1 Data Quality: GIRO Working Party Paper & Methods to Detect Data Glitches CAS Annual Meeting Louise Francis Francis Analytics and Actuarial Data Mining, Inc.

2 Objectives Review GIRO Data Quality Working Party Paper Discuss Data Quality in Predictive Modeling Focus on a key part of data preparation: Exploratory data analysis

3 GIRO Working Party Paper Literature Review Horror Stories Survey Experiment Actions Concluding Remarks

4 Insurance Data Management Association The IDMA is an American organisation which promotes professionalism in the Data Management discipline through education, certification and discussion forums The IDMA web site: Suggests publications on data quality, Describes a data certification model, and Contains Data Management Value Propositions which document the value to various insurance industry stakeholders of investing in data quality

5 Horror Stories – Non-Insurance Heart-and-Lung Transplant – wrong blood type Bombing of Chinese Embassy in Belgrade Mars Orbiter – confusion between imperial and metric units Fidelity Mutual Fund – withdrawal of dividend Porter County, Illinois – Tax Bill and Budget Shortfall

6 Horror Stories – Rating/Pricing Examples faced by ISO: Exposure recorded in units of $10,000 instead of $1,000 Large insurer reporting personal auto data as miscellaneous and hence missed from ratemaking calculations One company reporting all its Florida property losses as fire (including hurricane years) Mismatched coding for policy and claims data

7 Horror Stories - Katrina US Weather models underestimated costs Katrina by approx. 50% (Westfall, 2005) 2004 RMS study highlighted exposure data that was: Out-of-date Incomplete Mis-coded Many flood victims had no flood insurance after being told by agents that they were not in flood risk areas.

8 Data Quality Survey of Actuaries Purpose: Assess the impact of data quality issues on the work of general insurance actuaries 2 questions: percentage of time spent on data quality issues proportion of projects adversely affected by such issues

9 Results - Percentage of Time EmployerNo.MeanMedianMinMax Insurer/Reinsure r %25.0%5.0%50.0% Consultancy1327.1%25.0%7.5%60.0% Other823.4%12.5%2.0%75.0% All3826.0%25.0%2.0%75.0%

10 Results - Percentage of Projects EmployerNoMeanMedianMinMax Insurer/Reinsure r %20.0%5.0%60.0% Consultancy1343.3%35.0%10.0%100.0% Other822.6%20.0%1.0%50.0% All3632.3%30.0%1.0%100.0%

11 Survey Conclusions Data quality issues have a significant impact on the work of general insurance actuaries about a quarter of their time is spent on such issues about a third of projects are adversely affected The impact varies widely between different actuaries, even those working in similar organisations Limited evidence to suggest that the impact is more significant for consultants

12 Hypothesis Uncertainty of actuarial estimates of ultimate incurred losses based on poor data is significantly greater than that of good data

13 Data Quality Experiment Examine the impact of incomplete and/or erroneous data on actuarial estimate of ultimate losses and the loss reserves Use real data with simulated limitations and/or errors and observe the potential error in the actuarial estimates

14 Data Used in Experiment Real data for primary private passenger bodily injury liability business for a single no- fault state Eighteen (18) accident years of fully developed data; thus, true ultimate losses are known

15 Actuarial Methods Used Paid chain ladder models Incurred chain ladder models Frequency-severity models Inverse power curve for tail factors No judgment used in applying methods

16 Completeness of Data Experiments Vary size of the sample; that is, 1) All years 2) Use only 7 accident years 3) Use only last 3 diagonals

17 Data Error Experiments Simulated data quality issues 1. Misclassification of losses by accident year 2. Early years not available 3. Late processing of financial information 4. Paid losses replaced by crude estimates 5. Overstatements followed by corrections in following period 6. Definition of reported claims changed

18 Measure Impact of Data Quality Compare Estimated to Actual Ultimates Use Bootstrapping to evaluate effect of difference samples on results

19 Results – Experiment 1 More data generally reduces the volatility of the estimation errors

20 Results – Experiment 2 Extreme volatility, especially those based on paid data Actuaries ability to recognise and account for data quality issues is critical Actuarial adjustments to the data may never fully correct for data quality issues

21 Results – Bootstrapping Less dispersion in results for error free data Standard deviation of estimated ultimate losses greater for the modified data (data with errors) Confirms original hypothesis

22 Conclusions Resulting from Experiment Greater accuracy and less variability in actuarial estimates when: Quality data used Greater number of accident years used Data quality issues can erode or even reverse the gains of increased volumes of data: If errors are significant, more data may worsen estimates due to the propagation of errors for certain projection methods Significant uncertainty in results when: Data is incomplete Data has errors

23 Predictive Modeling & Exploratory Data Analysis

24 Modeling Process

25 Data Preprocessing

26 Exploratory Data Analysis Typically the first step in analyzing data Makes heavy use of graphical techniques Also makes use of simple descriptive statistics Purpose Find outliers (and errors) Explore structure of the data

27 Example Data Private passenger auto Some variables are: Age Gender Marital status Zip code Earned premium Number of claims Incurred losses Paid losses

28 Some Methods for Numeric Data Visual Histograms Box and Whisker Plots Stem and Leaf Plots Statistical Descriptive statistics Data spheres

29 Histograms Can do them in Microsoft Excel

30 Histograms of Age Variable Varying Window Size

31 Formula for Window Width

32 Example of Suspicious Value

33 Box and Whisker Plot

34 Plot of Heavy Tailed Data Paid Losses

35 Heavy Tailed Data – Log Scale

36 Box and Whisker Example

37 Descriptive Statistics Analysis ToolPak

38 Descriptive Statistics License Year has minimum and maximums that are impossible

39 Data Spheres: The Mahalanobis Distance Statistic

40 Screening Many Variables at Once Plot of Longitude and Latitude of zip codes in data Examination of outliers indicated drivers in Ca and PR even though policies only in one mid-Atlantic state

41 Records With Unusual Values Flagged

42 Categorical Data: Data Cubes

43 Categorical Data Data Cubes Usually frequency tables Search for missing values coded as blanks

44 Categorical Data Table highlights inconsistent coding of marital status

45 Screening for Missing Data

46 Blanks as Missing

47 Conclusions Anecdotal horror stories illustrate possible dramatic impact of data quality problems Data quality survey suggests data quality issues have a significant cost on actualial work Data Quality Working Party urges actuaries to become data quality advocated within their organizations Techniques from Exploratory Data Analysis can be used to detect data glitches

48 Library for Getting Started Dasu and Johnson, Exploratory Data Mining and Data Cleaning, Wiley, 2003 Francis, L.A., “Dancing with Dirty Data: Methods for Exploring and Cleaning Data”, CAS Winter Forum, March 2005, The Data Quality Working Party Paper will be Posted on the GIRO web site in about nine months