First Rate

Every insurance carrier has a slightly unique view of the world, according to Craig Weber, senior analyst in the insurance practice for Celent. That view often is based on the data carriers have acquired over the years and is the basis for the customized rating systems many carriers continue to rely on. In his recent report on trends in rating among property/casualty insurers, Weber estimates slightly less than two-thirds of the spending done by carriers in this area is directed internally for the creation of customized systems or toward staff supporting a customized vendor-based system.

"It's a little surprising how many carriers still are using totally custom systems to support rating," says Weber. "I think the reason for this is they have been rating the same way for a long time, and perhaps some of the vender packages available today were not available when they first built out the system."

Today's vendor packages come with better functionality, more flexibility, and the ability to support more complex rating procedures, Weber believes. "In talking to carriers that use packages, I haven't found any company that said its package couldn't do something it needed it to do," he says. "It's a classic buy-vs.-build decision. You have to weigh the long-term cost of ownership vs. flexibility."

The biggest issue facing carriers in the area of rating, Weber contends, is increased complexity. He asserts activities carriers were able to do yesterday in a customized way will not be as easily accomplished tomorrow. For example, he points to the layers of business being added by the top-tier carriers. "As you add more tiers, it builds in exponential growth in the number of rates you have to calculate," he says.

Having the data needed to price and assess risk is another issue facing many carriers. The top-tier carriers understand they have better data internally about their own existing customers and the claims experience of those customers than what they can get externally, Weber maintains. "So, instead of looking at the industry as a whole, you could look at your own customer base and determine what kind of risks you are facing, where you are pricing efficiently, and where you are not so profitable," he says.

This allows another layer of analysis to be built into rating approaches, Weber points out. The problem with this approach, though, is getting sufficient data so you have enough experience on which to base those decisions. "That's why it takes a top-tier carrier to do that sort of thing," he says. "The small regional [carrier] simply doesn't have adequate claims experience to analyze reliably the claims trends and profitability."

When a carrier uses its own data, it has access to more pertinent information than it could receive from outside sources. For example, Weber explains top-tier carriers might use the average number of miles driven in a year and the age of the driver in establishing a personal auto rate, but they may have some proprietary data to add to help them price more accurately.

Weber recommends carriers not be lulled into thinking their approach to rating requires unique, in-house solutions. "While there are infinite ways to slice and dice the inputs into the rating process, it turns out most carrier approaches are essentially similar," he says. Collaboration between business and IT is important, he adds. "The tussle over who controls technology projects is ongoing at most companies," he says. "Best-practice carriers seem to find a way to replace this cycle with a more collaborative approach that incorporates both viewpoints."

Weber indicates this trend mirrors the IT environment as a whole. "Line-of-business owners increasingly are concerned about the lack of control over what gets done with technology," he says. One solution, he suggests, is to emphasize the role of business users and lessen the role of IT. "The line-of-business owner typically can manage the business user more closely," he says. "It's a resource issue, and it ensures a tighter fit between business strategies and IT strategies. Business resources know intimately what the business is trying to achieve. There are a lot of things business users can do [with technology], and rating is a great example of that."