The insurance industry, with its complex web of regulations, diverse product offerings, and complex risk assessments, relies heavily on sophisticated IT systems. Many companies still operate on intricate legacy systems, built over decades and deeply integrated with core business processes. Modernizing these systems is a daunting task, often requiring significant investment of time and resources due to their complex architecture and the need to maintain business continuity during the transition. One particularly challenging component to modernize is the rating module, the engine responsible for calculating premiums for various insurance products.
The inherent complexity of rating algorithms presents a significant obstacle to modernization efforts. These algorithms are not standardized across the industry; they can vary significantly not only between different insurance products offered by the same company (e.g., auto, home, life) but also between companies offering the same type of coverage. For instance, while many insurers offer cyber insurance, the specific methodologies they employ to calculate premiums can differ drastically, incorporating factors like industry sector, data security practices, and past claims history. Adding another layer of complexity, rating algorithms often vary by geographic region. For example, the rating formula for a specific health insurance plan might differ significantly from one state to another, reflecting variations in state-specific regulations, local demographics, and regional risk assessments. This high degree of variability makes it nearly impossible to standardize rating algorithms across the industry, presenting a substantial challenge for IT departments tasked with modernization. While IT teams may be technically capable of developing systems that support these diverse and ever-changing algorithms, the constant need to accommodate changes, variations, and customizations turns this into a continuous and resource-intensive effort, diverting valuable resources from other strategic initiatives. These challenges highlight why insurance rating remains one of the most difficult and costly aspects of modernizing legacy insurance systems.
The Role of Excel in Insurance Rating
Excel has long been a cornerstone for actuaries and underwriters, serving as the primary tool for developing rating models. Actuaries rely on Excel to create, maintain, and update these models in response to changing regulations, market conditions, and company strategies. These models often extend beyond the actuarial department, playing a critical role for underwriters, brokers, and agents who use them to assess risk, determine premiums, and facilitate policy issuance. Excel's flexibility and widespread use make it invaluable, but its limitations become apparent when these models need to be integrated into larger systems.
For high-volume insurance products, rating algorithms are often integrated directly into core insurance administration systems, such as Policy Administration Systems (PAS) and Underwriting Workbenches. This integration enables automated processing of large numbers of transactions. However, actuaries frequently maintain Excel versions of these models for internal use, providing them with a flexible tool for testing, analysis, and adjustments. For low-volume or specialized insurance products, Excel remains the default solution due to its cost-effectiveness. While this approach avoids the high cost of developing dedicated software, it introduces inefficiencies, such as manual data entry, increased risk of errors, and delays in integrating rating information with other systems.
The Benefits of Converting Excel Models to APIs
Application Programming Interfaces (APIs) are fundamental to modern software architecture, acting as digital bridges that facilitate seamless communication and collaboration between diverse systems, applications, and services. By establishing standardized methods for data exchange, APIs empower developers to integrate various components, whether they are internal systems within the same organization or external third-party services. In contemporary software architecture, APIs are crucial for achieving scalability, modularity, and interoperability.
Converting Excel-based insurance rating algorithms into APIs is a logical and increasingly necessary step in modernizing insurance systems. This approach facilitates seamless integration with both:
- Internal Systems: APIs enable seamless consumption of rating algorithms by various internal systems, including Policy Administration Systems (PAS), Underwriting Workbenches, Claims Management Systems, and other internal tools. This eliminates the need for manual data entry and ensures consistency across different systems.
- External Systems: Beyond internal use, APIs extend the reach of these algorithms to external systems such as Customer Relationship Management (CRM) platforms (e.g., Salesforce, HubSpot), Agency Management Systems used by independent agents, and even consumer-facing online rating calculators, providing a more streamlined and efficient customer experience.
Converting Excel-based rating algorithms to APIs offers significant advantages:
- Simplified Legacy Systems: APIs decouple rating logic, simplifying modernization by allowing independent updates to other components.
- Streamlined IT Workflows: APIs free IT from coding complex algorithms, allowing them to focus on strategic initiatives.
- Empowered Business Units: Business teams gain ownership of rating algorithms, enabling faster updates and greater autonomy.
- Improved Change Management: Updates become seamless, as changes in Excel are instantly reflected by the API.
- Elimination of Excel Rater Distribution Issues: APIs centralize the rating process, resolving version control, governance, and connectivity issues associated with distributing Excel files.
Platforms for Conversion
There are several approaches to exposing an Excel rater as an API. As highlighted in the article “Embedding Complex Excel Financial Models into Web Applications,” the most effective and efficient method is to use one of the specialized platforms available in the market that are specifically designed to convert formula-heavy Excel models into robust and scalable APIs. These platforms offer various features and functionalities, such as automated API generation, version control, security features, and performance monitoring. Choosing the right platform that best aligns with your specific needs, technical capabilities, and budget is crucial for a successful implementation.
Modernizing insurance rating systems is not just an option; it is a complex but essential undertaking for insurance companies seeking to remain competitive in today’s rapidly evolving market. While Excel has served as a valuable and versatile tool for actuaries in developing and maintaining rating algorithms, its inherent limitations become increasingly apparent when integrating these calculations into broader insurance workflows and modern IT architectures. The manual nature of Excel-based rating, particularly for low-volume products, introduces inefficiencies, potential for human error, and significant integration challenges.
Converting these Excel models into well-defined and robust APIs offers a compelling solution. By decoupling rating logic from legacy systems, APIs streamline IT workflows, empower business units, significantly improve change management processes, and eliminate the numerous issues associated with distributing and managing Excel raters. This approach not only simplifies modernization efforts and reduces costs but also enhances business agility, reduces operational risk, and fosters better connectivity between various internal and external systems. As specialized platforms continue to emerge and mature, facilitating this conversion process, the transition from Excel-based rating to API-driven solutions becomes increasingly feasible, cost-effective, and advantageous, paving the way for a more efficient, integrated, and innovative future for the insurance rating landscape.
Republished from LinkedIn article.
