1 AI/ML Impact on Life Insurance

AI/ML and its Applications in Life Insurance Underwriting

Course summary

Through this course we learned the following;

Why is AI/ML booming now?

AI has been around since the 1950s. In recent years, there has been so much hype
and buzz about AI and how it's the future. AI has the potential to disrupt every
industry and every business. AI will enable companies of all sizes to achieve better
business results by maximizing the three trends.

1. Access to massive amounts of data.

2. Access to massive computing power through the cloud.
3. Access to recent breakthroughs in new AI algorithms.

What is AI/ML and its capabilities?

 Artificial Intelligence (AI) is the ability of computer programs or machines to

exhibit or mimic human-like behaviour (for example, visual senses, speech
recognition, decision-making, natural language understanding, and so on.
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 Machine learning is a subset of AI. Machine learning is a technique where a

machine sifts through numerous data to find patterns over time. Machine
learning uses algorithms that train a machine how to learn patterns based on
differentiating features about the data. The more the training data, the more
accurate the predictions. 

How to identify what machine learning techniques apply to your business

problem.

Expanding on the primary concepts of AI, where machines show capabilities that are
usually associated with human capabilities, you can see how learning over time,
interpreting data, and reasoning with data works. To achieve this, we need to feed
the machine a lot of data before it can learn. Additionally, machine learning creates
algorithms varying from simple linear functions to extremely complex ones, like an 
artificial neural network. Machine learning can be implemented to help solve
problems based on unique data and business needs.
 

An insurance company's core business is the act of data crunching in order to

quantify risk so it can be efficiently distributed. So, just as all companies can benefit
by calculating micro risks much the same as insurance companies do, it also works
the other way around: Insurance companies in turn can benefit by incorporating
machine learning methods to augment their core actuarial methods to do so. 

Traditionally, insurers employed actuarial methods that involved manual steps, such
as tabulation and analysis for underwriting. The methods can ultimately be as simple
as a table look-up. But these days, insurance companies at large are actively
augmenting these practices with the broader range of machine learning algorithms in
order to better predict outcomes. In general, machine learning methods are more
automated and souped-up than conventional actuarial methods.
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1.  Predictive models act as a tool to inform and support our underwriters

in risk selection and pricing decisions.

From the insurance company's perspective, there is a risk, mainly financial risk. The
risk a policyholder s will file high claims. There's been a clear movement in the
insurance industry to augment traditional actuarial practices with machine learning in
order to improve pricing and selection decisions.

 Negative outcomes, high claims

Pricing and selection are the main decisions made in the process of underwriting,
which is the act of accepting financial responsibility -- that is, offering and agreeing
upon an insurance policy.   Pricing here means to set the policy's cost, i.e., the
premium. And the selection is just deciding which applications for insurance to
accept in the first place, and which to deny. For a policy to be underwritten and be
economically viable, the policy premiums must be somewhat commensurate with
policyholder risk.

Supervised learning algorithms such as credit scoring models predict whether a

policyholder will go for a claim. This drives decisions such as whether to approve an
application and whether to grant a higher or lower premium etc. The predictive
models made an incremental improvement to the efficiency of these per-policyholder
decisions, which translated into a great boost in profit.

Advantages of using this model are:

 High profitability and efficiency

 Fairer premium calculation through better decision-making.
 Reduces manual work

2. AI-driven underwriting systems

The process of underwriting is often viewed as an art based on personal

judgment, but AI technologies have also worked their way into this area of
insurance, making the process increasingly scientific. AI-driven underwriting
systems assist the underwriters by accurately quantifying unstructured and
qualitative data points - like social media and news feeds, reliable statistics
from public sources, and 3rd parties - and convey a comprehensive risk
profile to the underwriters in a highly interpretable manner. This can
drastically improve loss ratios and standardize a 360-degree approach to risk
analysis across the insurer's underwriting function. The future of underwriting
will be automated, intelligent, and customer-focused.

Also, AI-driven underwriting calls for a process redesign in the pre-

implementation stage, which introduces standard operating procedures,
coherence, and builds best practices into the underwriting process - for
example, automatically assessing application completeness or pricing
coverages such that the customer keeps coming back. Standardization builds
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predictability into day-to-day operations, while RPA technologies like intake

automation enable the completion of tedious and repetitive tasks like data
collation, find-and-rekey, checklist-based assessments, and other quality
assurance measures at the touch of a button. Lastly, AI-driven underwriting
systems are not bottlenecked by capacity and bring inherently low bias into
underwriting decisions.

3. Fraud detection

Faster claims processing is one of the differentiations expected by insurance

customers. But for insurers, it comes with the potential risk of paying more fraudulent
claims. AI models and machine learning tools are here to help insurers to detect
fraudulent activity by spotting unusual patterns that a human eye might miss.
Developing algorithms and predictive models for AI claims fraud detection requires
data—a lot of data. The more data that’s analyzed, the more effective the system will
be at automatically recognizing suspicious patterns and characteristics indicative of
fraud. While an insurer’s historical claims data is a good foundation, incorporating
third-party data sources provides a more holistic picture because it taps broader
industry data for analysis.

 Advanced Digital Algorithms for detecting Historically Rejected Claim

Records

The claims that have historically been rejected will have a great probability of
being rejected in the future too citing potential fraudulence. Specialists put in
place digital algorithms that automatically scan through the claim’s parameter
patterns. This includes conciliation patterns and claims risk indicators such as an
individual’s SSN, phone numbers, address, etc. This can be achieved by using
advanced clustering-based Data Mining techniques. These algorithms categorize
clusters with high claim frequency based on the above risk indicators, filter the
clusters, and classify them into bins of various degrees. These bins indicate the
level of risk and each bin might need a different degree of attention.

 Fraud Pattern Recognition Method for Specific Individuals/Groups

AI can also be used to continuously monitor employee and customer behaviour to

look for patterns indicating large-scale fraud. A fraud pattern recognition algorithm is
used to detect and flag network groups or individuals that repeatedly file fraudulent
claims. Based on these flags, ‘fraudulent patterns’ can be identified using automated
algorithms to categorize individual or group records that have similar historical risk
patterns.