Real-world insurance policy pricing models often have 50 to 100 variables such as gender, age, credit score, claim history and more. (Photo: iStock)
Speed to market is a high priority for many property and casualty insurers, but creating quote-ready rate tables remains a major roadblock for personal line insurers to realize that priority. This stubborn issue applies to any line of business that has numerous rating variables and coverages. If it takes two years to update rating plans, the underlying rate factors may already be stale by the time the rate plans are used.
Auto and homeowner policies are two examples. If an underwriter were asked, "Where do rates come from?" he or she might respond, "The actuaries." In fact, factors created by actuaries are but the first step. The process of creating quote-ready rate tables is complex and time-consuming — truly among an insurer's most complex architecture processes.
Rate creation
Actuaries build statistical pricing models that use factors to determine rates. A 16-year-old male will be charged higher rates than a 30-year-old female, all things being equal. That is because the model uses factors such as: male = 1.06 vs. female = 1.00; and age 16 = 1.52 vs. age 30 = 1.12.
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