Machine learning applications in nonlife insurance

Abstract

AbstractThe literature on analytical applications in insurance tends to be either very general or rather technical, which may hold back the adoption of new important tools by industrial practitioners. Our goal is to stress that machine learning (ML) algorithms will play a significant role in the insurance industry in the near future and thus to encourage practitioners to learn and apply these techniques. After discussing the increasing relevance of data for nonlife insurance and briefly reviewing the major impact of digital technology on this business, we restrict our discussion to technical analytical applications and indicate where ML algorithms can add most value. We present two real examples: first a comparison of retention models for household insurance and then a dynamic pricing problem for online motor insurance. Both applications illustrate the advantages but also some of the difficulties of applying ML tools in practice. Finally, we mention some challenges posed by the use of ML in the industry and formulate a few recommendations for successful applications in insurance. This article is neither a tutorial nor an exhaustive review of technical ML applications in nonlife insurance. However, references for additional learning materials are provided.