Modeling Policyholder Behavior through Insurance Resonant Marts for Pricing Options and Guarantees

Abstract

Background: The 11th Annual Conference of Asia-Pacific Risk and Insurance Association was held on July 22-25, 2007 in Taipei, Taiwan. The first author participated in this annual conference where he met the second author who was invited to deliver two plenary speeches on Corporate Governance and Financial Institution Regulation [1] and Alternative Investments for Financial Institutions [2]. The first author was then working as consultant with i-flex solutions, a subsidiary of Oracle and the second author was Vice President of Strategic Business Initiatives Units at ING Life Insurance in its Taiwan operation. The two authors decided to start collaborating on a research paper titled “Modeling Policyholder Behavior through Insurance Resonant Marts for Pricing Options and Guarantees.” The first version of the paper was submitted for research purposes to ING Insurance Risk Management Global Conference 2007 [3] which was held in Beijing, China. Although it was neither presented nor published, the working draft was constantly updated and revised. In 2015, after eight years of continuous research collaboration, the two authors decided to submit the final version of the paper to the 5th World Congress on Engineering and Technology for scholarly presentation. Aim: The competition in the insurance industry is extremely fierce. Insurance companies are under tremendous pressure to retain and increase their customer base, to offer services at attractive rates and provide returns competitive with mutual funds, equities and banks, to achieve profitability across various lines of insurance, to comply with statutory norms etc. Despite having the best of breeds, such as accountants, actuaries [4], lawyers, underwriters, IT experts, consultants, etc., many insurance companies face severe problems to cope with and survive under such pressures. Insurance companies are now striving towards creating innovative products that can match the expectation of the customers with respect to investment returns and risk coverage at competitive rates, which is a very challenging task. Also it is very important to measure the expectations of the customers keeping in mind that those customers are already owners of other financial products. Pricing always follows the expectations and without proper data support, Model risk is imminent. Even if a product is correctly priced, without understanding the behavior of the policyholder towards various financial products will lead to heavy lapses [4]. The authors describe a new framework called UIRDM Approach (Unified Insurance Resonant Data Mart) for the insurance companies wherein this approach stresses the need to think beyond the insurance boundaries.