New Tariff Every Day — (Im)possible
Some insurance companies don’t change tariffs too often or too willingly. Oftentimes, changing tariffs involves costs and stress that everyone would like to avoid. This is due to the use of inadequate tools, which makes the process lengthy, expensive and unreliable.
Is there a better way? The fact is that all insurance companies create their tariffs in a very similar way. Using mathematics and statistics, insurers assess risks to optimize the primary function, which is most often, increasing profitability. This approach has stayed the same over the years.
What is changing, however, are the tools used in the tariffication process.
Until recently, most insurance carriers would train their teams to use analytical tools in order to efficiently introduce changes to insurance tariffs.
Imperfect Tools
There are available tools that combine both analytical and execution functions. This means that after building a new tariff model, we can implement it with just one click. However, insurers are stuck using models already built into the tool. In addition, these solutions are not cheap, and worst of all, they have problems with the calculation efficiency of generated models.
There are also tools without execution capability that provide ready-made tariff models. This means that over time, we somehow have to “install” them in our sales management systems.
There are actually no ideal software solutions that would allow you to quickly achieve all of your business goals. Insurers will almost certainly run into a problem. It will sound unbelievable, but I happened to work with such a software system in which a change to a tariff model caused the recalculation of existing offers waiting to be insured! To solve this issue, various business and programming tricks were performed, but each time the process was so laborious that the client decided it would be best not to change the tariff model too often.
In the Hands of IT
Typically, the IT department is required to “install” a new version of tariff models in the sales system. Unfortunately, in my career, I have seen this process take several months (!). First, the task is queued for deployment. Then, the tests reveal the discrepancies between the requirements provided by the pricing team and what the developer implemented. In the end, we wait and wait until our changes are next in the queue for the planned release of a new version of the system.
The Tests, Oh the Tests!
How can we be sure that the developers have correctly implemented the changes? By carrying out tests. During testing, we discover errors that need to be corrected. Then we test again to make sure there aren’t any remaining issues. This is a costly but necessary process to ensure business security.
Generating tariffs is a critical element of the sales process. An error during this process may lead to lower sales results or, conversely, cause large increases in sales of unprofitable policies.
Nobody Knows Anything
There’s another problem that does not become apparent but starts to grow over the course of months or even years.
Namely, the pricing team places a request to the IT department, which then implements that request in the form of a sales system that calculates a premium. They have absolutely no idea how these internal changes are implemented. Each subsequent change is a blind order.
Inevitably, after a few years, someone else takes over the task of modeling tariffs, whether because a programmer changed jobs or due to another reason, a completely different member of the IT team takes over the maintenance of the system. From this point on, it’s just a matter of time before the comedy of errors begins.
For example, a change that relates to the type of vehicle suddenly and inexplicably affects parameters relating to horsepower, leading to unacceptably high premiums. The costs of fixing such errors start to multiply, and changing the tariff becomes so stressful that everyone wants to avoid it at all costs.
When Auto Mode Isn’t Enough
Over time, pricing teams come to the conclusion that the existing tools are the equivalent of a camera with auto mode. In auto mode, users can only decide whether to take a portrait or a panorama shot, nothing more. Then the camera adjusts all the necessary parameters.
However, as the insurance company grows and teams become more knowledgeable about the market and their audience, it becomes apparent that the chosen software tool does not allow users to effectively model rates and premiums.
As a result, they start coming up with ways to avoid using the tool.
A New Approach
Recently, the trend of customizing models without starting from the standard models baked into the tool has increased in popularity. An increase in competition has certainly influenced this trend. While insurance carriers use the same models, they may have slightly different customer segments for whom they adjust premiums and rates.
However, nowadays, quick access to information allows customers to compare the offers of several companies in the blink of an eye. So insurers need to optimize their processes further, use more factors, or just draw better conclusions from what they already have.
Also, the process of modeling tariffs has certainly been influenced by various scientific disciplines. Just a few years ago, the division was clear — programmers were writing the code, and underwriters were counting their “tables”. An underwriter today is proficient in R or Python and uses dozens of publicly available libraries to test a new idea for creating a tariff model with minimal costs.
A New Approach — New Challenges
As is usually the case, each new approach brings with it a new set of challenges. First of all, how to make a customized model usable, i.e., how to connect it with our “sales template.”
How to check whether the policyholder will ultimately receive the premium we have designed for them?
We also expect changes made by another team to not affect our configuration. So, in addition to testing, we also need a validation mechanism that separates our work so that such mistakes are simply impossible.
In addition, carriers need to be able to safely publish changes when once they’ve been sufficiently tested and work properly. The tool should therefore ensure that any drafts remain drafts until they finally go live.
The (Un)real Software Solution
There are a few software solutions available that can help insurance companies to deal with many of the problems attached to implementing new tariff models. However, there is a perfect software solution for insurance companies — Higson.
I believe that today this software tool effectively addresses most of the problems insurance companies face that relate to the implementation of new tariffs, including both those mentioned in the article and those that no one wants to talk about publicly.
We have successfully implemented Higson in several major insurance companies. We can see that — in combination with the right process — the tool allows users to update tariffs as often as necessary to meet all the goals set by the management, both in terms of driving sales and profitability.
Importantly, as the market develops, new challenges arise. We listen to what underwriters, programmers, and IT teams are saying. We regularly monitor trends in the industry and make sure that Higson properly addresses the pain points of the entire process of generating tariffs. It’s important to note that Higson is an ever-evolving tool.
Higson Recycles
It’s interesting that we are constantly finding new uses for Higson with our customers. It is regularly used by many carriers not only to customize tariffs but also in other areas of the insurance business. For instance, there are several companies that are successfully using Higson to segment their customers.
This hyper-efficient software tool has already found application in building sales and engagement in networks, both own and external, by configuring discounts for insurance agents and generating sales campaigns.
For one of our clients, Higson also plays an important role in automating decisions that determine whether a given calculation should be sent for additional underwriting.
Higson is perfectly suited to meet the needs of today’s insurance companies that are looking to cut down on operational costs while improving the customer experience.
Our business rules engine can be configured to perform a wide range of tasks using the same interface, which is one of its many competitive advantages.
How it will be used — whether just to model simple new tariffs on a daily basis or to, for example, segment customers — depends entirely on the needs and imagination of our customers.
