3 Technologies That Enhance Business Insurance Pricing (2024)

Finding cost-effective business insurance is a pressing need for companies. A recent survey found 80% of risk managers name price as a top factor in selecting an insurer. This demand pressure means insurers need to optimize pricing capabilities to stay competitive.

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Fortunately, new technologies are emerging to enable insurers to price policies strategically. By leveraging advancements in areas like AI, IoT, and blockchain, insurers can accurately assess risk while keeping premiums attractive.

This article will explore the top 3 technologies transforming business insurance pricing:

The Growing Importance of Pricing in Business Insurance

Price optimization is becoming a key capability for insurance providers. Here‘s why:

Intensifying competition: A crowded marketplace gives buyers more options, forcing insurers to offer competitive pricing.
Profit pressure: Rising claims and underwriting costs squeeze insurer profits, putting emphasis on pricing for profitability.
Customer churn: Policyholders readily switch for lower rates, so pricing greatly impacts retention.
Expense ratio: More accurate pricing helps lower the insurer expense ratio for issuing policies.

According to Deloitte, 77% of carriers see price optimization as very or critically important. The right pricing strategy can boost policy volume by 10% or more.

Clearly, insurers need advanced capabilities to price premiums strategically. This is where new technologies come in.

1. AI/ML for Granular Risk Assessment

AI and machine learning can analyze thousands of data points to precisely evaluate risk levels. This allows highly personalized pricing.

How AI pricing models work:

AI algorithms can incorporate hundreds of variables related to the insured, including:

Financial metrics
Management expertise
Operations
Supply chain
Industry trends
Regional risk factors
Past loss data
Insurance scores
And more

By processing and detecting patterns across massive datasets, AI models can identify the most predictive risk indicators for a given business. This enables very segmented, customized pricing tailored to an individual company’s risk profile.

Some AI techniques used:

Linear regression
Random forests
Neural networks
Gradient boosting

For example, Zesty.ai offers AI that analyzes aerial images, property data, geographic risk, and other factors to assess hazard exposure. Their models can estimate future losses, allowing insurers to accurately price property coverage.

Benefits of AI pricing:

Hyper-customized premiums: AI provides pricing at a very granular, individualized level.
More accurate risk assessment: AI analyzes exponentially more data than human underwriters.
Scenario modeling: AI can rapidly assess "what-if" scenarios to optimize pricing strategies.
Competitive pricing: Precision pricing means insurers can offer lowest viable premiums to win business.
Improved loss ratios: AI modeling enhances risk predictions and prevents underpricing.

According to McKinsey, AI techniques can reduce loss ratios by up to 30 percent. More accurate pricing via AI gives insurers a competitive advantage.

AI analyzes massive data sets to enable precise risk modeling. (Image source: AIMultiple)

2. IoT for Usage-Based Coverage

The Internet of Things provides real-time data through connected sensors that allows insurers to base premiums on actual usage metrics.

How IoT enables usage-based insurance:

IoT devices like telematics, smart home systems, thyroid monitoring implants, and commercial sensors allow insurers to directly measure risk-related metrics. For example:

Fleet telematics track driving behavior, mileage, vehicle diagnostics, crash data, etc.
Smart factory sensors monitor production, equipment, inventory, shipments, facilities, and more.
Smart buildings provide data on occupancy, security, maintenance issues, energy use, and occupants‘ health.

Insurers can then price policies based on actual usage. For instance, a manufacturer‘s premiums could be based on running hours of machinery. A retailer may pay based on foot traffic. This aligns premiums to real risk exposure.

Benefits of IoT-enabled pricing:

Usage-based pricing: Premiums directly correlate to metrics like miles driven, energy consumed, workload, etc.
Real-time risk monitoring: Insurers gain ongoing visibility rather than periodic snapshots.
Proactive loss prevention: Usage patterns can trigger risk alerts and loss control recommendations.
Competitive pricing: Precision pricing means insurers can offer lowest viable premiums to win business.
Enhanced underwriting data: Granular data provides a clearer picture of the unique risk.
New revenue models: Usage-based options meet customer demand for alternatives to traditional policies.

According to Bain & Company, uptake of IoT insurance could increase premium volumes by up to 30% by 2030.

IoT data allows insurers to price based on real-time usage metrics. (Image source: AIMultiple)

3. Blockchain for Automated Claims Processing

Blockchain‘s smart contracts automate claims payouts, reducing admin costs. These savings allow insurers to reduce premium prices.

How blockchain and smart contracts enhance pricing:

Smart contracts instantly pay valid claims once a specified event occurs, without manual intervention. For example, a weather data trigger could automatically initiate a crop insurance payout after a drought.
This automation eliminates claims admin workload associated with assessing, validating, and paying covered losses.
The cost savings from streamlined claims handling means insurers can maintain profit margins even at lower premium prices.
Blockchain also provides trusted data exchange between parties, giving insurers confidence in usage data from IoT devices that informs pricing.

Benefits of blockchain-powered pricing:

Lower admin costs: Automated claims slash operating costs by 30% or more.
Faster claims resolution: Smart contracts pay in minutes to hours instead of weeks.
Competitive pricing: Administrative savings allow insurers to reduce premiums.
Trust through transparency: Tamper-proof ledgers provide trusted data for pricing models.
Enhanced customer experience: Faster, automated claims create goodwill and loyalty.

According to EY research, blockchain could reduce insurers‘ operating costs by 10-15%. Those savings directly enable lower premium pricing.

Streamlined claims handling via blockchain reduces costs. (Image source: AIMultiple)

Comparing the Technologies

While AI, IoT, and blockchain each enable pricing advantages, they are optimal in different scenarios:

Technology	Best For
AI	Highly customized pricing using vast data sets
IoT	Usage-based insurance with real-time risk monitoring
Blockchain	Automating high-volume, low-value claims

Insurers should assess their specific priorities, risk pool, and operations to determine which technology investments will maximize pricing capabilities. Many leading insurers leverage all three.

The Bottom Line

Price optimization is now imperative for insurance providers. Fortunately, AI, IoT, and blockchain innovations offer new ways to price policies strategically while controlling costs.

For insurers, technology is the key to remaining competitive on pricing. For insurance buyers, partnering with tech-forward carriers means accessing these pricing benefits.

Overall, leveraging the latest advancements allows insurers to operate profitably while offering customers attractively priced coverage tuned precisely to their risk profile.

To explore how these technologies can transform your business insurance program, contact us for expert consultation.