Experts Debate: Is Big Data a Boon or Risk for Actuaries?

Banks, insurance companies and other firms in the financial sector have relied extensively on big data for decades. Over the last couple of years, the big data revolution has opened new doors for these firms. According to a report from Accenture, they invested $6.4 billion in big data in 2015.

Few people want to dispute the benefits of big data. They believe that it will reduce inefficiencies, improve their risk models and bolster customer service. While there is a lot of truth to all of these points, there are also some risks that actuaries and other financial professionals need to be aware of.

Is Big Data a Big Opportunity or Big Risk for Actuaries?

Jenny Lyon, Senior Vice President of the Actuaries Institute, spoke at The Institute and Faculty of Actuaries (UK) 2nd Asian Conference last year. A number of other experts also spoke at the conference, including Peter Banthorpe, Global Head of Research and Development at RGA and Fellow of the Institute and Faculty of Actuaries.  They mentioned that companies such as ZoomHR are using big data more than ever before. Lyon and Banthorpe said that big data is a double-edged sword for actuaries throughout the world.

Here are several concerns that need to be addressed to ensure big data is used properly.

Quality, Completeness and Accuracy of Data

Every actuarial model relies extensively on data. The quality of those models hinges on the quality of the data behind them.

One of the biggest issues with big data is validation. Data is often aggregated from sources where it can be difficult to assess the reliability. A growing number of actuaries use data from social media, where it can be difficult to authenticate.

If actuaries intend to rely more heavily on big data, they are going to need to vet it first. They will either need to:

• Develop new algorithms that can filter suspicious data from less trustworthy sources.
• Restrict their analyses to data that can be easily validated.

If they become too reliant on unverifiable data, their models will become less accurate.

Future Regulations

Regulators around the world are trying to decide how tightly they need to restrict access to big data. They have to weigh concerns about privacy, discrimination risks and other factors to protect the general public.

Banthorpe predicts that the FTC and other regulators are expected to roll out new regulations in the future. This is a risk for actuaries, because they may need to revise their models in the future if they lose access to certain data that has become instrumental to their models.

Accuracy of Algorithms

Even if data has been carefully vetted, it can be difficult to ensure it is properly employed. Many actuaries worry that the algorithms behind big data may not be properly setup.

These algorithms tend to be less accurate with predictive analytics, especially after a few years. One algorithm suggested there was a 99% likelihood that actuaries would be replaced by machines in the near future, while more reliable models suggested that the likelihood was only 21%.

Big Data Can Be Very Helpful for Actuaries, but Risks Remain

Big data is changing the actuarial profession in unprecedented ways. Overall, the benefits seem to far outweigh the costs. However, there are a number of risk that need to be taken into consideration as well.

Actuaries and their employers will need to be selective with their data. They must also make sure that their models are properly constructed.

As long as they take the necessary precautions, big data should significantly improve the quality of their models. A growing number of insurance companies and lenders will use it to minimize their risk profiles.

Lyon states that big data won’t automate the actuarial profession. Actuaries will need to be proactive about learning how to use it to bolster the quality of their work.

“There is an increasing need for collaboration and companies working in partnerships and in a multidisciplinary environment will continue to expand.  For example, when considering wearables and their emergence in the insurance field, insurers will need to think about the role they want to play and probably work with partners who can manipulate the data and provide insights… In summary, I came away excited about the potential for actuaries working in this field but very aware that, as in most areas, there will be a strong need for individual motivation, learning and development along with a flexible and adaptable approach.”