In the ever-evolving landscape of the insurance industry, pricing strategies for technology and data services have come under scrutiny. A recent discussion by Guillaume Bonnissent in his Insurance Technology Diary emphasized a troubling trend: many technology vendors charge their insurance clients a percentage of gross written premium (GWP). This model, while prevalent, raises several issues, both for the technology providers and their clients.
Understanding Gross Written Premium Pricing
The notion of pricing based on gross written premium might seem straightforward. Insurance companies often use GWP as a primary metric for assessing performance. However, when technology providers apply this model, it leads to a significant disparity in how services are valued and delivered. For instance, consider a Managing General Agent (MGA) with ten users processing 10,000 policies averaging a premium of $1,000. In contrast, another MGA could be managing 100 policies at an average premium of $100,000. Under a GWP-linked pricing structure, both would incur the same costs, despite the stark differences in their service demands.
The Cost Implications
From the viewpoint of a technology supplier, the inconsistency in the GWP model can lead to financial instability. The support and hosting costs for the first MGA, with significantly more transactions, would far exceed those of the second MGA. This issue creates uncertainty for tech providers, as their income is tied to an often-fluctuating figure that doesn’t accurately reflect the usage and support required for each client.
Moreover, year-end underwriting budgets typically look vastly different from projections made at the beginning of the fiscal year. As rates oscillate dramatically, tech providers find it difficult to ensure sufficient revenue under a GWP-linked structure. A more usage-based pricing model may offer a more sustainable solution, ensuring that clients only pay for the services they actually use rather than an inflated percentage of their premiums.
Regulatory Considerations
Interestingly, there are regulatory implications tied to charging a percentage of GWP. Some legal experts suggest that such a pricing model may lead regulators to classify technology firms as intermediaries. While this may seem flattering, being viewed as an intermediary comes with its own set of regulatory scrutiny and challenges that most tech companies would prefer to avoid.
The Right Way to Price Technology Solutions
Bonnissent argues for a more logical pricing strategy for tech services. Technology providers should base their pricing on the costs associated with the development, support, and hosting of their products. This should encompass all fixed and variable costs, with additional costs reflective of actual usage, such as customer support. A clearer and more accurate pricing structure would not only benefit the technology providers but also provide clients with a fairer deal.
When it comes to data pricing, the landscape becomes even trickier. Clients typically engage in purchasing decisions based on perceived value, which often comes only after they see evidence that the data can indeed boost their bottom line. Vendors should aim to set prices as low as feasible, covering their costs while maximizing buyer interest. After covering substantial fixed costs, any additional sales would lean heavily toward profit, which is crucial for maintaining a sustainable business model.
Consequences of Current Pricing Models
Despite the arguments for a more rational approach to pricing, many data providers continue to adopt the GWP model. This inconsistency can leave them scratching their heads as to why their valuable insights and offerings are not as enticing to potential clients. Established firms within the sector often price their services based on historical trends in GWP, which can lead to overpricing for clients. Underwriting teams accustomed to GWP-based metrics might find themselves facing inflated bills that do not correlate with the actual value of the services rendered.
A Call for Change
Pricing, as Bonnissent articulates, should reflect the true costs of service delivery without leading clients to overpay due to inflated GWP percentages. There is a pressing need for transformation in the way technology and data are priced within the insurance industry. For clients, understanding the implications of purchasing based on GWP will be crucial in securing the best value from their technology expenditures.
As the industry progresses, it is vital for tech providers and clients alike to advocate for changes that prioritize transparent and fair pricing models. By shifting the focus from GWP to usage and fixed costs, we can foster a more equitable environment that benefits both sides of the transaction.
Conclusion
In conclusion, Bonnissent’s insights into the pricing discrepancies within the insurance technology sector highlight a need for change. The current reliance on gross written premium as a pricing metric often leads to confusion and misalignment between what clients pay and the actual service provided. A shift towards basing costs on the actual usage and necessary support structures would create a more logical and sustainable pricing ecosystem in this essential industry. Only through this re-evaluation can we hope to see a healthier, more efficient insurance technology market emerge.
