Debunking the myths of standalone rating and pricing engines

Several factors influence a consumer’s decision to buy insurance, of which pricing is a significant one. How an insurer defines and prices their products is probably the most important aspect of what makes that insurer competitive and ultimately successful.

Every insurer wants to be innovative, fast to market and competitive; all these roads lead straight to rating and pricing. The epicentre for every insurance company is the definition of products, yet relatively little emphasis is placed on the tools used to define and deploy them.

Some insurers use whatever rating and pricing tools are provided in their policy administration system. Others rely on antiquated, on-premises external systems. And yes, believe it or not, some are still using Microsoft Excel.  

This article explores the myths about externalised rating and pricing engines and how leveraging modern, cloud-native API-architected solutions can revolutionise your insurance product development capabilities.

What is an externalised rating and pricing engine? 

Before we get into the myths, we should establish some definitions around rating and pricing engines. The software that insurers use to define their products is the essence of a rating and pricing engine. This typically includes rating factors, coverages, forms and premium calculations.

Product definitions are deployed to a production environment where other systems submit requests for the engine to calculate. The requests typically cover every aspect of the policy lifecycle, from new business quoting to cancellations.

An externalised rating and pricing engine is simply a system that is not embedded within another system – for example, a policy administration system. Because it is externalised, it can be called as a service request from almost any other application.

Now let’s dig into the myths...  

Myth #1: My policy admin system already includes an embedded rating engine

There has been endless debate in the insurance industry between embedded or externalised rating and pricing engines. This first myth lives at the heart of that debate.

It is true that most policy administration systems include a rating engine. They also include claims, billing, underwriting and several other systems. The real question is whether it’s better to use the embedded rating engine or to externalise it.

At first glance, an embedded rating and pricing engine may seem like a better approach. It provides a sense of stability, security and pre-integration with your core system. That all sounds great – until you need to do something outside the core. 

Most embedded engines are designed to work specifically and exclusively with that core system. They were not designed to be exposed externally, which inhibits your ability to distribute your products. They also tend to be code-intensive.

Standalone rating and pricing engines bring an array of benefits, such as more flexibility, greater distribution and integration with various interfaces. This approach reduces the impact on the business when other core systems change. It also provides product continuity.

So this myth isn’t really a myth, because rating engines are in fact embedded within policy administration systems. However, the real myth is the value of the embedded system. While an embedded system may be good enough to get you started, it probably does not have the scalability you need to modernise your digital capabilities.

Myth #2: We can build our own rating engine that does exactly what we want

The ongoing dilemma of “buy versus build” extends well beyond rating and pricing engines. Those who have embarked on the journey to build their own system often discover that this route comes at a higher cost than buying a commercial-ready solution. And it almost never achieves expectations.

Home-built systems are typically designed to cater to specific issues and are not developed with flexibility or scalability in mind. Often, these homegrown systems are also built around existing company processes – which in many cases are part of the problem – or to price requests.

Rating and pricing engines must serve a greater purpose than just calculating premium. It’s about the entire product definition, development and distribution process. In other words, insurers need more than the ability to create innovative products. They also need to expose their products to the world. And the way to do that is through APIs.

For many of these homegrown systems, APIs are an afterthought – which ultimately isolates the insurer’s products to just their core system (hence why externalised engines are better). To compete in today’s market, insurers need the ability to promote their products through all their distribution channels and make it easy for MGAs, wholesalers, brokers and agents to access, price and sell their products. APIs turn that goal into a reality.

Myth #3: Excel works just fine

Believe it or not, many insurance companies in the market are still using Microsoft Excel as a rating and pricing engine. Well, it’s not really an engine, although it is used to manually rate coverage and policy premiums.

Excel is undoubtedly a powerful tool that is used broadly throughout every industry. However, it was not designed as an operational system. If your current business is only processing one or two policies, then yes, Excel may be the best option. But what happens when your business grows, or if you want to expand?

The reality is that Excel is not scalable. As your business continues to grow, the sheer volume of pricing requests will overwhelm your capacity. You can either hire teams of people to handle requests manually, or you can digitise the entire process.

This is often the case for speciality and emerging markets where the initial demand is low, or coverages are not heavily regulated.  

Myth #4: All rating/pricing engines are configurable

While insurers want a powerful rating and pricing engine, they also need it to be configurable. For years, rating and pricing was managed by IT departments who required expensive programming resources to implement their products. As rating technology became more advanced, insurers demanded more configurability to shift ownership back to the business.

The real issue with configurability is that every vendor defines it differently. If the vendor trains your business resources how to modify code through a nice user interface, they will claim configurability. If they train you on an entirely new syntax language that only works with their rating engine, they will do the same. However, that “configurability” breaks down when the time comes to deploy those products. IT resources will need to be involved.

There are also different levels of configurability. Some engines will only permit changes to the product definition itself, requiring IT resources to code any specific rules, data mapping and forms logic. Ultimately, if a system is truly configurable, any resource can easily create, change and deploy products without IT intervention.

Digital distribution done right

As one of the fastest-growing categories within the insurance industry, digital quoting has become an essential tool across all lines of business. In November 2021, Zywave, a leading insurtech provider, acquired ClarionDoor, an innovator in digital distribution for the insurance industry.

Together with Zywave’s existing configure, price, quote (CPQ) solutions for insurance agencies and brokers, ClarionDoor’s digital distribution solution for carriers and MGAs reinforced the combined company’s position as the industry leader in end-to-end CPQ technology, from rating and quoting through presentation to binding and policy issuance.

Zywave understands the significant value of distribution in the industry and the criticality of externalising this capability. With these solutions, carriers are now able to expand their reach, enter new markets, quickly launch new products and instantly make product changes in response to market conditions.  

By externalising rating into an enterprise-class engine, insurers are well-positioned to deploy products faster and mitigate any risks of being tethered to a specific core system.

By Jeff Cohen, Senior Vice President, Zywave

With more than two decades of insurance industry experience, Jeff Cohen leads Zywave’s carrier and media businesses. He was president of Advisen, a leading provider of data, media and technology solutions for the commercial P&C market, which Zywave acquired in November 2020. He also spent 15 years at Bloomberg. Contact him at jeff.cohen@zywave.com.