies employed by participants, and the essential takeaways for a successful motor insurance pricing approach in a dynamic market.

Sharpen your actuarial skills and gain insights into real-world pricing challenges with the Addactis Pricing Game!

The Addactis Pricing Game puts you in the shoes of an actuary, tackling market challenges and where you’ll analyze a pre-built pricing model and develop strategies to optimize it for a specific market challenge.

Ready to compete? Learn more about the Addactis Pricing Game and discover how to develop your actuarial expertise.