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Predictive Modeling in Property Casualty InsuranceIowa Actuaries Education DayFebruary 25, 2015

John Broadrick, Predictive Modeling and Competitive Intelligence VPFarm Bureau Financial Services

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Agenda

Anti-Trust Statement

Lifecycle of Property Casualty Policies & The Predictive Models That Support Them

Learn More About Predictive Modeling

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This discussion is intended to present an individual point of view on the topic described herein. Under no circumstances shall this presentation be used as a means for competing companies or firms to reach any understanding – expressed or implied – that restricts competition or in any way impairs the ability of members to exercise independent business judgment regarding matters affecting competition. It is the responsibility of participants to be aware of antitrust regulations, to prevent any written or verbal discussions that appear to violate these laws, and to adhere to every respect the relevant antitrust compliance policy.

For an example of the Casualty Actuarial Society antitrust compliance policy, refer to the CAS website at http://www.casact.org/professionalism/policiesProc/index.cfm?fa=antitrust.

All statements and written comments from this presentation are the opinion of the presentor only, and are not necessarily shared by Farm Bureau Financial Services, the Iowa Actuaries Club or the Casualty Actuarial Society

Compliance with Casualty Actuarial Society Anti-Trust PolicyANTI-TRUST STATEMENT

Please comply with the anti-trust policies of your relevant organization.

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Agenda

Anti-Trust Statement

Lifecycle of Property Casualty Policies & The Predictive Models That Support Them

Learn More About Predictive Modeling

5

Policy LifecycleLIFECYCLE OF PROPERTY CASUALTY POLICIES & THE PREDICTIVE MODELS THAT SUPPORT THEM

Policies must be sold, priced and underwritten. Additional policies are cross-sold. Claims are filed and adjusted, and reserves are estimated. Lastly, pricing changes take place every policy period.

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Competitive Intelligence– Estimate competitive position of renewal book

– Estimate competitive position of prospects

– Models options– In house or vendor supplied models

Models to estimate close rates– Estimate close rates based upon competitive comparison and other

characteristics

– Model options– Logistic models, CART, others

Lead qualification– Identify prospects that are most likely to respond to solicitation

– Model options– Logistic models, CART

– Incorporate third party consumer data

Models Supporting Policy AcquisitionLIFECYCLE OF PROPERTY CASUALTY POLICIES & THE PREDICTIVE MODELS THAT SUPPORT THEM

Policy Acquisition

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Manage rate avoidance– Predict situations where inspections are appropriate

– Identify potential inaccuracies in garaging address

– Models Examples– Inspection models, use of commercial addresses, unrepaired damage

Tier/Company placement & schedule modification guidance– Estimate expected profitability of the business given the pricing

model

– Model options– Loss ratio models, offset loss cost models, classification modeling, GLM,

CART

Models Supporting Policy UnderwritingLIFECYCLE OF PROPERTY CASUALTY POLICIES & THE PREDICTIVE MODELS THAT SUPPORT THEM

Policy Underwriting

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Pricing Models– Loss cost, Frequency, Severity models

– GLM very common

– Expense models– Cohort studies, duration and expense activities

Scoring– Tier, credit score models, driving scores etc.

– Transformations of underlying models, transformations

Territorial segmentation– Integration of geo-demographic data

– Integration of competitor relativities

– Geospatial smoothing

Policy Pricing

Models Supporting Policy PricingLIFECYCLE OF PROPERTY CASUALTY POLICIES & THE PREDICTIVE MODELS THAT SUPPORT THEM

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Model cross-sale opportunities– Identify prospects likely to purchase additional products

– Focus on sales channel, competitive offerings, client information

– Primarily logistic models

Distribution models– Evaluate agency characteristics leading to greater product

penetration

– Evaluate agency characteristics leading to greater client satisfaction

– Model options– Logistic models, CART, others

Cross-Sale

Models Supporting Cross-SaleLIFECYCLE OF PROPERTY CASUALTY POLICIES & THE PREDICTIVE MODELS THAT SUPPORT THEM

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Claim handling– Predict likelihood of fraudulent activity

– Predict likelihood that a given claim will become a represented claim

Production models– Identify elements that lead to claims leakage

Claim Adjustment

Models Supporting Claim AdjustmentLIFECYCLE OF PROPERTY CASUALTY POLICIES & THE PREDICTIVE MODELS THAT SUPPORT THEM

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Reserve opinion needs to include a reasonable range– Many determined that reasonable range should be statistical

confidence intervals

– This led to inclusion of many total loss models and reserving models

Model options– Stochastic loss modeling

– GLM applications to chain-ladder

– Bayesian inference models

Loss Reserving

Models Supporting Loss ReservingLIFECYCLE OF PROPERTY CASUALTY POLICIES & THE PREDICTIVE MODELS THAT SUPPORT THEM

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Retention models– Evaluate expected retention applicable to a given change to rates

– Models options– Logistic models

Considerations– Competitive position

– Experience used to generate the existing model

– Regulatory action around pricing models

Policy Retention

Models Supporting Policy RetentionLIFECYCLE OF PROPERTY CASUALTY POLICIES & THE PREDICTIVE MODELS THAT SUPPORT THEM

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Agenda

Anti-Trust Statement

Lifecycle of Property Casualty Policies & The Predictive Models That Support Them

Learn More About Predictive Modeling

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Formal Educational Programs– Statistics Undergraduate and Master’s Degree Programs– Executive Education Programs

Massive Open Online Courses (MOOCs)– Udacity– Coursera

Actuarial Literature– ASTIN articles– CAS publications

– Exam materials, Variance, CAS University

Books:– Generalized Linear Models, P. McCullagh and John A. Nelder– Applied Predictive Modeling, Max Kuhn and Kjell Johnson– Predictive Modeling Applications in Actuarial Science: Volume 1, Edward W. Frees and

Richard A. Derrig

ResourcesLEARN MORE ABOUT PREDICTIVE MODELING

Our purpose: protect livelihoods and futures. Our values: Integrity Service Leadership Accountability Teamwork Passion Our purpose: protect livelihoods and futures. Our values: Integrity Service Leadership Accountability Teamwork Passion Our purpose: protect livelihoods and futures. Our values: Integrity Service Leadership Accountability Teamwork Passion Our purpose: protect livelihoods and futures. Our values: Integrity Service Leadership Accountability Teamwork Passion Our purpose: protect livelihoods and futures. Our values: Integrity Service Leadership Accountability Teamwork Passion Our purpose: protect livelihoods and futures Our values: Integrity Service Leadership Accountability Teamwork Passion Our Purpose: Our purpose: protect livelihoods and futures. Our values: Integrity Service Leadership Accountability Teamwork Passion Our purpose: protect livelihoods and futures. Our values: Integrity Service Leadership Accountability Our purpose: protect livelihoods and futures. Our values: Integrity Service Leadership Accountability Teamwork Passion Our purpose: protect livelihoods and futures. Our values: Integrity Service Leadership Accountability Teamwork Passion Our purpose: protect livelihoods and futures. Our values: Integrity Service Leadership Accountability Teamwork Passion Our purpose: protect livelihoods and futures. Our values: Integrity Service Leadership Accountability Teamwork Passion

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