Actuaries tend to see their company's IT department as a consistent blocker for flexible and efficient pricing. But the problem isn't the people - it’s the legacy systems and processes that are the bane of effective insurance pricing.
Many insurers work with a patchwork of software products, and most actuaries have no direct control over the implementation of new prices. But this approach to pricing is "old-tech thinking" and needs to be updated.
We'll look at the words we use first because they can stand in the way of thinking about insurance pricing from a fresh perspective. But when we do, modern technology can give us much better solutions to our problems.
Pricing and Rating
‘Price’ has the straightforward meaning of the amount of money someone pays for a product or service. In this general sense, for insurance, the ‘price’ would be the premium an insured customer pays.
‘Rate’ has a more specific meaning in the context of insurance. ‘Rates’ typically refer to what an insurer will charge (i.e. the rating plan of an insurer). This algorithm is what insurers use to calculate a proposed price (a quote) for a new or renewing customer in personal and small commercial lines of business.
This is why the actuarial activity of creating these rating plans is called ‘ratemaking’. Even in commercial lines where there may not be a rating plan, when actuarial approaches for determining a price exist, they are still referred to as ‘rating’ (e.g. ‘retrospective rating’).
And yet, actuaries whose job is ratemaking are referred to as ‘pricing actuaries’, and the creation of rating plans is referred to as ‘pricing’ at least as much as ‘ratemaking’. Add to this the existence of ‘rating engines,’ whose sole purpose is to encode the rates in order to calculate a price, and one sees why there can be confusion.
Is this even a problem?
Within actuarial circles, this isn’t really a problem. Actuaries tend to learn the terms specific to their geographies and lines of business, and within those realms, co-workers use the same terms. Even when crossing into unfamiliar locations and lines of business, someone with a good understanding of the pricing process can usually clarify what is meant without undue confusion. Actuaries can interchange the use of ‘price’ and ‘rate’ without much difficulty.
But an insurer is more than actuarial and pricing departments. For this discussion in particular, it is the rating engine, usually the domain of IT departments, that complicates the picture. The separate nature of rating engines from the actuarial process of pricing sets up a ‘pricing v. rating’ split that most actuaries would recognize. It is this separateness that is the cause of most implementation issues when it comes to pricing changes.
Certainly, the split between pricing and rating was caused by real concerns, not bad terminology. Consider each of the following:
| Pricing | Rating | |
| Task | Determine what prices should be | Calculate the price in a live setting |
| Skills Required | Analytical | Technical |
| Personnel | Actuaries, analysts, data scientists | Software Developers, system architects |
| Challenges | Model accuracy and explainability | Response time, rating accuracy |
But the terminology hardens into the expected, and the separation of these two functions has historically caused problems and inefficiencies that too many insurance companies simply live with.
Changing the Way We Think
The analysis of historical data for the determination of adequate and effective future rates is a specialized problem requiring specific skills. But the same could be said for developing robust and responsive software systems that can help an insurer with their day-to-day operations. Therefore, the implementation of rates through a rating engine has not been historically under the control or direction of pricing actuaries.
The key word here is “historically.” Software systems have come a long way in the past 10 - 20 years, and legacy approaches limit our thinking as much as our flexibility. Step back from what you have now and ask the question: Given the tools and architectures available today, why would we assume that rating should be disconnected from pricing?
Software systems, especially core operating systems that run an insurer’s operations, will need to be developed and supported by modern IT professionals. However, there is no need for a lack of integration between the steps of the pricing process - from data to analysis to rating.
Consider data transformations done for analysis, such as a new feature engineered for the predictive models. No software architect working today would accept a process which requires the actuaries to translate their transformation into a separate spec document, send that on to an IT group, and then wait while IT programs the same transformation into a different system. The inefficiencies are clear and the chance for error should be unacceptable.
A more modern approach to systems engineering sees the developer’s task not as handling the rates themselves, but rather, providing a system that lets the actuaries handle as much of the changes and specifications as possible. This allows for transformations to be defined once and carried over to rating automatically. It allows for consistency between the rates coming from the analysis, those filed with regulators, and those implemented on the street.
Guidewire PricingCenter
The problems discussed here are the reason why PricingCenter exists, because what insurers need today is a pricing solution, not another piece of pricing software.
PricingCenter is part of the Guidewire Cloud Platform, so it comes with the same security and stability that the insurance industry trusts. PricingCenter also integrates the analytics and rating engine into one package with the Design and Execute modules, bringing consistency and control to the updating of rates. And PricingCenter gives you advanced and automated modeling techniques which accelerate the creation of better models.
Taken together, PricingCenter helps you:
- Accelerate time-to-market
- Enhance pricing sophistication
- Reduce risk of errors
- Improve cost efficiency
- Minimize integration cost
- Provide unmatched security and performance
PricingCenter will be natively architected within Guidewire products ensuring seamless connectivity, but like them, it can also be used on its own when that is the best solution. Either way, contact Guidewire today if you want to know more about PricingCenter.