Can Smart Machine Learning

Tools Replace Actuaries in the

Future Of Insurance Business?

By Karan Gaur, Tushprit Singh and Malwinderjeet at EXL Service (I) pvt ltd
Machine learning tools vs. actuarial science:
In today’s fast paced world of technology, an insurance industry executive or aspiring
leader has to think about the future, investor expectations, scaling and leveraging
technology, and this new question of “Smart Machine learning tools vs actuarial
science?”

ML vs. AS — What’s the difference?

Machine learning (ML) is a type of artificial intelligence (AI) that provides computers
with the ability to learn without being explicitly programmed. Machine learning focuses
on the development of computer programs that can teach themselves to grow and change
when exposed to new data.

Actuarial science (AS) is the discipline that applies mathematical and statistical methods
to assess risk in insurance, finance and other industries and professions. Actuaries are
professionals who are qualified in this field through intense education and experience.
Actuaries use statistical inference to help predict the future. Actuaries help underwriters
understand the “why” in the data, they bring tremendous value to underwriters and
organizations that are trying to understand risk via the statistical data.

Machine learning tools vs. actuarial science is a continuous debate by insurance industry
leaders. Eventually an Actuary is going to team up with a Data scientist to build an
algorithm and tool that can do both. Until then — we will focus on the idea that these two
fields compete with each other.

Do underwriters need to know the why? If they can just get the result via a Smart
GUI based interactive ML tool?

Would you or your shareholders trade optimal return on risk or equity for increased scale,
relevance, and speed? The question of this generation of insurers/reinsurers.

Is making a 10% ROE using traditional actuarial science sustainable if you can make 8–
9% ROE using ML tool and reduce your expenses and scale at the same time? What if
the ML algorithm based tool produced the same ROE ~10%?

These examples highlight a fundamental question — does the actuarial process provide

enough value to support the time, costs, and restraints? Or should industry executives be
focusing on using a ML algorithm to build a similar return & leverage the technology for
increased scale and relevance to customers/brokers/the market.

If not, are you willing to return a Beta of the underwriting result using ML tools vs.
generating alpha using actuary?
Benefits of the Machine Learning tools approach

Expense savings

If less actuaries are required, the speed is improved and underwriters can scale their
portfolios easier — the more expense savings can be found.

If these savings are used to hire more claims staff. The money saved in acquisition
expenses used to evaluate the price of the risk (actuarial salaries) could be reallocated to
the claims staff/resources. It is believed that claims are one of the best ways to allocate
resources to improve results — focus should be on the loss costs side. This should be the
focus of the insured and insurer — and how we add value to customers over time.

By hiring additional claims expertise, the insurer would have savings to the bottom line.

Time speed of analysis

If the algorithm/tool is processing the submission information, the speed of the

transaction and analysis can improve. Therefore, offering improved turnaround time to
underwriters for coverage and risk analysis.

Scale

The nature of ML algorithm based smart tool will allow for increased scale and growth
for insurers/reinsurers. This scale provides a host of benefits — as mentioned helps with
expenses and expense ratios. The scale will also help you maintain preferred relationships
with core customers and the ability to absorb shock losses.

Outcome

We predict this debate will go on for quite some time, as the industry is historically slow
to embrace change. However, we predict the following to occur:

 Insurance industry will need Data engineers

 Insurance industry will need Data scientists
 Insurance industry will need less “actuary only” resources
 Software Developers will build Platforms that will produce easy to use output for
non-data scientists
 The data and employees that Insurers and Reinsurers have will become their most
valued asset to generate Alpha
 We predict these new tools will produce different types of future
Insurers/Reinsurers, along with different expectations from investors.
 Underwriters will continue to sell product, evaluate risk, and change coverage —
 however will have to become versed in the data science field
 Two different types of future insurers
 Quick quote and small lines — that will produce a beta return of market
 Slow quote larger lines uses Actuarial science — generates alpha