Premium is the amount a customer agrees to pay to an insurance company to buy an insurance and its process is insurance premium calculation. This can be a single payment, installments, or installments with up-front payment.
Have you ever seen a fixed premium that fits everyone? No matter what you insure, a car, life, or health, the premium is given as a quote after asking a number of questions as it is not possible to provide a one-size-fits-all price.
Why There is No One-size-fits-all Premium?
The answer is simply because there are many factors to consider such as,
- Coverage type
- Coverage amount
- Customer information
- Market competition
- Underwriting guidelines
- Government tax
- Stamp Duties
Customer information itself may contain age, gender, claim history, income, etc. So, you can see that there is a vast number of factors to be considered in insurance premium calculation.
Most importantly, if an insurance policy is sold, that means an insurer agrees to pay an amount when a customer requests a valid claim. The profit of the insurance company depends on the income gained by selling these policies. A wrong calculation of premium can result in a massive loss.
That is why there is no one-size-fits-all premium, making it a risky complex process involving several decisions.
One Decision at a Time
Let’s consider car insurance for an example. When we calculate the car premium, many different questions are asked from the customer such as personal information, car information, and claim history.
The following DRD (Decision Requirement Diagram) created on FlexRule® Advanced Decision Management Suite shows how several decisions are made depending on the customers’ information and requirements along with the insurer’s existing knowledge, leading towards determining premium step-by-step.
Each decision is based on a set of business rules or data coming from various sources. So you can see how decisions can be drilled down to logic documents such as decision tables, natural language, and tree.
The following decision table calculates the auto premium based on various data (i.e. car age, condition, and theft rating).
Imagine that the insurer decides to increase the auto premium for a car with a high theft rating. It can be easily done by updating the value of “Auto Premium” in Rule, R12.
Drilling down to another step, conditions in the decision table are mapped in a Business Glossary. So, the business terms can be used instead of expressions making it clearer specifically to the business users.
Advantages of Making One Decision at a Time
Now we already know how complex an insurance pricing engine can be and how risky it is. Therefore, let’s see further advantages.
| Step | Advantage | ||
|---|---|---|---|
| 1 | Map the business terms and concepts | It bridges the gap between business terms and technical expressions. |
|
| 2 | Use a logic document such as decision table to model business rules | Unlike using a specific programming language, decision tables are easy to understand by business users as well. | |
| 3 | Separate logic documents linked to each decision | Separately manage each decision. For example, the decisions made based on theft rating are separated from occupant injury rating. | |
| 4 | The final DRD (Decision Requirement Diagram) | It clearly maps all the decisions made in order to calculate the final premium. It gives the big picture of the complex process visually. The hierarchy helps to understand based on what decisions did we make a certain decision. |
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Conclusion
The calculation of premiums in insurance is complex. Because, it needs to factor in many different risks and regulations such as government tax, natural disasters, customer income, customer, and several claims change regularly. It involves a lot of decisions at different levels. However, if you break down the entire calculation into individual decisions dealing with their area, it becomes very easy to understand, change, and maintain. The quality across all channels is guaranteed. Also, you will be able to calculate an accurate premium and have a full explanation of how a customer’s premium is calculated.
Learn More
- How Underwriting Teams Can Rely Less on Software Development and IT Teams
- Vehicle Insurance Claim Settlement
- Updating Business Rules in Insurance Underwriting
- Dynamic Pricing
- Streamlining Business Processes
- 3 Ways to Improve Insurance Underwriting using Decision Automation
- Machine Learning in Health Insurance Premium Calculation
- Handling Compliance Challenges in Insurance
- Minimizing Health Insurance Risks
- Why Automate Insurance Pricing Model?
Last updated September 2nd, 2022 at 09:32 am, Published November 19th, 2020 at 09:32 am
Product Engineer at FlexRule – She focuses on analyzing and understanding customer requirements and identifying process. She also works in the emerging areas of technology such as Decision Robotics, testing and ensuring that the product functionalities align with the customer requirements.
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