Predictive Modelling SOA Annual Meeting 2008
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Transcript of Predictive Modelling SOA Annual Meeting 2008
watsonwyatt.com
2008 SOA Annual Meeting
Predictive Modeling in Life Insurance
Yuhong (Jason) Xue, FSA, MAAAOctober 21, 2008
1
Agenda
Theoretical Background of Predictive Modeling– Generalized Linear Modeling (GLM)
Applications of GLM in Life Insurance– Mortality analysis– Policy holder behavior study– Stochastic modeling
2
Theoretical Background
3
Predictive Modeling
Statistical model that relates an event (death) with a number ofrisk factors (age, sex, YOB, amount, marital status, etc.)
Amount
Y.o.B.
Age
etc.
Sex
Married
ExpectedmortalityModel
4
Generalized Linear Models (GLMs)
Special type of predictive modelling A method that can model
– a number
as a function of – some factors
For instance, a GLM can model– Motor claim amounts as a function of driver age, car type, no
claims discount, etc …– Motor claim frequency (as a function of similar factors)
Historically associated with P&C pricing (where there was a pressing need for multivariate analysis)
5
Understanding GLM Results
Base Level0.005
GenderGLMFactor
M 1.0 F 0.8
A GLM will model the ‘observed amount’ (eg motor claims frequency, mortality rate, economic capital results from a life model) asAmount = Base level × Factor 1 × Factor 2 …
For example, if ‘observed amount’ is mortality, Factor 1 is gender, and Factor 2 is annuity payment band, then
Mortality for Female with Payment in band 100-500 =0.005 x 0.8 x 1.5 = 0.006
Payment Band
GLMFactor
100-500 1.5 500-1000 1.1 1000-2000 1.0 >2000 0.9
6
E[Y] = = g ( X )-1
Observed thing(data)
Some function(user defined)
Some matrix based on data(user defined)
as per linear models
Parameters to beestimated
(the answer!)
Mathematical Form of GLM
7
Bedtime Reading
Copies available atwww.watsonwyatt.com/glm
8
Applications of GLM in Mortality Analysis
9
Mortality Analysis of Annuitant
The traditional approach: experience study– Focus on limited risk factors, such as Age, Sex, may extend to
other factors (i.e. amount)– Calculate A/E ratio with slicing and dicing techniques to come
up with a set of weights (or multipliers)– Limitation: Ignore interaction
For example, a simple tabulation of mortality by annuity amount ignores impact of other risk factors such as marital status
Advantages of GLM– A multivariate analysis including all risk factors simultaneously– Isolate impact of a single risk factor– Unique ability of using calendar year as a risk factor, making it
possible to study many years of data
10
Examples of Mortality Analysis
Examples Using GLM to Analyze Annuitant MortalityBased on dataset representing a life company’s
typical portfolio of retirees currently receiving benefits
11
Example 1: Effect of Annuity Amount
Results show evidence of reduced mortality with increased benefits
Generalized Linear Modeling IllustrationIncome Effect
-29%
-18%
-15%
-6%
0%
-0.36
-0.3
-0.24
-0.18
-0.12
-0.06
0
0.06
Income
Log
of m
ultip
lier
0
200000
400000
600000
800000
1000000
1200000
1400000
1600000
<= 30K <= 50K <= 75K <= 100K > 100K
Expo
sure
(yea
rs)
Oneway relativities Approx 95% confidence interval Unsmoothed estimate Smoothed estimate
12
Example 2: Calendar Year Trend
Mortality improvements 1% per annum over previous six years
Generalized Linear Modeling IllustrationRun 1 Model 2 - GLM - Significant
0%1%
2%
4%4%
5%
-0.04
-0.02
0
0.02
0.04
0.06
0.08
0.1
Calendar year
Log
of m
ultip
lier
0
100000
200000
300000
400000
500000
600000
700000
2002 2003 2004 2005 2006 2007
Expo
sure
(yea
rs)
Oneway relativities Approx 95% confidence interval Unsmoothed estimate Smoothed estimate
13
Example 3: The Selection Effect
Selection effect is inconclusive
Generalized Linear Modeling IllustrationRun 1 Model 2 - GLM - Significant
0%
-3%
-0.08
-0.07
-0.06
-0.05
-0.04
-0.03
-0.02
-0.01
0
0.01
Duration
Log
of m
ultip
lier
0
500000
1000000
1500000
2000000
2500000
3000000
<=5 5+
Expo
sure
(yea
rs)
Approx 95% confidence interval Smoothed estimate
14
Example 4: Birth Cohort EffectGeneralized Linear Modeling Illustration
Birth Cohort
0%
4%
-1%
5%5%
7%
5%5%4%
3%
-1%
2%
-4%
0%-1%
-2%-1%
1%
-2%-1%
-0.15
-0.1
-0.05
0
0.05
0.1
0.15
Log
of m
ultip
lier
0
100000
200000
300000
400000
500000
<= 1915 <= 1918 <= 1921 <= 1924 <= 1926 <= 1928 <= 1931 <= 1933 <= 1936 <= 1940
Expo
sure
(yea
rs)
Smoothed estimate, Sex: M Smoothed estimate, Sex: F
No Cohort Effect for male and Female
15
Example 5: Effect of Joint Life Status
Evidence of “broken heart syndrome” which may influence pricing
Generalized Linear Modeling IllustrationJoint Survivor Status
3%
-4%
0%
-0.08
-0.06
-0.04
-0.02
0
0.02
0.04
0.06
0.08
Log
of m
ultip
lier
0
500000
1000000
1500000
2000000
2500000
Single Life Joint Life Primary Joint Life Surviving Spouse
Expo
sure
(yea
rs)
Oneway relativities Approx 95% confidence interval Unsmoothed estimate Smoothed estimate
16
Mortality Varies by Postcode
Map shows age-standardised mortality rates in England & Wales
From red = high to blue = low
17
Why Use GLM in Analyzing Mortality
Valuation– More accurate mortality rates can impact the present
value of cash flow by 1 – 2% which is significant in bulk buyout situations
Pricing– Characteristics identified by GLM that influence
mortality can be used for pricing purposes Understanding Risks
– Certain characteristics identified by GLM, such as geographical location, can be used to focus marketing efforts
18
Use GLM to Study Policy Holder Behavior
19
Example of Lapse Study
Advantages of GLM in studying policy holder behavior– Better quantify effects of factors: age/sex, duration,
calendar year of exposure, benefit amount, geographical location, distribution channel, …
– Can Include standard economic measures such as GDP and equity market returns to study dynamic lapses
– Can also study correlations of guarantee utilization rate with factors like In-The-Moneyness and value of liability
The following examples are based on a portfolio of single premium deferred annuities
20
The Effect of DurationGLM life surrender analysis - duration
-1.5
-1.2
-0.9
-0.6
-0.3
0
0.3
0.6
Log
of m
ultip
lier
0
500000
1000000
1500000
2000000
2500000
3000000
0 1 2 3 4 5 6 7 8 9 10 >=11
Exp
osur
e (y
ears
)
Oneway relativities Unsmoothed estimate
21
Application of GLM in Stochastic Modeling
22
Example of Economic Capital (EC) Modeling
Economic Capital (EC) is the end of year one capital requirement at 99.95% confidence level
Treat result of every scenario in the stochastic run as one observation
Treat the parameters in the ESG as risk factors Advantages
– Quick independent check of the model as stochastic results are difficult to validate
– Provides a closed-form solution of EC which can be used as approximations to avoid nested stochastic loops in certain applications
23
Economic Capital Modeling Change in credit spread
SimulationEquity return
Property return Pc1 Pc2 Pc3 AAA AA A Capital yr 1
1 -18.1% -11.3% 1.1728 -0.0694 -0.0764 0.14% 0.19% 0.19% 351,956,2322 37.5% 28.4% -0.8093 0.1426 0.0376 0.15% 0.19% 0.20% 182,869,2643 -16.0% 12.9% -1.1597 -0.2165 0.0151 0.10% 0.08% 0.09% 295,234,1824 34.0% 0.9% 1.5612 0.3284 -0.0514 0.40% 0.57% 0.60% 273,541,4405 -7.6% 42.1% 5.7572 0.1840 -0.2618 0.00% -0.06% -0.08% 132,504,0956 21.9% -19.8% -4.3497 -0.1075 0.1720 0.23% 0.32% 0.34% 401,335,7157 -28.9% 0.8% 2.4245 0.0486 -0.1218 0.11% 0.14% 0.15% 310,364,0288 58.4% 13.0% -1.9035 0.0247 0.0747 0.08% 0.05% 0.01% 192,173,5519 11.5% 45.0% -2.9855 -0.6720 0.0549 0.00% -0.07% -0.10% 188,914,076
10 1.0% -21.5% 3.8398 0.9810 -0.0792 0.22% 0.30% 0.32% 303,942,20711 -8.5% 3.5% 3.5653 0.7616 -0.0941 0.02% -0.05% -0.03% 221,069,50512 22.9% 10.0% -2.7940 -0.5229 0.0594 0.07% 0.06% 0.05% 276,782,15113 4.2% -12.3% -2.3709 0.1354 0.1092 0.17% 0.22% 0.24% 355,975,36514 8.1% 29.9% 3.0075 -0.0947 -0.1628 0.35% 0.52% 0.57% 223,679,04515 -9.1% -9.2% 0.7996 -0.5391 -0.1028 0.02% -0.04% -0.06% 327,166,41116 23.8% 25.5% -0.4267 0.6100 0.0772 -0.02% -0.12% -0.14% 151,541,79317 14.8% 12.6% -4.6239 -0.1730 0.1771 0.36% 0.41% 0.51% 338,591,62718 -2.0% 1.2% 6.1837 0.2795 -0.2719 0.20% 0.40% 0.45% 245,649,58419 -28.8% -4.4% 1.2037 0.2253 -0.0464 0.01% -0.06% -0.09% 303,185,90020 58.2% 19.2% -0.8391 -0.1285 0.0094 0.14% 0.32% 0.31% 188,498,682
24
Initial Results (good)
Preliminary analysis of ICA resultsRun 1 Model 3 - Initial runs - All factors, normal identity, no interactions (Genmod used)
-40%
-29%
-24%-21%
-18%-14%
-11%-7%
-4%0%
4%7%
11%15%
18%24%
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
Property return
Log
of m
ultip
lier
0
2000
4000
6000
8000
10000
Num
ber o
f cla
ims
Approx 95% confidence interval Unsmoothed estimate Smoothed estimate P value = 0.0%Rank 5/8
The higher the return the less the capital requirement
25
Initial Results (bad)
Preliminary analysis of ICA resultsRun 1 Model 3 - Initial runs - All factors, normal identity, no interactions (Genmod used)
0%
1%
0%
0%0%
0%0%0%0%
0%
0%
-1%
-1%
-0.016
-0.012
-0.008
-0.004
0
0.004
0.008
0.012
Change credit spread A
Log
of m
ultip
lier
0
2000
4000
6000
8000
10000
12000
Num
ber o
f cla
ims
Approx 95% confidence interval Unsmoothed estimate Smoothed estimate P value = 0.0%Rank 1/8
Spike indicated a problem in the model