New technologies and competitive pressures are gradually prying open the doors to carriers' rating systems, long locked away in the silos of proprietary or homegrown systems. These rule-driven systems, designed to evaluate potential policyholder risk and price policies accordingly, are increasingly being called upon to integrate with multiple channels, back-end systems and front-end portals to provide real-time or close to real-time pricing for customers.These changes are being driven by a number of factors, relates Craig Weber, an analyst with Boston-based Celent LLC. Rising customer and agent expectations, for one, are pressuring carriers to provider faster, more accurate and more flexible quoting. In addition, there is continuing pressure to keep a lid on IT spending, causing carriers to look for more efficient solutions.

However, opening up or installing new ratings engines, many of which still run on mainframe computers, is a task far easier said than done. Celent calculates that half of the rating systems now in production are custom-built systems, which are difficult and expensive to adapt or integrate with other systems. Weber notes that many insurers will be forced to continue to rely on an assortment of custom-developed and packaged systems for the foreseeable future. "Very few carriers have the luxury of starting from scratch," he adds.

Celent's most recent estimates (2006) puts spending among U.S. carriers on rating systems at approximately $837 million. Of that total, more than $500 million was directed at supporting custom systems or toward maintenance of existing packaged systems.


Many of these cobbled-together systems may not be up to the task in an environment that demands increasingly faster time to market, experts agree. Many carriers either rely on multiple systems that need to be synched up through manual intervention. "Right now, the agent runs a pre-quote, then a secondary quote for the customer, then ships the application up to the carrier, which then runs everything through a rating engine," says Michael Gaughan, vice president of insurance for Chicago-based TransUnion LLC. "If the rating engine had been changed, and the rating software used by the independent agent wasn't exactly accurate, there could be a change."

Why aren't more of these systems being replaced on a wholesale basis with open, standardized software? In many cases, highly customized ratings engines provide a competitive edge, Weber explains. "Through the years, carriers have differentiated on product and price. Their rating programs have their little twists and tweaks. That's how carriers compete. They're not going to go to a standard ISO form and use that exclusively."

Since so many companies rely on custom systems, many carriers are forced to support multiple rating engines. Celent data confirms that 63% of carriers use two or more rating engines today. This is either because different engines have been created over time to support different lines of business or because the rating functionality required across product development, agency operations and policy administration cannot be supported by a single tool, Weber says.


The most plausible scenario for change, then, is a gradual migration to more open and standardized systems, versus wholesale ripping and replacing of older systems. "Just keeping a working system running requires some investment," Weber explains. "These systems are constantly being updated with new rates, new products and new interfaces. The best-case scenario is targeting that steady stream of maintenance at migrating toward a solution that is more flexible, and can support more channels and more integration methods."

Web services and service-oriented architecture (SOA), which enable the development and deployment of standardized interfaces between systems, hold the greatest promise to enable carriers to extend their legacy ratings systems to a wider audience. This is the approach being undertaken at Harrisburg, Pa.-based Penn National Insurance, which is putting into place a common interface that treats the rating engine as a service that can be accessed by multiple applications. To start, Penn National's mainframe-based policy administration system and its online agency portal system will use the same rating service.

"We are implementing a single rating engine that will support both our mainframe policy admin process, as well as our online quoting process," says Helena Vendrzyk Gordon, manager, projects and planning. "It will be a common Web service that is used to call it from several different places."

Penn National intends to bring together rates that are currently maintained in the two separate systems, the mainframe and the online agency portal system. "Any time we make rate changes, we need to coordinate between the two systems and make sure the rates move forward at the same time," Gordon relates.

Currently, agents have the ability to get a quote online through the portal. "The problem, from a back-end perspective, is that it is a separate rating calculation used to generate the policy when it finally goes out the door, says Gordon. "There is a lot of work on our part to make sure the rates in the two systems are in synch with each other."

Such complexity is one of the major challenges that SOA-style solutions will need to address, Gaughan agrees. "Carriers are developing more and more complex rating systems," he explains. "The algorithms for these systems are much more involved, more complex, harder to build and changing more often."


San Diego-based Arrowhead General Insurance Agency Inc., for example, has acquired new business units through mergers and acquisitions and, as a result, accrued a number of disparate policy administration systems, each with its own rating engine to maintain. Arrowhead's rating unit needed to use and maintain multiple, unrelated rating systems until the company launched a SOA approach to provide a common service to multiple applications.

"What we've been able to do with SOA is extend our rating engine and services, such as our binding, payment and printing services, to online aggregators so they can drive the interview process on their Web site," says Stephen Boyd, vice president of IS for Arrowhead. "They'll get a rate request to us and we'll validate the data, run it through our underwriting engine, run it through our rating services and, in the case of personal auto policy, bind the risk online."

Arrowhead's Boyd reports that his company has seen improved time to market as a result of the consolidated rating engine. "Arrowhead's strategy is all about capitalizing on market conditions that the big players don't want to touch, and partnering with insurance companies to get a product in that space. Time to market is a big deal for us. Our target implementation time for a new product, soup to nuts, is five to six weeks. Since moving to the DRC rating engine, our turnaround time-our ability to push product out the door-is easily half the time."

Penn National Insurance is implementing the InsBridge rating system from Frisco, Texas-based Skywire Software to create, deploy and manage complex rating and rules for its personal lines of business. The company will replace the rating functionality within its current PMSC mainframe policy administration system with an SOA-based approach. "We expect to get better pricing sophistication and overall, with the project, better straight-through processing," says Gordon. "The goal is to have policies rated with less human intervention. That's being accomplished with an automated rules engine."

TransUnion's Gaughan says there's another solid business case to be made for opening up ratings engines-increasing margins by cutting down on rate evasion. "Incorrect rating accounts for up to 10% of premium revenue lost, and more of half of that is rate evasion," he says. This is an especially relevant source of new revenue, since it is often difficult to convince state regulators to grant rate increases, he says. "If a carrier with a single-digit margin could eliminate the 5% of premiums being lost due to rate evasion, that would travel all the way to their bottom line."

Joe McKendrick is an author and consultant specializing in information technology, based in Doylestown, Pa.

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