Articles - When technical price and market price diverge

By Laura Hobern, Partner, LCP

Many firms have more sophisticated models, better tools and more data than ever before. This is positive, but it can also create a false sense of comfort. Models may appear robust, yet they are often still built on limited data, judgemental assumptions and a degree of uncertainty that doesn’t show up in the final figure. Modelling technical price alone is not enough; it needs to sit within a wider pricing framework that recognises both what models can tell us and what they cannot.

Too much reliance on technical pricing at an individual risk level can be misleading. However, dismissing technical pricing altogether is far more dangerous.

The market price, by contrast, is shaped by competition. It reflects available capacity, broker influence and growth targets. These forces intensify as capacity expands and competition increases.

A gap between technical and market price is inevitable. What matters is not the existence of the gap, but how well you understand and manage it.

For example, a portfolio may show favourable loss ratios this year because it is still benefiting from last year’s pricing. Meanwhile, new business is being written at thinner margins. On paper, performance looks healthy. In reality, the risk profile may already be shifting.

This claims lag can lead to a false sense of comfort. By the time deterioration shows up in the numbers, the portfolio has already changed shape.

Technical pricing remains critical in this environment. It gives you a consistent reference point to the underlying risk when market signals become unreliable. It is not a price that must always be achieved, but a way of understanding how far the business is moving away from its risk-based view and whether that movement is deliberate.

Without that anchor, under-pricing can build gradually. When correction comes, it is often sharper and more painful than it needed to be.

If you treat it as a reference point, it becomes easier to see what is actually happening. For example, are you winning new business based on quality and risk selection, or on price concessions? Are certain brokers consistently outside technical levels? Are technical price overrides becoming routine rather than occasional?

Problems tend to arise when models are overridden routinely without understanding why. Over time, those adjustments can become systematic, effectively changing your assumptions without scrutiny or validation. These patterns matter more than any single deal.

On the other hand, insisting on achieving the technical price in all circumstances is not the answer. Doing so can reduce competitiveness, encourage model manipulation, and reinforce the perception that actuarial pricing is disconnected from market reality. The aim is not perfection but, rather, informed decision making.

In practical terms, this means tracking how far and how often pricing departs from technical levels, asking for a clear rationale when deviations persist, and using model outputs to support discussion rather than to restrict decision making.

Many actuarial teams have strong technical capability, but less clarity on how to turn those outputs into insight for the business.

That does not mean building a long list of metrics. A small set of focused measures is often more effective. For example: how rate change compares to changes in technical adequacy, how often (and by how much) technical prices are overridden, where win rates are increasing, and whether technical inadequacy is concentrated in certain brokers or segments.

In practice, this can be challenging. Data often exists but it sits in different place, and discussions tend to focus on approvals rather than what the decisions add up to over time.

Even firms with sophisticated models can struggle to interpret divergence, translate outputs into insight and design management information that prompts timely action.

Used properly, technical pricing does not prevent commercial decisions.  Rather, it ensures that they are well-informed and deliberate.

In the next article in this series, we look at where technical pricing ends and judgement begins, and who decides how far to follow the market.