What Is a Risk Equalizer, and How it is Changing the Actuarial Profession landscape?
Updated: Feb 8
In an era which the machines analyzes the financial consequences of risk autonomously, what will be the future of actuaries? possibly designing the insurers portfolio with an equalizer. just like sound engineers.
What is a Risk Equalizer?
A Risk Equalizer is a method and software that enables insurers to easily add a human touch to align its market strategies with their risk exposure, helping price policies within the context of an insurer’s risk appetite and general brand aspirations, to implement a straight-through-processing (STP) pricing for a customer’s personal type of risk in real-time.
Risk Equalizing is simply to adjust underwriting data factors of specific frequencies in a risk portfolio. As with all actuarial science, the basis of the insurance premium is determined by the risk exposures. Certain frequencies are generating larger loss to the combined ratio, despite having the same or even more probability to occur. The closer an actuary approach or exceed those risk portfolio boundaries, the less policies with sharing the same attributes an insurer will want to offer a policy to.
Compounded by the fact that risk factors can have various sources, reasons, impact, and configurations, the same risk from the same factor can impact the total loss ratio differently.
Facio Risk Equalizer was developed to allow insurers to compose a risk pool of customers that will fit both the companies' desired customer profile while obtaining the loss ratio goals.
For example, some more desired customers will respond better to lower prices than less desired ones, and vice versa, so the equalizer can lower the price down to the more desired one to prevent negative portfolio feedback and higher slightly up the premium for the rest on the less desired customers to even things out. In general, equalize for the general customer portfolio, to account for the particular combination of the customers and risk attributes.
How Is It All Equalized?
Risk Equalizer basically works in dynamic data sets or bands (#EqualizerBands). A single designed risk portfolio by an insurer might have millions of bands. Unlike traditional actuary, the BIG DATA actuary defines more bands. Consequently, fewer factors influence insurance pricing.
Each band in BIG DATA actuary controls ranged factors. This allows an adequate human involvement or control over the artificial intelligence integrated pricing engine.
The information or data that your customer leaves behind can be very useful to you when it comes to making your customers’ profiles.
For instance, an average P&C insurance consist at the minimum dual-band, for the insured person and the insured item, meaning insurers can cut and boost the high and low risk ranges for the insured customers or items. These are also referred to as “customer” and “object” bands, respectively.
Each isolated band can be manually defined as a bell shaped normal distribution curve around a central band. Equalizing knobs allows actuaries to visually set the frequency and shape the bands curve on the equalizer interface.
Well designed risk portfolio may have hundreds, thousands, millions or even billions of bands. The more bands an actuary defines, the less factors influence the pricing. Because of this, each band controls a small range of “factors groups”, thus allowing more human control over the rating engine.
Facio Equalizer allows actuaries to generate equalizing custom settings and presets and being able to reuse them through different lines of product easily while maintaining the general company risk appetite.
Carriers that have implemented Facio’s equalizer reported dramatic improvement both in profitability and growth, and admit that actuary equalizers are changing the way actuary is performed.