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APPLYING ECONOMIC MEASURES TO LAPSE RISK MANAGEMENT WITH MACHINE LEARNING APPROACHES

Published online by Cambridge University Press:  04 June 2021

Stéphane Loisel*
Affiliation:
Univ Lyon, Université Claude Bernard Lyon 1 Institut de Science Financière et d’Assurances (ISFA) Laboratoire SAF EA2429, F-69366, Lyon, France
Pierrick Piette
Affiliation:
Univ Lyon, Université Claude Bernard Lyon 1 Institut de Science Financière et d’Assurances (ISFA) Laboratoire SAF EA2429, F-69366, Lyon, France Seyna, 58 Rue de la Victoire, 75009 Paris, France E-Mail: pierrickpiette@gmail.com
Cheng-Hsien Jason Tsai
Affiliation:
Department of Risk Management and Insurance Risk and Insurance Research Center, College of Commerce National Chengchi University (NCCU)Taipei City, Taiwan E-Mail: ctsai@nccu.edu.tw

Abstract

Modeling policyholders’ lapse behaviors is important to a life insurer, since lapses affect pricing, reserving, profitability, liquidity, risk management, and the solvency of the insurer. In this paper, we apply two machine learning methods to lapse modeling. Then, we evaluate the performance of these two methods along with two popular statistical methods by means of statistical accuracy and profitability measure. Moreover, we adopt an innovative point of view on the lapse prediction problem that comes from churn management. We transform the classification problem into a regression question and then perform optimization, which is new to lapse risk management. We apply the aforementioned four methods to a large real-world insurance dataset. The results show that Extreme Gradient Boosting (XGBoost) and support vector machine outperform logistic regression (LR) and classification and regression tree with respect to statistic accuracy, while LR performs as well as XGBoost in terms of retention gains. This highlights the importance of a proper validation metric when comparing different methods. The optimization after the transformation brings out significant and consistent increases in economic gains. Therefore, the insurer should conduct optimization on its economic objective to achieve optimal lapse management.

Type
Research Article
Copyright
© 2021 by Astin Bulletin. All rights reserved

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