Premium Modeling

Any accountant with a penchant for using driver-based approaches to planning and budgeting will revel in the insurance industry; I know I did. It’s because just a handful of drivers, such as the proportion of policies in force that cancel or lapse each month and the percentage of those that renew at the end of each policy year, can be used alongside other metrics for forecasting everything from premium income and the number of claims that will need processing right through to the postage charges for mailing out policy documents and renewal invitations.  Once built, such models have all the elegance of a precision timepiece and can be quickly update each month to generate a rolling reforecast that departmental managers in customer contact centers, claims management, and new business need for their own planning and budgeting, as well as providing finance with the basic information for reserving, cash flow forecasts, and other financial reports.

Premium modeling; the epicenter of planning in insurance

At the heart of all this is premium planning, where typically finance and a small group of folk from other functions come together to forecast the amount of new business that will be written, project the existing renewal business, and determine rates that will deliver a healthy loss ratio. The output is a budget for premium income and lots of other information that will ripple out into departmental plans right across the business. Now while this all sounds simple and straightforward, it’s actually quite complex as rates vary by different combinations of risk factors, distribution channel and payment type. As a result, each line of business, and sometimes each plan, may need to be modelled differently.

Because of this and the need to continually experiment with rates, premium modelling is usually done in spreadsheets, or occasionally a stand-alone OLAP tool. Now while these are infinitely flexible, they are not without problems. Spreadsheets are laborious to amend, prone to errors, and difficult for others to audit as rules are embedded in individual cells. They also struggle to cope with the complex dimensionality involved. While this may be not an issue when OLAP tools are available, not all users have the expert skills required to use that level of tool.

Anaplan overcomes the limitations of existing modeling tools

Such shortcomings have led a growing number of insurers, including UK-based Aviva, to choose Anaplan for premium modelling and other operational and financial planning, budgeting, and reporting processes. That’s because the platform’s intuitive modelling interface means those involved in premium modelling can still build and amend their own models themselves without having to wait for expert skills to be available to assist them. What’s more, they’ll find it easier and quicker to add new dimensions for things such as new risk groups, write new rules for the way premiums are calculated, and spread high level targets across periods and risk groups using Anaplan’s built-in accelerators.  And because Anaplan calculates results in real time, they’ll lose nothing of the immediacy of working with spreadsheets even if models grow to billions of data points.

The users benefit and the enterprise benefits too. The built-in collaborative workflow makes it quick and easy to review and approve new rates and forecasts with enterprise-level security giving authorised users access only to those parts of the data relevant to their line of business or department. The built-in audit trail also allows users and their managers to keep track of what changes others have made to models and when they were made, while the central storage of customized business rules makes it quicker and easier for everyone involved to understand all the underlying logic without having to scroll through hundreds of individual cells like you do in a spreadsheet.

All of this is important, because while there is typically just a small group of people involved in premium modelling, they are creating data that flows out far and wide into virtually every other part of the business. Using Anaplan, that data is held under enterprise- level security standards but is shared with others in sales, operations, and actuarial services in a controlled manner. Having a single source of the truth means outputs can also be confidently linked into budgets, cash-flow projections, and other financial reports; something that is not possible when spreadsheets and other stand-alone tools are being used.

And because Anaplan is available on subscription without having to license and install any software or purchase extra hardware, premium modelling makes an ideal place for an insurer to quickly pilot any bigger planning and budgeting project.