What is the future of predictive probabilities in insurance?

This post was written with Laurence Barry and Ewen Gallic, in French, in November 2019 (see hal-02350006)

Insurance policies are classic examples of random contracts. This forces insurers to regularly quantify this uncertainty, to calculate probabilities in order to propose “fair” premiums for the commitments they are going to make. Isn’t it time to question this practice, at a time when artificial intelligence is exploding, offering predictive algorithms of a precision never seen before? At a time when big data / big brother could mean the disappearance of uncertainty itself?
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On consequences of Goodhart’s law

This post was initially written in French, in the Winter 2021.

As Marilyn Strathern stated, Goodhart’s Law says that “when a measure becomes a goal, it ceases to be a good measure.” There are many economic applications, but this law also helps to understand the dangers of algorithmic decisions, or to explain the difficulty of using the data available since the beginning of the SARS-CoV-2 COVID-19 pandemic.

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The scientific approach in times of crisis

This post was initially written in French, and published in April 2020.

In a conference given on February 13, 2020[i], entitled Against the Method, Didier Raoult stated “I have never done randomized trials […] to do that on infectious diseases, it makes no sense“. This view was repeated in a more detailed article, where Didier Raoult defended (what he called) “the morality [and] the humanism” of the Hippocratic oath against “the method” (and “mathematics”). As he reminds us, doing control groups is “telling the patient that we are going to give him at random either the drug we know works or the drug we do not know works” (Raoult (2020a, 2020b)). While this method of randomized experiments is now hailed in all disciplines – as the Nobel Prize in Economics awarded in 2019 to Esther Duflo, Michael Kremer and Abhijit Banerjee reminds us – how can a researcher take such a position today?
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Predicting Drought and Subsidence Risks in France

Our paper, Predicting Drought and Subsidence Risks in France, written with Molly Rose James, and Hani Ali, will appear soon in Natural Hazards and Earth System Sciences.

The economic consequences of drought episodes are increasingly important, although they are often difficult to apprehend in part because of the complexity of the underlying mechanisms. In this article, we will study one of the consequences of drought, namely the risk of subsidence (or more specifically clay shrinkage induced subsidence), for which insurance has been mandatory in France for several decades. Using data obtained from several insurers, representing about a quarter of the household insurance market, over the past twenty years, we propose some statistical models to predict the frequency but also the intensity of these droughts, for insurers, showing that climate change will have probably major economic consequences on this risk. But even if we use more advanced models than standard regression-type models (here random forests to capture non linearity and cross effects), it is still difficult to predict the economic cost of subsidence claims, even if all geophysical and climatic information is available.

Government Intervention in Catastrophe Insurance Markets

Our paper, Government Intervention in Catastrophe Insurance Markets: A Reinforcement Learning Approach, jointly written with Menna Hassan and Nourhan Sakr is now available on ArXiv.

This paper designs a sequential repeated game of a micro-founded society with three types of agents: individuals, insurers, and a government. Nascent to economics literature, we use Reinforcement Learning (RL), closely related to multi-armed bandit problems, to learn the welfare impact of a set of proposed policy interventions per $1 spent on them. The paper rigorously discusses the desirability of the proposed interventions by comparing them against each other on a case-by-case basis. The paper provides a framework for algorithmic policy evaluation using calibrated theoretical models which can assist in feasibility studies.

What responsibility for the algorithms?

This post was initially written in French with Rodolphe Bigot (lecturer at the University of Picardie Jules Verne), in the Winter 2020, and follows a previous post entitled Rethinking responsibility and causality.

Historically, algorithms were content to provide decision support, leaving a human being to make the decision, but experiments are underway, with autonomous systems, making decisions, whether it be car driving systems, or predictive justice algorithms, as shown by Huss et al. (2018). This autonomy, which basically means the “ability to act freely” also refers to the idea of “governing oneself by one’s own laws“. But what is the responsibility of the decision maker in the case of a prediction that leads to harm?
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Rethinking responsibility and causality

This post was intially written in French with Rodolphe Bigot (lecturer at the University of Picardie Jules Verne) in the Fall 2019.

In 150 years, the concept of responsibility has evolved a lot, without ever disappearing. And today, we find it in a variety of contexts, from ecological or industrial disasters – we will evoke a “precautionary principle” that has blurred the very notion of causality – to “intelligent machines” – which leave the role of helper to finally make decisions in our place.
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Insurance and discrimination, what role for actuaries?

This post was initially published in French in September 2021.

The essential role of an actuary in charge of pricing is the segmentation of the portfolio (or “insurance classification” in English), corresponding to a discrimination activity (mathematically speaking) in the sense that the actuary will look for the most “discriminating” variables, to explain another one (in relation with the loss experience). But in the legal sense, discrimination is forbidden by law, which places the actuary in an often delicate and complex position.
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An Open Lab-Notebook Experiment

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