• December 4, 2022

Calculating Premiums with the Right Technology

​Insurance products don’t have uniform prices, rather each policy has a specific premium. Despite the fact that insurance companies rely on many of the same factors, each provider has its own way of calculating premiums.

What Are Premiums? 

An insurance premium is the amount a customer pays for the policy, and is generally paid in monthly or annual installments.

Coverage

Seeing that insurers collect premiums in advance, they need to be able to anticipate how much money is required to pay out future insurance claims. 

Reliable predictions require volumes of detailed customer data, collected over many years. Insurers’ underwriting department synthesizes data from countless sources to calculate premiums. 

Common Factors Used

Let’s take a quick look at some of the most important factors that carriers use to calculate insurance premiums:

  • Age: Providers use the candidate’s age because that's the most critical variable in determining the price of health and life insurance policies.
  • Scope: Comprehensive policies are more expensive.
  • Personal Information: An insurer may look at different factors, including an applicant’s claims history, medical history, and whether they were involved in car accidents.

While these are some of the most common factors used in a premium calculation, it is necessary to find more factors that help generate better prices.

Home Insurance Premiums 

The location of the property is an important factor. Insurers consider past non-natural losses such as break-ins, vandalism, or burglary. 

Quality 

The way a property is built determines prices since some types of properties are more susceptible to damage.

Occupancy

The way a policyholder uses their property determines premiums. For example, empty houses are more expensive to insure, because there are no residents that can take immediate action to address any damage that might occur. 

Property Use

Premiums are also affected depending on whether the insured property is the main residence or a vacation home. Primary residences come with the least amount of risk and therefore cost less to secure and insure.

Modern Approach to Calculation

Insurance carriers use actuaries who build complex mathematical formulas to determine risk and help issue premiums.

Many insurance carriers use ready-made business software to calculate their premiums. While these software solutions provide accurate pricing, carriers are restricted to the formulas already deployed in these software tools.

So, moving beyond the limits of these ready-made tools and reaching complete freedom in risk modeling is the proven way of obtaining a competitive edge over competing insurers.

It is often the case that tariff models are installed in the software. As a result, insurance companies have to wait for the IT department to make necessary updates to the models. This means that carriers need to wait days or even weeks before the IT team is able to deploy a new version of the software.

The Answer Are Rules Engines that Provide Flexibility

In order to sidestep this potentially crippling issue, many insurers are using business rules engines to calculate premiums. A business rules engine is a powerful piece of pluggable software that runs conditional statements known as business rules. Powerful pricing algorithms are made using these statements.

Rules engines allow non-technical subject-matter experts to manage their pricing and scoring models without being confined to pre-built models.

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