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Aspen opinion

Overcoming commodity addiction

26 September 2011

Capacity-based pricing means price war. We are problem solvers, not commodity salespeople.

Brokers and insurers share most of the challenges we face as an industry. Our job is to make sense of whatever tomorrow brings, but after an unprecedented recession and a tenuous recovery, forecasting the future becomes substantially more difficult. There are many theories as to which way the market might turn, be it impacted by catastrophic natural or political events, diminished returns as a result of the recession or insurer’s negative cash flow.   

'When it comes to the future, there are three kinds of people: those who let it happen; those who make it happen; and those who wonder what happened' Dr John Richardson of American University

Many theories claim that market pricing is based on the capital surplus available to address customer needs. However, many predictions contradict each other and become far less important than preparation. Instead of letting the future happen, brokers and insurance companies would be wise to make the future happen – to improve our industry, regardless of any turns the market might take.

Capacity-based pricing is the opposite of what we should aim for. Instead we should strive for a market where prices are based on the value that brokers and insurers deliver to customers. The insurer or broker who cracks the code of creating true value-based pricing will enjoy epic success. Here are 10 ways to crack that code:

  • Create value-added relationships with a deeper understanding of our clients’ business, supply chains, cultures, vulnerabilities and ambitions. Similarly, when we take the time to understand our industry partners, we reap comparable benefits. Key to this is the ability to listen.
  • Every client meeting is a learning experience that we can either use or disregard. The difference is in how well we listen, interpret and respond. And we add value by improving the way we deliver to our customers, together.
  • Reduce the number of trading relationships – it isn’t realistic to manage an enormous number. There are 25,000 brokers and 2,000 insurers in the US. How many have mutually beneficial relationships? It’s better to have a few close friends than thousands of acquaintances. And limiting the number of truly close relationships has a focussing effect which leads to profitability.
  • Brokers and carriers have everything to gain from working together, starting with winning new customers to creating growth. Brokers need to determine if they are working closely enough with insurers and if they can integrate solutions.
  • Brokers should align their efforts with Insurers to generate new efficiencies for all concerned.
  • Innovate and demonstrate a genuine willingness to write difficult lines. As a unified industry we have to consider the total solution to customers at a fair price – this is a substantial part of the value we add.
  • Think globally, act locally. In a globalised economy we must offer much more than just coverage. We must help them achieve their business plans by providing global solutions.
  • Optimise costs instead of simply justifying them. We must deliver risk management solutions through proven pre-and post-loss approaches via integrated cost structures. 
  • But optimising the costs is not enough. Each of us needs to understand the cost of risk and service pricing and how price levels create stability and fair return.
  • Deliver solutions, not prices. We should not take a piecemeal approach to selling products, but instead provide integrated approaches that help customers surmount their business obstacles. We are not sales people; we are problem solvers delivering solutions.
  • When brokers and insurers align their efforts, we can provide genuine value to prospects and customers. This alignment creates a truly consultative, professional experience that will deliver a united and capable image to customers when it matters most. Together we can create the level of industry expertise and service that will sustain an authentic value-based pricing market. Imagine brokers and insurance companies working together: strengthened, aligned and focused. We can make the future happen together for what matters most – our customers.

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The above article/opinion reflects the opinion of the author and does not necessarily represent Aspen's views. The article reflects the opinion of the author at the time it was written taking into account market, regulatory and other conditions at the time of writing which may change over time. Aspen does not undertake a duty to update these articles.