Application of data mining methods to solving the problems of actuarial modeling and estimation of financial risks

Abstract

Results of application of the data mining to solving the problem of actuarial processes modeling and risk estimation for insurance companies are presented. As a mathematical modeling tool the following approaches were used: generalized linear models, Bayesian networks, the group method for data handling, fuzzy GMDH, and Bayesian parameter estimation techniques. Using actual statistical data from the insurance industry, new generalized linear models were constructed that were used for estimation of a possible loss by an insurance company. Also, a model in the form of a Bayesian network was constructed that was applied to estimate the bankruptcy risk in a case of insurance losses. The best model constructed in this case turned out to be the gamma distribution based model and logarithmic link function whose parameters were estimated within four iterations of the estimation algorithm. A substantial computed value of the insurance company bankruptcy risk reflects the fact that the company under consideration does not possess an effective mechanism for managing its own capital and the payments from clients. Thus, an application of data mining is an effective approach to solving the problems of short-term forecasting financial processes and estimation of actuarial risks.