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Rating Systems Move Out Into the Open

Joe McKendrick October 2007

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.

COBBLED TOGETHER

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.

WEB SERVICES AND SOA

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.

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