Price elasticity models identify the extent to which a customer is prepared to pay a specific premium on offer. As such, elasticity is a crucial input in determining a set of optimal prices. Models are required to be constructed for acquisition rates, renewal rates, and cancellation rates.
For new business, price competitiveness is a key driver, and so any model should seek to reflect as accurate an assessment of the competitive position of the price offered to the customer as possible.
For renewals, the competitive position is less important than inertia to premium change, and granular elasticity differentials can be identified based on the greater range of information known about the customer.
Cancellations play an important part in understanding the profile of a portfolio over time, particularly for monthly instalment customers who typically cancel during the year rather than at their renewal. Hence, many cancellations are not price driven.
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