R In Actuarial Pricing Teams

Chibisi Chima-Okereke
Mango Solutions

E-mail: cchima-okereke@mango-solutions.com
 Agenda

Current software in actuarial analysis

What is R?

R as a functional language

Basic Examples

Actuarial pricing

GLM Example

Challenges and opportunities

Actuarial Survey
Geographical Area

UK Actuaries & CAS (Casualty Actuarial Society)

Source Palisade ( @Risk ): http://www.palisade.com/downloads/pdf/Pryor.pdf
Main Areas Of Work

UK Actuaries & CAS (Casualty Actuarial Society)

Source Palisade 2006 ( @Risk ): http://www.palisade.com/downloads/pdf/Pryor.pdf
Main area of work in
which software is used

UK Actuaries & CAS (Casualty Actuarial Society)

Source Palisade ( @Risk ): http://www.palisade.com/downloads/pdf/Pryor.pdf
Percentage of respondents
using each package

UK Actuaries & CAS (Casualty Actuarial Society)

Source Palisade ( @Risk ): http://www.palisade.com/downloads/pdf/Pryor.pdf
Use of Statistical Packages

Percentage of statistical package

users using individual packages

UK Actuaries & CAS (Casualty Actuarial Society)

Source Palisade ( @Risk ): http://www.palisade.com/downloads/pdf/Pryor.pdf
R is the programming
language of statistics
Why should it not be the programming language of
Actuaries?

Inadequate current incumbents

VBA: huge versioning issues and inadequate data manipulation and
statistical function capabilities
Excel: Inappropriate for analysis
Proprietary Actuarial Software: No Granular Access To Processing
Outputs

R offers so much in terms of data manipulation, statistical

models
Spreadsheets are unstructured computer programs:
The Risks Of Using Spreadsheets for Statistical Analysis (IBM White Paper):
http://public.dhe.ibm.com/common/ssi/ecm/en/imw14297usen/IMW14297USEN.PDF
 Excel

Very labour intensive

Excel spreadsheets are unstructured computer programs

Problems with checking calculations and types of errors which can be silent and unknown

Do your spreadsheets start to grind to a halt with rather moderate sets of data?

Versioning excel files could be over 50MB each relative to script versions few KB. Imagine this
across your network and the waste of space this encourages

Linking spreadsheets stability issues etc

VBA versioning problems, inadequate for data analysis and most useful purposes harsh but
true?
What is R?

A big calculator?
People A programming
have language?
described A rapid prototyping tool?
R as: A free SAS?
Statistical Analysis Tool?
Useful R Features

Open source object oriented and functional programming language based on

S+ designed for manipulating data/objects and carrying out statistical
analysis

Easy connections to external programs databases, e.g. RODBC - very stable,

dynamic SQL queries etc

Massive library of tools >>3400 packages

GUIs can be created in a straightforward way, gWidgets (GTK+, RGTK)

package

Easy output formats, all picture files, data formats, even Excel!
Current Actuarial R
Packages

actuar (loss distributions)

ChainLadder

lifecontingencies

LifeTables

http://cran.r-project.org/web/packages/
Functional Programming

Reference: http://nsaunders.wordpress.com/2010/08/20/a-brief-introduction-
to-apply-in-r/

apply(data, index, function)

lapply(list, function)

aggregate(data, by, FUN)

mapply(function(arg1, arg2), vector(arg1), vector(arg2), ...)

by(data, indices, function)

More advanced/powerful {plyr} package extends the apply functionality

(Hadley Wickham)
{plyr} Author: Hadley Wickham

http://www.jstatsoft.org/v40/i01/paper

I/O Array Data Frame List Discarded

Array aaply adply alply a_ply
Data Frame daply ddply dlply d_ply
List laply ldply llply l_ply

a*ply(.data, .margins, .fun, ...)

d*ply(.data, .variables, .fun, ...)

l*ply(.data, .fun, ...)

Example Data

Data Source (Simulated): Modern Actuarial Risk Theory Using R: Kaas, Goovaerts, Dhaene, and Denuit.
Dynamic SQL
Query Example
require(RODBC)

doMyAnalysis <- function(myYear = 2001){

sqlString <- paste("SELECT * FROM policyClaims WHERE Year='",myYear,"'", sep = "")
myData <- sqlQuery(channel = odbcConnect(dsn = "InsuranceData"), query = sqlString)
odbcCloseAll()
myGlm <- glm(noclaims ~ age + bonusmalus + region + mileage, data = myData, offset =
log(exposure), family = poisson(link = "log"))
myCoeffs <- summary(myGlm)$coeff
theNames <- colnames(myCoeffs)
myCoeffs <- data.frame(myCoeffs)
myCoeffs <- data.frame(rownames(myCoeffs), myYear, myCoeffs)
colnames(myCoeffs) <- c("Coeff", "Year", theNames)
print(myYear)
return(myCoeffs[1,])
}

analysisOutPut <- lapply(2001:2010, doMyAnalysis)

analysisOutPut <- do.call(rbind, analysisOutPut)
rownames(analysisOutPut) <- 1:nrow(analysisOutPut)
Dynamics SQL Query Analysis
Combination Example

Coeff Year Estimate Std. Error z value Pr(>|z|)

Intercept 2001 -0.76 0.03 -24.68 0.00
Intercept 2002 -0.77 0.03 -24.92 0.00
Intercept 2003 -0.80 0.03 -25.65 0.00
Intercept 2004 -0.78 0.03 -25.17 0.00
Intercept 2005 -0.80 0.03 -25.91 0.00
Intercept 2006 -0.76 0.03 -24.92 0.00
Intercept 2007 -0.70 0.03 -23.03 0.00
Intercept 2008 -0.76 0.03 -24.67 0.00
Intercept 2009 -0.79 0.03 -25.30 0.00
Intercept 2010 -0.75 0.03 -24.46 0.00
Plotting Analysis

myFun <- function(x){

hist(x$GrossIncurred, col = "blue", xlab = "GIC", main =
paste("Histogram of GIC for bonus malus \n group ", x$BonusMalus[1], "
and year ", x$Year[1], sep = ""))
}

pdf(file = paste(myFolder, "myPlots.pdf", sep = ""), width = 7, height =

7)
by(policyTable, list("Year" = policyTable$Year, "BonusMalus" =
policyTable$BonusMalus), FUN = myFun)
dev.off()

C:\Users\cchima-okereke\Documents\R\RScripts\ActuarialPricing\tmp\myPlots.pdf
Plotting Analysis
GUI In R (claimsExploreR)
 GUI In R (claimsExploreR)
Histogram of claim counts with BonusMalus and Age

Age : >65 Age : >65 Age : >65 Age : >65 Age : >65 Age : >65 Age : >65 Age : >65 Age : >65 Age : >65
Year : 2001 Year : 2002 Year : 2003 Year : 2004 Year : 2005 Year : 2006 Year : 2007 Year : 2008 Year : 2009 Year : 2010
40

30

20

10

Age : 18-23 Age : 18-23 Age : 18-23 Age : 18-23 Age : 18-23 Age : 18-23 Age : 18-23 Age : 18-23 Age : 18-23 Age : 18-23
Year : 2001 Year : 2002 Year : 2003 Year : 2004 Year : 2005 Year : 2006 Year : 2007 Year : 2008 Year : 2009 Year : 2010
40
Frequency

30

20

10

Age : 24-64 Age : 24-64 Age : 24-64 Age : 24-64 Age : 24-64 Age : 24-64 Age : 24-64 Age : 24-64 Age : 24-64 Age : 24-64
Year : 2001 Year : 2002 Year : 2003 Year : 2004 Year : 2005 Year : 2006 Year : 2007 Year : 2008 Year : 2009 Year : 2010
40

30

20

10

0.0 0.2 0.4 0.6 0.8 0.0 0.2 0.4 0.6 0.8 0.0 0.2 0.4 0.6 0.8 0.0 0.2 0.4 0.6 0.8 0.0 0.2 0.4 0.6 0.8 0.0 0.2 0.4 0.6 0.8 0.0 0.2 0.4 0.6 0.8 0.0 0.2 0.4 0.6 0.8 0.0 0.2 0.4 0.6 0.8 0.0 0.2 0.4 0.6 0.8

Exposure weighted claims count

BonusMalus
1 3 5 7 9 11 13
2 4 6 8 10 12 14
 GUI In R (claimsExploreR)
Boxplots of exposure weighted severity with BonusMalus and Age

Age : >65 Age : >65 Age : >65 Age : >65 Age : >65 Age : >65 Age : >65 Age : >65 Age : >65 Age : >65
Year : 2001 Year : 2002 Year : 2003 Year : 2004 Year : 2005 Year : 2006 Year : 2007 Year : 2008 Year : 2009 Year : 2010

4
10

3
10

2
10
Exposure Weighted Severity (Log Scale)

1
10

Age : 18-23 Age : 18-23 Age : 18-23 Age : 18-23 Age : 18-23 Age : 18-23 Age : 18-23 Age : 18-23 Age : 18-23 Age : 18-23
Year : 2001 Year : 2002 Year : 2003 Year : 2004 Year : 2005 Year : 2006 Year : 2007 Year : 2008 Year : 2009 Year : 2010

4
10

3
10

2
10

1
10

Age : 24-64 Age : 24-64 Age : 24-64 Age : 24-64 Age : 24-64 Age : 24-64 Age : 24-64 Age : 24-64 Age : 24-64 Age : 24-64
Year : 2001 Year : 2002 Year : 2003 Year : 2004 Year : 2005 Year : 2006 Year : 2007 Year : 2008 Year : 2009 Year : 2010

4
10

3
10

2
10

1
10

BonusMalus
1 3 5 7 9 11 13
2 4 6 8 10 12 14
GLM Models in Pricing

Poisson Frequency

Gamma Severity

Negative Binomial for frequency {MASS}

Tweedie combines frequency and severity

{statmod}
Variable Selection
Criteria

Information Criteria
AIC
What metrics
BIC (Multiple flavours)
shall we use to
Significance of variable: Chi-
include/exclude Squared/F-Test
variables? Consistency measures
Other Measures
Automation Algoritms

Forward Algorithm
What
mechanics will Backward
we use to Algorithm
select/exclude
variables? Some other
bespoke method
Actuarial Pricing in R

Any statistical or data

analysis process can be
implemented in R but we
will think specifically
about GLMs

glm(Claims ~ Location + CarType + Age +

Example: ..., data = myData, family = poisson(link
= log), offset = log(Exposure))

But actuarial pricing is

also the whole decision
making process around the
GLM ...
Automated pricing
Process Structure
in R

Claim Counts analysis

Load data from database
Continuously writing
Carry out pre-specified step
algorithm with variable desired outputs, PDF,
aggregation Severity analysis Obtain Final Models log files,
Variable selection criteria documentation, model
Check variable consistency plots, coefficients etc
Decide to reject/accept
variable
Automated Actuarial
Pricing
We need to defined the consolidation structure
for categorical variables e.g.

Location 1 Location 2 Location 3 Location 4

North North North North
N.East North North North
N.West N.West N.West North
S.West S.West S.West South
S.East S.East South South
South South South South
Outputting Results

R has perhaps the most extensive choices for outputs of analysis

Link to Excel

Text files, e.g. CSV etc

Charting Output: picture files: jpeg, tiff, png, pdf, etc..

Report generation: PDF(Sweave - Latex), Word

PowerPoint direct output

Printing log reports of process

Example Process
Example Process
Example Process
 Effects package
Effects plot of Age and Bonus Malus

Age : 18-23 Age : 24-64 Age : >65

150

140
Relativity (%)

130

120

110

1 2 3 4 5 6 7 8 9 10 11 12 13 14 1 2 3 4 5 6 7 8 9 10 11 12 13 14 1 2 3 4 5 6 7 8 9 10 11 12 13 14

Bonus Malus

effects package from John Fox: http://www.jstatsoft.org/v08/i15/paper

Example Process
Example Process:
Final Model
Final Charts
Final Model
Potential Scheme for
analytical process

Write results
Connect to R, to PDF, any
Data residing
RODBC, Carry out picture
in some
RPostgreSQL, analysis in R format, push
database
RODM etc. to Latex,
Excel, CSV, etc
Advantages of
R for GLM Analysis

Standard actuarial GLM techniques are available, e.g.

R offers a splines, interaction terms etc.
The best plotting functions of any statistical package
complete More advanced techniques are available, GAM, GMM,
GNM, GHMM, MCMC methods too many packages to list
statistical, here!
Bespoke methods and new actuarial techniques can be
data readily implemented in R while they are unavailable in
standard actuarial software

processing, Easy to integrate and fully customisable in any

analytical environment

and analysis Complete array of statistical/analysis tools, clustering,

neural nets, GRM, tree models, bootstrapping, Bayesian

environment
techniques, ODE/PDE, HMMs, contingency tables,
survival analysis, copulas, extreme value analysis,
geospatial analysis and visualisation
Challenges &
Opportunities

If you are new to R, do something small to begin with test R out

IT support for R

There is great need for training and generation of material to enable

actuarial analysts to use R

For mere mortals (like me) the learning curve is tough and the
documentation appears ambiguous

R & Hadoop and R & Oracle

See me later for live R demos