Insurance companies typically harness a methodology called risk assessment when calculating
premiums for policyholders. But humans are no longer at the center of the risk assessment
process. Leading the calculations are sophisticated algorithms that measure key indicators
about the policyholder to predict the potential risk of a particular event taking place.
That risk is then measured as a cost to the company and the premiums required to balance that
risk are calculated. Within this post, we”ll take a look at how insurance pricing algorithms impact
A principal advantage of insurance pricing algorithms is that they offer greater accuracy over
other premium pricing methodologies, such as statistical analysis. While statistical analysis
simply looks at the overall population in addition to the individual risk factors to determine a
persons insurance rates, algorithms work to measure the risk to the company on an on-going
basis, helping to bring a level of fairness to the insurance rating process.
The increased accuracy supported by the use of algorithms helps insurance companies ensure
they’re not overcharging compared with their competitors. It also helps insurance companies
better tailor their policies to the individual and their day-to-day coverage requirements as
algorithms increase in complexity.
Reliance on Data Capture Technology
With the improvement in algorithms and the accuracy they provide, companies are now using
ever-more sophisticated data capture technology to drive insurance rate decisions. For
example, vehicle insurance companies are now implementing telematics that analyzes how a
person drives in real-time to ensure they have an insurance rate that truly reflects their abilities.
While it may take some time for this technology to be used across the country, its an insight into
how the insurance industry is now using algorithms and real-time data analysis to compute rate
costs. Only by harnessing the power of the latest computational systems can this level of
intuitive analysis be completed.
The insurance industry continues to evolve as technology drives greater levels of service
efficiency. Its clear that insurance is a complex product and requires a complex system of data
analysis to ensure the right product is available at the best market cost for both the high-value
customer and the insurance company.