Nothing in insurance is more important than risk selection and risk pricing. The convergence of four technologies—business rules engines, predictive scores/analytics, data management, and optimization—now provides insurers with a significant opportunity to improve how they do underwriting. These technologies create a superior way to evaluate risks and to determine a strategically competitive rate. They also have the potential to transform the underwriting function from selection and pricing of individual risks to managing risk portfolios. They give insurers tools to manage the relationships among risks and premiums, growth and underwriting profitability. They have immediate applicability to property/casualty personal lines business, and potential applicability to other property/casualty and life/health lines.
Each of the four technologies provides its own benefits:
A business rules engine is a type of enterprise software which creates and executes rules to automate decisions. Using a business rules engine in underwriting means more decisions are made quickly and consistently.
Predictive scores give an insurer a more transparent and predictable way to assign applicants to tiers, make underwriting decisions, and determine rates. Insurers develop predictive scores through the use of analytics.
Good data management gets the data required for underwriting and rating to the right place at the right time.
Optimization allows insurers to identify and choose among trade-offs in growth, underwriting profitability, and/or other outcome measures.
Working together these technologies can lower underwriting expenses, reduce losses, increase premiums, and improve the premium/risk relationship. Celent estimates that taken together these changes could reduce the average personal lines insurer’s “Underwriting Expense Only” ratio by about 30% (0.6 combined ratio points); and reduce the loss ratio by 2% to 4% (1.5 to 3.0 combined ratio points).
© 2004, Celent Communications. Authorized reproduction permitted.