New Product Development in Insurance: The Actuary

4 minutes, 30 seconds read

Published on Jan 22, 2020

Updated on May 11, 2020

Ratemaking, or insurance pricing, is the process of fixing the rates or premiums that insurers charge for their policies. In insurance parlance, a unit of insurance represents a certain monetary value of coverage. Insurance companies usually base these on risk factors such as gender, age, etc. The Rate is simply the price per ‘unit of insurance’ for each unit exposed to liability.

Typically, a unit of insurance (both in life and non-life) is equal to $1,000 worth of liability coverage. By that token, for 200 units of insurance purchased the liability coverage is $200,000. This value is the insurance ‘premium’. (This example is only to demonstrate the logic behind units of exposure, and is not an exact method for calculating premium value)

The cost of providing insurance coverage is actually unknown, which is why insurance rates are based on the predictions of future risk.

Actuaries work wherever risk is present

Actuarial skills help measure the probability and risk of future events by understanding the past. They accomplish this by using probability theory, statistical analysis, and financial mathematics to predict future financial scenarios.

Insurers rely on them, among other reasons, to determine the ‘gross premium’ value to collect from the customer that includes the premium amount (described earlier), a charge for covering losses and expenses (a fixture of any business) and a small margin of profit (to stay competitive). But insurers are also subject to regulations that limit how much they can actually charge customers. Being highly skilled in maths and statistics the actuary’s role is to determine the lowest possible premium that satisfies both the business and regulatory objectives.

Risk-Uncertainty Continuum

Source: Sam Gutterman, IAA Risk Book

Actuaries are essentially experts at managing risk, and owing to the fact that there are fewer actuaries in the World than most other professions — they are highly in demand. They lend their expertise to insurance, reinsurance, actuarial consultancies, investment, banking, regulatory bodies, rating agencies and government agencies. They are often attributed to the middle office, although it is not uncommon to find active roles in both the ‘front and middle’ office.

Recently, they have also found greater roles in fast growing Internet startups and Big-Tech companies that are entering the insurance space. Take Gus Fuldner for instance, head of insurance at Uber and a highly sought after risk expert, who has a four-member actuarial team that is helping the company address new risks that are shaping their digital agenda. In fact, Uber believes in using actuaries with data science and predictive modelling skills to identify solutions for location tracking, driver monitoring, safety features, price determination, selfie-test for drivers to discourage account sharing, etc., among others.

Also read – Are Predictive Journeys moving beyond the hype?

Within the General Actuarial practice of Insurance there are 3 main disciplines — Pricing, Reserving and Capital. Pricing is prospective in nature, and it requires using statistical modelling to predict certain outcomes such as how much claims the insurer will have to pay. Reserving is perhaps more retrospective in nature, and involves applying statistical techniques for identifying how much money should be set aside for certain liabilities like claims. Capital actuaries, on the other hand, assess the valuation, solvency and future capital requirements of the insurance business.

New Product Development in Insurance

Insurance companies often respond to a growing market need or a potential technological disruptor when deciding new products/ tweaking old ones. They may be trying to address a certain business problem or planning new revenue streams for the organization. Typically, new products are built with the customer in mind. The more ‘benefit-rich’ it is, the easier it is to push on to the customer.

Normally, a group of business owners will first identify a broader business objective, let’s say — providing fire insurance protection for sub-urban, residential homeowners in North California. This may be a class of products that the insurer wants to open. In order to create this new product, they may want to study the market more carefully to understand what the risks involved are; if the product is beneficial to the target demographic, is profitable to the insurer, what is the expected value of claims, what insurance premium to collect, etc.

There are many forces external to the insurance company — economic trends, the agendas of independent agents, the activities of competitors, and the expectations and price sensitivity of the insurance market — which directly affect the premium volume and profitability of the product.

Dynamic Factors Influencing New Product Development in Insurance

Source: Deloitte Insights

To determine insurance rate levels and equitable rating plans, ratemaking becomes essential. Statistical & forecasting models are created to analyze historical premiums, claims, demographic changes, property valuations, zonal structuring, and regulatory forces. Generalized linear models, clustering, classification, and regression trees are some examples of modeling techniques used to study high volumes of past data.

Based on these models, an actuary can predict loss ratios on a sample population that represents the insurer’s target audience. With this information, cash flows can be projected on the product. The insurance rate can also be calculated that will cover all future loss costs, contingency loads, and profits required to sustain an insurance product. Ultimately, the actuary will try to build a high level of confidence in the likelihood of a loss occurring.

This blog is a two-part series on new product development in insurance. In the next part, we will take a more focused view of the product development actuary’s role in creating new insurance products.

Generic AI is no longer enough. Domain-specific AI is the new enterprise advantage.

From hospitals to factories to insurance carriers, organizations are learning the hard way: horizontal AI platforms might be impressive, but they’re often blind to the realities of your industry.

Here’s the new playbook: intelligence that’s narrow, not general. Context-rich, not context-blind.
Welcome to the age of domain-specific AI agents— from underwriting co-pilots in insurance to care journey managers in hospitals.

Why Generalist LLMs Miss the Mark in Enterprise Use

Large language models (LLMs) like GPT or Claude are trained on the internet. That means they’re fluent in Wikipedia, Reddit, and research papers; basically, they are a jack-of-all-trades. But in high-stakes industries, that’s not good enough because they don’t speak insurance policy logic, ICD-10 coding, or assembly line telemetry.

This can lead to:

Hallucinations in compliance-heavy contexts
Poor integration with existing workflows
Generic insights instead of actionable outcomes

Generalist LLMs may misunderstand specific needs and lead to inefficiencies or even compliance risks. A generic co-pilot might just summarize emails or generate content. Whereas, a domain-trained AI agent can triage claims, recommend treatments, or optimize machine uptime. That’s a different league altogether.

What Makes an AI Agent “Domain-Specific”?

A domain-specific AI agent doesn’t just speak your language, it thinks in your logic—whether it’s insurance, healthcare, or manufacturing.

Here’s how:

Context-awareness: It understands what “premium waiver rider”, “policy terms,” or “legal regulations” mean in your world—not just the internet’s.
Structured vocabularies: It’s trained on your industry’s specific terms—using taxonomies, ontologies, and glossaries that a generic model wouldn’t know.
Domain data models: Instead of just web data, it learns from your labeled, often proprietary datasets. It can reason over industry-specific schemas, codes (like ICD in healthcare), or even sensor data in manufacturing.
Reinforcement feedback: It improves over time using real feedback—fine-tuned with user corrections, and audit logs.

Think of it as moving from a generalist intern to a veteran team member—one who’s trained just for your business.

Industry Examples: Domain Intelligence in Action

Insurance

AI agents are now co-pilots in underwriting, claims triage, and customer servicing. They:

Analyze complex policy documents
Apply rider logic across state-specific compliance rules
Highlight any inconsistencies or missing declarations

Healthcare

Clinical agents can:

Interpret clinical notes, ICD/CPT codes, and patient-specific test results.
Generate draft discharge summaries
Assist in care journey mapping or prior authorization

Manufacturing

Domain-trained models:

Translate sensor data into predictive maintenance alerts
Spot defects in supply chain inputs
Optimize plant floor workflows using real-time operational data

How to Build Domain Intelligence (And Not Just Buy It)

Domain-specific agents aren’t just “plug and play.” Here’s what it takes to build them right:

Domain-focused training datasets: Clean, labeled, proprietary documents, case logs.

Taxonomies & ontologies: Codify your internal knowledge systems and define relationships between domain concepts (e.g., policy → coverage → rider).
Reinforcement loops: Capture feedback from users (engineers, doctors, underwriters) and reinforce learning to refine output.
Control & Clarity: Ensure outputs are auditable and safe for decision-making

Choosing the Right Architecture: Wrapper or Ground-Up?

Not every use case needs to reinvent the wheel. Here’s how to evaluate your stack:

LLM Wrappers (e.g., LangChain, semantic RAG): Fast to prototype, good for lightweight tasks
Fine-tuned LLMs: Needed when the generic model misses nuance or accuracy
Custom-built frameworks: When performance, safety, and integration are mission-critical

Use Case	Reasoning
Customer-facing chatbot	Often low-stakes, fast-to-deploy use cases. Pre-trained LLMs with a wrapper (e.g., RAG, LangChain) usually suffice. No need for deep fine-tuning or custom infra.
Claims co-pilot (Insurance)	Requires understanding domain-specific logic and terminology, so fine-tuning improves reliability. Wrappers can help with speed.
Treatment recommendation (Healthcare)	High risk, domain-heavy use case. Needs fine-tuned clinical models and explainable custom frameworks (e.g., for FDA compliance).
Predictive maintenance (Manufacturing)	Relies on structured telemetry data. Requires specialized data pipelines, model monitoring, and custom ML frameworks. Not text-heavy, so general LLMs don’t help much.

Strategic Roadmap: From Pilot to Platform

Enterprises typically start with a pilot project—usually an internal tool. But scaling requires more than a PoC.

Here’s a simplified maturity model that most enterprises follow:

Start Small (Pilot Agent): Use AI for a standalone, low-stakes use case—like summarizing documents or answering FAQs.

Make It Useful (Departmental Agent): Integrate the agent into real team workflows. Example: triaging insurance claims or reviewing clinical notes.
Scale It Up (Enterprise Platform): Connect AI to your key systems—like CRMs, EHRs, or ERPs—so it can automate across more processes.

Think Big (Federated Intelligence): Link agents across departments to share insights, reduce duplication, and make smarter decisions faster.

What to measure: Track how many tasks are completed with AI assistance versus manually. This shows real-world impact beyond just accuracy.

Closing Thoughts: Domain is the Differentiator

The next phase of AI isn’t about building smarter agents. It’s about building agents that know your world.

Whether you’re designing for underwriting or diagnostics, compliance or production—your agents need to understand your data, your language, and your context.

Ready to Build Your Domain-Native AI Agent?

Talk to our platform engineering team about building custom-trained, domain-specific AI agents.

Further Reading: AI Code Assistants: Revolution Unveiled

New Product Development in Insurance: The Actuary