5/10/2019 Top 10 Data Science Use Cases in Insurance – ActiveWizards: machine learning company – Medium

Top 10 Data Science Use Cases in

Insurance
Igor Bobriakov Follow
Jul 9, 2018 · 8 min read

The insurance industry is regarded as one of the most competitive and

less predictable business spheres. It is instantly related to risk.
Therefore, it has always been dependent on statistics. Nowadays, data
science has changed this dependence forever.

Now, insurance companies have a wider range of information sources

for the relevant risk assessment. Big Data technologies are applied to
predict risks and claims, to monitor and to analyze them in order to
develop effective strategies for customers attraction and retention.
Undoubtedly, the insurance companies benefit from data science
application within the spheres of their great interest. Therefore, we
have prepared the top 10 data science use cases in the insurance
industry, which cover many various activities.

Fraud detection
Insurance fraud brings vast financial loss to insurance companies every
year. Data science platforms and software made it possible to detect
fraudulent activity, suspicious links, and subtle behavior patterns using
multiple techniques.

To make this detection possible the algorithm should be fed with a

constant flow of data. Usually, insurance companies use statistical

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models for efficient fraud detection. These models rely on the previous
cases of fraudulent activity and apply sampling method to analyze
them. In addition, predictive modeling techniques are applied here, for
the analysis and filtering of fraud instances. Identifying links between
suspicious activities helps to recognize fraud schemes that were not
noticed before.

Price optimization

Price optimization procedure is a complex notion. Therefore it uses

numerous combinations of various methods and algorithms. Despite
the fact that it is still the disputable issue of applying this procedure for
insurance, more and more insurance companies adopt this practice.

This process supposes combining the data not related to the expected
costs and risk characteristics and the data not related to the expected
loss and expenses, and its further analysis. That is, it takes into
consideration the changes in comparison to the previous year and
policy. Thus, price optimization is closely related to the customers’
price sensitivity.

In other words, historical costs, expenses, claims, risk, and profit are
projected into the future. Special algorithms give the insurers the
opportunity to adjust the quoted premiums dynamically.

As a key positive feature, price optimization helps to increase the

customers’ loyalty in long perspective. Along with this, comes the
maximization of profit and income.

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Personalized marketing
The customers are always willing to get personalized services which
would match their needs and lifestyle perfectly well. The insurance
industry is not an exception in this case. The insurers face the challenge
of assuring digital communication with their customers to meet these
demands.

Highly personalized and relevant insurance experiences are assured

with the help of the artificial intelligence and advanced analytics
extracting the insights from a vast amount of the demographic data,
preferences, interaction, behavior, attitude, lifestyle details, interests,
hobbies, etc. The consumers tend to look for personalized offers,
policies, loyalty programs, recommendations, and options.

The platforms collect all the possible data to define the major
customers` requirements. After that, the hypothesis on what will work
or won`t work is made. Here comes the turn to develop the suggestion
or to choose the proper one to fit the specific customer, which can be
achieved with the help of the selection and matching mechanisms.

The personalization of offers, policies, pricing, recommendations, and

messages along with a constant loop of communication largely
contribute to the rates of the insurance company.

Customer segmentation
Modern technologies have brought the promotion of products and
services to a qualitatively new level. Different customers tend to have
specific expectations for the insurance business. Insurance marketing
applies various techniques to increase the number of customers and to
assure targeted marketing strategies. In this regard, customer
segmentation proves to be a key method.

The algorithms perform customers’ segmentation according to their

financial sophistication, age, location, etc. Thus, all the customers are
classified into groups by spotting coincidences in their attitude,
preferences, behavior, or personal information. This grouping allows
developing attitude and solutions especially relevant for the particular
customers.

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As a result, target cross-selling policies may be developed and personal

services may be tailored for each particular segment.

Lifetime value prediction

Customers lifetime value (CLV) is a complex phenomenon representing

the value of a customer to a company in the form of the difference
between the revenues gained and the expenses made projected into the
entire future relationship with a customer.

Prediction of the CLV is typically assessed via customer behavior data in

order to predict the customer’s profitability for the insurer. Thus, the
behavior-based models are widely applied to forecast cross-buying and
retention. Recency, a monetary value of a customer for a company and
frequency are regarded as important factors to calculate future income.
The algorithms put together and process all the data to build the
prediction. This allows forecasting the likelihood of the customers’
behavior and attitude, maintenance of the policies or their surrender.
In addition, the CLV prediction may be useful for the marketing
strategy development, as it renders the customers’ insights at your
disposal.

Recommendation engines
Recommendation engines are the algorithms applied to provide proper
offers for each particular customer. They help to influence the
customers’ day to day decisions, choices, and preferences.

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These algorithms use special filtering systems to spot the preferences

and peculiarities in the customers’ choices. The algorithms, also,
include analysis of the data gained from simple questionnaires
concerning demographic data and some personal information
regarding the insurance experience and the insurance object.

On the basis of these insights, the engines generate more targeted

insurance propositions tailored for specific customers. Thus, for
example, the insurance company can avoid the ambiguity of the
offering car insurance to a customer who is searching for a health
insurance proposition.

Healthcare insurance
Healthcare insurance is a widespread phenomenon all over the world.
It usually refers to the coverage of costs caused by the disease, accident,
disability, or death. In many countries, the policies of healthcare
insurance are strongly supported by the governments.

In the age of fast digital information flows this sphere cannot resist the
influence of data analytics application. The global healthcare analytics
market is constantly growing. The insurance companies suffer from
constant pressure to provide better services and reduce their costs.

A wide range of data including insurance claims data, membership and

provider data, benefits and medical records, customer and case data,
internet data, etc. are gathered, structured, processed and turned into
valuable insights for the healthcare insurance business. As a result, the

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aspects such as costs reduction, quality of care, fraud detection and

prevention, and consumers engagement increase may be significantly
improved.

Risk assessment
Implementation of the risk assessment tools in the insurance industry
assures the prediction of risk and limits it to the minimum in order to
cut losses. There are two major types of risk: pure and speculative. The
risk assessment process is called to bring balance to the company’s
profitability and to avoid both these types.

Risk assessment lies in identifying the risk quantification and the risk
reasons. These are the basis for data analysis and calculations. The
matrix model of the analysis is widely applied in this field. This model
provides a systematic approach to risk information comparable in time.
It is based on the algorithms which detect and combine the data
concerning individual risks which vary by nature, character, and effect.
Then, the potential risk groups are assessed. Thus, the overall
company’s risk is forecasted via prediction of the exposure groups risks.

Claims prediction
The insurance companies are extremely interested in the prediction of
the future. Accurate prediction gives a chance to reduce financial loss
for the company.

The insurers use rather complex methodologies for this purpose. The
major models are a decision tree, a random forest, a binary logistic
regression, and a support vector machine. A great number of different
variables are under analysis in this case. The algorithms involve
detection of relations between claims, implementation of high
dimensionality to reach all the levels, detection of the missing
observations, etc. In this way, the individual customer’s portfolio is
made.

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Forecasting the upcoming claims helps to charge competitive premiums

that are not too high and not too low. It also contributes to the
improvement of the pricing models. This helps the insurance company
to be one step ahead of its competitors.

Automating life-event marketing

Under conditions of the highly-competitive insurance market, the
insurance companies face the everyday struggle to attract as many
customers as possible via multiple channels. Thus, the companies need
to use comprehensive marketing strategies to achieve their goals. The
automated marketing reaches its peak in this respect.

The automated marketing is a key to revealing the insights of the

customers` attitude and behavior via initial research, product inquiry,
purchases, and claims. As the main goal of digital marketing is to reach
a right person at a right time with a right message, life-event marketing
is more about the special occasion in the customers’ lives. Due to data
science techniques, the insurers can collect the data from multiple
channels and detect special dates and celebrations. Then, via complex
algorithms and associations, targeted suggestions and strategies are
applied.

Tracking the customer moving through the life cycle, the insurance
companies guarantee themselves a constant flow of clients matching a
wide range of their suggestions.

Conclusions

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Modern technologies are moving extremely fast making their ways into
various fields of the business. In this respects, the insurance industry
does not lack behind the others. The application of statistics in the
insurance has a long history. Thus, the fact that insurance companies
are actively using data science analytics is not surprising.

In essence, the aim of applying data science analytics in the insurance is

the same as in the other industries — to optimize marketing strategies,
to improve the business, to enhance the income, and to reduce costs. In
this article, we presented the most vivid examples of using the analytics
tools and algorithms in the insurance industry to successfully achieve
this aim.

Originally published in activewizards.com

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