A Pricing Strategy That Succeeds in the Medicare Supplement Market
Is being number one always the best? In the game of life, we’re taught that we should strive to be number one. Whether it is in school, an athletic competition or just every day activities, being the leader of the pack is a goal we drive ourselves to achieve. However, when it comes to Medicare Supplement insurance, it’s a different story. Having the lowest priced product – which some think is a means to become number one – may not be the best long-term strategy for a carrier that wants to be successful in the long-term in this industry.
We’ve observed over the past few years that Medicare Supplement has become a commoditized product and is being sold by many agents on price alone. Through our research on the Medicare Supplement insurance industry, produced in the annual Medicare Supplement Market Survey, we can see that some carriers consciously price their Medicare Supplement product to be the lowest in the market. They do so as a strategy to gain market share within the first few years they are on the street. At Gen Re we feel that this approach is not sustainable and will negatively impact results in the long-term, and the following explains why.
The market has proven on a number of occasions that carriers who follow this strategy struggle those first three years to maintain the block of business they have written. In order to keep the block profitable and make up for the aggressive pricing strategy, these carriers need to then file significant rate increases, excess of medical trend, and hope they are approved. This course of action can have a devastating effect on an in force block of business. Healthy policyholders - ones that can go through underwriting - will choose to move their business to a different carrier with lower rates. This can then negatively impact the spread of risk within the carrier’s remaining block since those customers that remain will most likely be unhealthy and utilize their coverage more often than a healthy policyholder.
In addition, if the aggressive rate increases are approved, this now makes the product uncompetitive and, as a result, the carrier’s sales will be negatively impacted. If the aggressive rate increases are not approved then insufficient pricing may result in high loss ratios. Either of these scenarios could force a carrier to withdraw from the market soon after entering.
Gen Re's experience as a reinsurer committed to the Medicare Supplement insurance market has shown that carriers that follow a competitive, slow and steady pricing strategy are more effective in growing their business and achieving long-term success. At Gen Re, we believe pricing should be part of an overall long term strategy that will bring a carrier into the market in a competitive pricing position, but also allow them to manage their business for the long term. While Medicare Supplement is a uniform product, and we know that pricing is an important factor to the customer, we also believe that having steady rate increases, a solid reputation, brand awareness and an excellent service platform are just as important when a consumer is making a buying decision. Carriers that are looking to build long-term relationships with their customers may want to leverage these relationships to cross sell their other products.
Price, however, is likely to remain a driver in the Medicare Supplement market. For the time being, we expect some carriers to continue to roll the dice and take an aggressive strategy. Gen Re is selective with the carriers we work with in the Medicare Supplement market and we seek to partner with carriers that are focused on winning, not just being number one.