A new era for insurance risk modelling and pricing

  • Blog
  • 6 minute read
  • May 17, 2024

Key actions for Canadian insurers to thrive through 2030 and beyond

As the insurance industry comes under growing pressure to embrace and adopt change, insurers have already been showing their nimbleness as key issues like the implementation of International Financial Reporting Standard 17 and the COVID-19 pandemic spurred major transformations to technology systems, financial reporting processes, marketing strategies and distribution channels. As the pace of change continues to rise, Canadian insurers need to maintain their recent transformation momentum, particularly in light of some of the global megatrends impacting their businesses. These include:

  • a widening trust gap in an uncertain world;
  • evolving customer needs and preferences;
  • technological change, including the rapid adoption of generative artificial intelligence;
  • climate change risk and the growing focus on sustainability; and
  • industry convergence, collaboration and competition.

Carriers that take proactive steps to adapt to these forces of change will be the ones that secure their future in this evolving business landscape. But as they look to stay ahead of these trends, they also need to continue to ground themselves in the core driver of their top and bottom lines: the ability to adequately price insurance risk.

Enhancing pricing capabilities a critical imperative

As they navigate these wide-ranging industry shifts, a key issue for some insurers is the need for greater data and modelling sophistication. This challenge becomes even clearer when we think about the ongoing use of legacy tools and systems to price complex products. By focusing on the following three areas, Canadian insurers can improve their pricing capabilities and, in turn, enhance their future in the insurance business:

1 Technical rates

Accurate pricing is the cornerstone of any successful insurer. While critical for all, it’s even more important in personal lines, which is a high-volume sector. The ability to target desired customers as efficiently as possible and adopt the latest technical rates while minimizing adverse selection is key.

Advances in machine learning, generative AI and changing demographics make the need for insurers to update rating algorithms and develop innovative approaches to pricing even more urgent. By adopting sophisticated pricing models to integrate large volumes of data and make the most of cloud capabilities, insurers can enable a more profitable bottom line and harness further downstream benefits, such as real-time portfolio and claims analytics. Conversely, we estimate that by not embracing opportunities to price risks accurately and push rates to customers in real time, carriers could see an increase in actual loss ratios by 1–2% every quarter.1

2 Governance

The technologies that can support better pricing are clearly on the agenda of insurance executives. Among insurance chief executives who participated in our recent Global CEO Survey, 76% told us they expect generative AI will significantly change the way their business creates, captures and delivers value during the next three years. While this is a significant opportunity, insurance companies can also expect increased scrutiny from provincial and federal regulators, which have already been active recently in introducing new requirements and guidelines for insurers.

The prospect of further regulatory activity makes it critical to have proper governance around insurers’ AI models, especially when it comes to mitigating potential bias in pricing decisions, minimizing model risk and ensuring transparency for stakeholders. Having the right safeguards can help insurers build trust, not just with policyholders but also with regulators. This is even more important in regulated lines of business in which insurance companies will be looking to have updated rates approved.

Insurers with improved and upgraded processes and systems will adapt most easily to new requirements they’ll soon face, such as the Office of the Superintendent of Financial Institutions’ model risk management guideline (E-23). Developments on the provincial front, as we saw with Alberta’s recent automobile insurance reform, are also pointing to a heightened need to focus on the risks created by increasingly complex models. Insurers that enable proper governance will benefit in ways that go beyond giving comfort to stakeholders like regulators; it’s also about good business as it leads to better models that price risk more accurately.

3 Climate change

Also among the regulatory changes prompting insurers into a new way of thinking is OSFI’s B-15 guideline on climate risk management. To comply, all carriers must now implement a robust climate risk management framework. And the considerations are broad, especially as it becomes clear that traditional catastrophe models can no longer be the primary tool carriers use for assessing their climate exposure.

As part of analyzing the impact of various climate scenarios on a carrier’s viability, insurers will need to look at desired product offerings in different locations and make sure they adequately price each of them given the effects of, and damages caused by, a changing climate. This will be critical as we continue to see just how significant those impacts can be. According to Catastrophe Indices and Quantification Inc. (CatIQ), Canadian insurers incurred CA$3.1 billion of insurable losses from catastrophic events in 2023.2

Insurance executives are acknowledging the impacts on their companies: 55% of those who took part in our Global CEO Survey say their organization is at least moderately exposed to climate change threats, compared to 38% among all respondents.

27th Annual Global CEO Survey

But there’s a need for more urgency in responding, with just 13% of insurance CEOs saying they have completed actions to incorporate climate risk into financial planning. Another study, from the investor-led initiative Climate Action 100+, found that only 4% of the companies assessed align their climate policy activities with the Paris Agreement.3

Helping Canadian insurers stay ahead of change

The imperative to act in the face of these trends is clear. According to our recent CEO Survey, 39% of insurance company respondents think their organization may not be viable in 10 years if it continues on the same path. Findings like this only reinforce the need for Canadian insurers to secure the future of their businesses through initiatives such as enhancing their pricing strategies.

This will require carriers to push refreshed technical rates through evolving distribution channels to enable a competitive rate-to-market delivery. To support these changes, they’ll need to upgrade technology systems and pursue AI-enhanced model migrations to the cloud. There will also be a need for transparency in these increasingly complex and dynamic pricing models. 

Our risk modelling services team offers the right mix of actuarial expertise and technology know-how to help Canadian insurance companies navigate this transition. No matter where you’re at in your pricing journey—whether you're focusing on incremental efficiencies or are looking to reinvent your whole approach to pricing—we’ll work closely with you to find the right solutions for your business. To learn more about the trends impacting your business and how you can stay ahead of change, contact us today.

An overview of our risk modelling services

We can help insurers with ensuring:

• Loss modelling
• Governance/filings
• Financial performance

• Cloud processing
• Pricing integration
• Quote systems

Future orientation
• Climate change
• Social responsibility
• Consumer demographics

Estimate based on current trend of 5–6% cost inflation in property and casualty insurance with insurers taking about a quarter to implement new rates.

2 CatIQ news release, January 8, 2024

3 Climate Action 100+, “Climate Action 100+ net-zero company benchmark 2.0: 2023 results,” October 2023

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Keegan Iles

Keegan Iles

Partner, Strategy& and National Insurance Leader, PwC Canada

Tel: +1 416 815 5052

Dave Harris

Dave Harris

Partner, National Risk Modelling Services Leader, PwC Canada

Tel: +1 416 869 2475

Gloria Asare

Gloria Asare

Director, Risk Modeling Services, PwC Canada

Tel: +1 437 518 9235

Eugene Korol

Eugene Korol

Senior Manager, Risk Modeling Services, PwC Canada