Building predictive models to estimate claim risk is not revolutionary. We all know that the techniques of using multivariate analysis and regression to predict a given outcome or behavior have been around since the end of World War II. Yet, as discussed in my previous article, the challenge has been to engage actuaries in the use of these techniques.
While actuaries are certainly very knowledgeable in the mechanics of these techniques, they have been limited by their inability to use them due to very challenging data environments. The advent of the data mining discipline now allows actuaries to leverage the use of these more advanced techniques and overcome data obstacles.
To further embrace the use of these techniques by the actuarial community, some data mining practitioners have built models that predict differentials as opposed to an actual score. The notion of differentials represents a concept that is familiar terrain for all actuaries.
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