The theme of this issue of The Actuary is big data and predictive analytics. These are buzzwords we hear daily, in multiple professions and industries, and topics about which I am passionate.
A Large Opportunity Set
My practice area is life insurance, and the opportunities for life insurance companies to improve core business operations by deploying applications of predictive analytics are vast, strategic and impactful. Colleagues who work with applications of predictive analytics in other practice areas and industries repeatedly tell me the same is true for their business operations. In this issue of The Actuary, we have a collection of articles covering a diverse set of these opportunities, written by actuarial leaders across multiple practice areas, industries and business functions. A common theme in these examples is that predictive analytics is being deployed as a tool to enhance core business operations, often by saving time and money, and/or improving efficiency or accuracy.
These examples and others leave me convinced that organizations should treat data as a strategic asset and use it to improve traditional business processes. We are approaching a day when that approach to business will be common for insurance companies, as has already happened in other industries. Insurance companies and other actuarial employers will use predictive analytics and digitization to uniquely identify customers for targeted marketing campaigns, with a customized product offer at the right time and the right price. Internal company operations, such as new business, inforce management and claims, will be monitored, improved and eventually optimized using predictive analytics. While this evolution will not happen overnight, the pace of innovation in this area is only increasing, and the associated set of opportunities facing many business organizations is enormous and growing.
In fact, in my experience, this opportunity set can be so broad that it can be daunting to decipher, and to determine how and where to begin. There are many considerations that go into determining the use cases or business applications of predictive analytics an organization may wish to pursue. And the answer is different for each organization. Not only does it depend on the company’s business—in terms of its target markets, distribution channels, core operations and so on—but it also depends on the willingness and the appetite of that organization to challenge traditional business processes, and to redesign and improve those by deploying applications of predictive analytics. Due to sheer volume and associated strategic impact, the exercise of determining and deciphering this broad opportunity set, aligning with strategic business priorities and developing an execution plan is one of the most critical and strategic challenges companies face with predictive analytics.
Actuaries Are Equipped to Lead
As actuaries, due to our skills, training and natural interests, we are well positioned to lead our respective organizations and industries through these exciting opportunity sets. As actuaries, we are recognized for skills and abilities in blending statistics and risk management to create business value. Our recently revised strategy map refers to us as highly sought- after professionals and leaders who measure and manage risk, and who develop and communicate solutions for complex financial challenges. It calls for us to be at the forefront of evolving methods for solving complex business problems, and to provide trusted research, analysis and insights.
In my practice area of life insurance, I often refer to senior actuaries as “the engineers of a life insurance company,” since they deeply understand the financial, business, risk, profitability and long-term viability aspects of a company’s core business operations. In this role, actuaries can challenge and improve traditional business operations by deploying applications of big data and predictive analytics in core business operations. Yes, we, as actuaries, will lead our organizations and industries through the pending disruption and the strategic opportunity that is emerging as a result of big data and predictive analytics, because we are uniquely positioned to do so.
The Path Will Not be Easy
The path of true leadership through this pending wave of disruption and opportunity will not be easy, and it will include challenges. Selected natural hurdles for us to overcome may include the following:
- Culture and mindset. In order for us to lead in this opportunity to transform our organizations into leading data-driven organizations, we must have the courage to change. A natural initial reaction may include resistance to such change, referencing years of historical business stability without such data sources or methods, or a lack of “need” to change today. Furthermore, certain business functions can feel threatened, particularly if the data sources and models are not well understood. This transformational path will require us to be open-minded and transparent, to try new approaches and to display overall willingness to embrace the power of predictive analytics in improving our core business operations.
- Focus on creating business value. As we expand beyond traditional actuarial data sets and supplement those with various big data sources, the quantity of data becomes magnitudes larger. By our nature as actuaries, we enjoy exploring these large data sets to discover new insights, but we need to be careful, as that magnitude can become a trap for us. Before we get lost in the exercise of data exploration and model building, we need to remind ourselves that we create business value only when we develop a model that becomes implemented in a business operation. In the midst of many “interesting” or “theoretical” observations as we explore the data sets and build predictive models, we must remain focused on creating solutions to practical business needs.
- No “easy button.” In the vast opportunity set we face, predictive analytics does not magically produce solutions. Instead, predictive analytics is a tool that helps deliver insights from data. It is up to us to interpret those insights and to design operational tactics to act upon those insights as they arise in a future business production process. The design and implementation of those operational tactics are the means by which we use predictive analytics to improve core business. That exercise requires careful thought and effort, and is far from hitting an “easy button.”
This is a uniquely exciting time to be an actuary. Predictive analytics brings a large, complex business opportunity, which increases in size and complexity on a daily basis. As actuaries, our skill sets, training, and individual motivations and abilities leave us well positioned to lead. I find this to be a fascinating opportunity for our profession.