Mike Altman shares his view on why segmentation is so important and what Mutuals need to consider in order to implement a successful segmentation strategy.
Hi, everyone. Mike here to discuss some valuable information on how to stay competitive in today’s ever changing insurance market. We’re here to discuss segmentation today, as it’s a very important aspect of every carrier’s rating plan.
We’re going to discuss why it’s important and what you need to think about when implementing a successful segmentation strategy. As you know, segmentation is the process of matching price to risk for rating customers differently through a multitude of variables.
It is used by every carrier in today’s insurance industry and if used effectively allows carriers to improve their ability to match price to risk. Each carrier uses a different amount of segmentation and has a unique way to rate each customer. This creates a marketplace where each customer is going to see a different price based on the variables that each carrier uses in their class plan.
Best in class segmentation is utilizing the right variables, the right combination of these variables in reading tables and selecting the right factors. Understanding what segmentation you utilize versus the rest of the marketplace is critical to managing your book.
A great example of this is in personal lines and the use of verified mileage. In this hypothetical scenario, let’s say carrier one utilizes verified mileage while carrier two does not, and a customer who drives long distance to and from work is looking for an insurance policy. While both these carriers are going to offer a price to this customer, carrier one is going to capture that this customer is on the road a lot and therefore at a higher risk for an accident. While Carrier two will not receive this exposure. Here, two will most likely offer a lower price for this vehicle.
That would be true for all vehicles that have higher mileage, and they’re not going to rate for that exposure. This concept is called adverse selection and is very detrimental to the loss ratio and is the reason segmentation is so important. Based on performance carriers can increase rates on certain segments of business while holding steady on others, which over time can improve the loss ratio.
The use of segmentation is extremely important to managing your book and improving long term loss ratio performance. Those carriers that utilize segmentation most effectively can more accurately match price risk over time, improving the long-term profitability. Over the next couple of videos, I will discuss with other team members and talk about how they have helped clients improve segmentation and avoid adverse selection.