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Dracula gets the bite on big data

Dracula gets the bite on big data

This article was originally commissioned for the Actuarial Post.

The re-emergence of a new series based on Dracula on our screens gives pause for thought.  Inevitably, the vampire is portrayed as possessing a large amount of wealth, enabling him to live an extremely upper class lifestyle.  This is quite impressive, as here we have an example of someone, who’s ability to provide for his future income needs, appears to be spectacularly successful; managing the longevity risk for your savings must be spectacularly difficult when you may have many centuries to provide for before someone finally gets to stake you through the heart.

There must be many chief actuaries out there who must feel there is an element of the undead about some of the members of their schemes, as the longevity of the older members appears to be stretching out towards immortality.

What’s needed to keep their schemes in the black, of course, is better information about the likely longevity trends into the future.  The actuaries of earlier years got this wrong by quite a significant amount, which is why so many defined benefit schemes are underfunded.  However, there will be little excuse for today’s actuaries if they get it wrong as there is a huge surfeit of information available today that wasn’t available to those in years gone by.

The information now is even better than it was before.  Responses to surveys, even anonymous ones, tend to be skewed somewhat by the fact that people in formal situations like to present a slightly better version of themselves than the reality.  So responses to questions designed to work out the scale of unhealthy lifestyles and risky practices are likely to get conservative responses from the majority of the respondents.

The good news for those trying to estimate longevity or health risks today is that huge amounts of people are putting their lifestyle information, and the choices they are making, online  making it possible to trawl the data to get accurate information on lifestyles.  So much information is available that segmentation into well-defined groups is likely to be far easier than before.  Without realising it, people are putting all the unadulterated information online that would be required in order to establish trends among the population.

The difficulty now is the sheer volume of information that is available.  How to recover this information from the mass of social media sites, loyalty card sites and the online retail sites is a major conundrum.  When you consider the amount of relevant information also being posted on news and hobby sites where people are quick to give their opinions and recount personal experiences, the phrase ‘big data’ seems to be a massive understatement.

Yet within this mass of data lies the key to establishing the habits and proclivities of the current and future generations and this information lies at the heart of any attempt to establish the longevity patterns that will be crucial to the production of financial products that will enable these generations to prepare adequately for their future needs.  The bonus for companies in the life and pension sector is that the government will need to get involved too.  The same information will be crucial in establishing future patterns of living that are vital for long-term public strategy decisions.  As a result, governments are leaders in trying to find ways to make sense of this mass of data.

Technology is making this information available and it requires technology solutions in order to get the required information back in a useful format.  This will be the primary challenge for those trying to forecast future longevity, health and other trends that are central to planning for the future, and planning for the future is what the life and pensions industry is all about.

The information gathered about peoples’ habits is also central to some more of the risks involved, including investment risk, as the likely success stories for investment will be those areas that attract the consumer’s interest, which is best identified from the postings of consumers themselves.

Extracting information from large databases is one thing and it is already happening, at least in the area of national security.  Whatever about the ethics of some of the data trawling carried out by the CIA,  and while its usefulness is a matter that only future historians can judge, what is certain is that where the government goes big business is sure to follow. The key lies in the quality of the algorithms that will be used to extract the patterns from the data and this is a relatively new science – but one that is growing in knowledge and experience quite rapidly.

The most important new skill that life and pension companies will have to acquire is the ability to assess this data and produce the information that is needed to drive the product innovation that will surely be required for future generations.

It’s unlikely we can succeed as well as Bram Stoker’s original creation.  The latest series posits a Dracula who is a wealthy US businessman and shows all the signs of having intelligently invested his fortune over the centuries in order to have the power and trappings that come with wealth.  Actuaries struggling to meet the liabilities of their schemes can be forgiven for wishing that some of their own members with extraordinary long lives might be as susceptible to the daylight as the vampire.
Without the ability to drive a stake through their hearts, the actuary’s best bet is to focus on extracting from the mass of information the key clues that will enable them to correctly estimate longevity in the future.  This information will be far more effective at warding off disaster than any amount of garlic or holy water.

Tom Murray

Twitter: @TomMurrayDublin or @Exaxe

Google Plus: TomMurray

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