Different types of Merit Rating
Merit Rating assesses the merit of the person doing the job. In Insurance, a merit rating plan is used by an insurer to adjust auto insurance premium based on the operator’s driving record. Merit rating is based on the assumption that the loss experience of particular insured will differ substantially from the loss experience of other insured. Insurers looking to implement a price optimization strategy must consider these essential components:
- Information management
Key to the success of using price optimization is the quantity and quality of the available data, especially claims and customer data.
- Data exploration
The emergence of business analytics software, like data exploration and visualization tools, helps insurers refine their analysis and evaluation of certain risk elements. For example; 20 years ago, credit score was probably deemed unimportant. Now it is probably the most used variable in determining premium rates.
- Predictive modeling
Insurers must use analytical tools to perform what-if simulation and scenario testing to forecast future behavior and improve the underwriting performance of the insurance company.
- High-performance analytics
To process the large data quantity and perform complex analytical calculations, insurers need an in-memory or distributed computing environment.
- Competitive intelligence
Price optimization requires an in-depth understanding of the competitive landscape, industry-wide pricing strategies, and customer demographics and buying preferences.
Especially in lines of business where price is a key differentiator — such as auto, home, and some commercial lines — price optimization represents the future for insurance. In Insurance, this is the basis of an insured’s loss record such as for auto insurance used in computing premium on a policy.