In part one of this series on rating systems, we looked at how traditional development processes can expose your insurance business to risk. Among the most serious of these are having a single point of failure in your pricing model and the financial risks that result from long development cycles that limit how often you can update pricing. In this post, we take a look at a new approach that enables you to complete a rating initiative by defining and deploying rating models, tables, and algorithms in a fraction of the time, while empowering you to safeguard your margins by revising pricing as often as your business demands.
Inefficiencies of traditional rating engines
The biggest drawback to the traditional approach to rating is that the development process occurs in completely separate silos that use different technologies. Actuaries often rely on Microsoft Excel. They have elevated its use to the level of art in documenting the company’s most precious asset, its pricing model. The problem is that tools like Excel are not suitable for production, nor do they provide the compliance rigors that management demands. As a result, once beautiful pricing models must be translated into executable code for production, written by IT developers.
It’s a process that involves months of back-and-forth translation between actuaries and IT. Insurers end up with a production-worthy rating engine, but it’s often a black box. Even though most rating engine solutions support import from Excel, the results tend to be insufficient. After import, the carefully structured Excel pricing models can be saddled with IT artifacts to the point where they can no longer be read, manipulated, or evaluated by the actuaries who created them in the first place.
A further inefficiency is that this process is often not flexible enough to accommodate certain dynamic changes, such as updating algorithms. As a rating takes shape, actuaries often become locked in to how developers have interpreted their pricing models in code. The rating methodologies become fixed. If actuaries wish to reconfigure the methodology, for example to revise algorithms or add new steps, their options are limited. If they insist on making significant modifications, it can take many months of rebuilding effort and regression testing to implement them.
The bottom line is that the high cost and long development cycles used in defining and implementing rates within traditional rating engines can put your business at a serious disadvantage when it comes updating your pricing to meet ever-changing markets and risk profiles.
A Far More Nimble Approach
Now there’s a much better way to create or modify rates, one that cuts development time from many months to just weeks—or even hours for certain aspects. Developed by EIS Group, it entails using a single, unified rating platform that allows actuaries to work in Excel, while automatically and accurately executing their models for immediate use by applications without them having to be converted into IT artifacts.
The pricing model becomes part of a browser-based, collaborative environment that anyone with permission can access. Better still, unlike a pricing model in a traditional system that can be understood only by the actuary who built it, the pricing model defines algorithms and tables in business terms that they, as well as other actuaries and business users can readily comprehend and navigate. It thereby eliminates the single point of failure that plague traditional rating systems.
A few of the many benefits of this unified and open approach include having the ability to completely trace calculations and actively model pricing scenarios—advantages that vastly improve the quality, accuracy, and timeliness of rating engines.
How It Works
In a unified rating platform, actuaries continue to build their pricing models in the tools that they already know, Excel. The pricing model appears in the shared online environment as is. No data conversions are required. Actuaries can literally use the pricing model as a sandbox to experiment with rating, explore scenarios, and simulate changes, without having to wait on developers. In fact, developers never have to touch the rating methodology.
A Market-Leading Advantage
Insurance carriers can realize substantial benefits from unifying their approach to rating in this manner. In contrast to the tedious linear process and limited configurability of conventional rating development, this nimble system is iterative, dynamic, and collaborative. Better still, the models actuaries create to document a company’s pricing methodology are recognizable. They closely match the execution at all times.
With a unified platform, insurers can:
- Accommodate new, innovative algorithms and predictive models throughout the rating process.
- Shorten their time-to-market. For example, in just four months, an EIS Group client was able to implement a rating engine for twenty-seven coverages in four product classes created by a single actuary.
- Lower costs by enabling organizations to spot problems much earlier in the implementation process, when they’re easier and cheaper to fix.
- Eliminate the risk of errors being introduced during myriad data transformations.
By far the biggest benefit that a nimble rating platform offers, however, is that it frees actuaries and insurance carriers to update product pricing essentially at will. It enables you to price based on the needs of your business, not the limitations of your development process. In highly competitive, ever shifting markets, having such agility is not only a market leading advantage; it's one that many carriers would rightly regard as nirvana.
View a case study in which the EIS Rating Engine played a key role in speed-to-market of a new policy administration system.