Download Data Mining – Best Practices

EFFECTIVE PREDICTIVE MODELINGDATA,ANALYTICS AND PRACTICE
MANAGEMENT
Richard A. Derrig Ph.D.
OPAL Consulting LLC
Karthik Balakrishnan Ph.D.
ISO Innovative Analytics
CANE Meeting
Southbridge, MA
September 26, 2008
Topics in Predictive Modeling
•
•
•
•
•
•
•
Introduction
Explanatory vs. Predictive Modeling
Data Quality
Data augmentation
Data adjustments
Predictive Problems/software issues
Analytic Methods of Interest
Introduction
• Research by IBM indicates only 1% of data collected
by organizations is used for analysis
• Predictive Modeling and Data Mining widely
embraced by leading businesses
– 2002 Strategic Decision Making survey by Hackett Best
Practices determined that world class companies adopted
predictive modeling technologies at twice the rate of other
companies
– Important commercial application is Customer retention:
5% increase in retention  95% increase in profit
– It costs 5 to 10 times more to acquire new business
• Another study of 24 leading companies found that
they needed to go beyond simple data collection
Models
Explanatory vs Predictive
• Explanatory Model The association of
some target or decision variable with
explanatory variables through
mathematical formulations in which it
is assumed that all variables are known
with certainty.
• Example: Underwriting Model, decision
to accept or reject is target
Models
Explanatory vs Predictive
• Predictive Model The association of
some target or decision variable with
predictor variables through
mathematical formulations in which it
is assumed that all predictor variables
are known with possibly varying
probabilities .
• Example: Claim Investigation Model,
decision to investigate is target
Data Mining
• Data Mining, also known as
Knowledge-Discovery in Databases
(KDD), is the process of automatically
searching large volumes of data for
patterns. In order to achieve this, data
mining uses computational techniques
from statistics, machine learning and
pattern recognition.
• www.wikipedia.org
Successful Implementation of
Predictive Modeling
• Data availability and quality are essential
• Insights from different areas are needed
• Multidisciplinary effort
–
–
–
–
–
–
Quantitative experts
IT
Business experts
Managers
Upper management buy in
Not just for Actuarials
DATA
Manage the Human Side of
Data and Analytics
• Data Collection: Design and Reality
• Understand and convey business benefits
• Belief, model understanding, model
complexity
• ‘Tribal’ Knowledge as model attributes
• Behavioral change and transparency
• Disruption in ‘standard’ processes
• Threat of obsolescence (automation)
Don’t over rely on the technology; recognize the disruptive role you play
DATA
CRISP-DM
• Cross Industry Standard Process for
Data Mining
• Standardized approach to data mining
• www.crisp-dm.org
Phases of CRISP-DM
DATA
Data Quality
• Scope of problem
• How it is addressed
• New educational resources for
actuaries
Survey of Actuaries
• Data quality issues have a significant
impact on the work of actuaries
– About a quarter of their time is spent on
such issues
– About a third of projects are adversely
affected
– See “Dirty Data on Both Sides of the
Pond” – 2008 CAS Winter Forum
– Data quality issues consume significantly
more time on large predictive modelling
Projects
Statistical Data Editing
• Process of Checking data for errors and
correcting them
• Uses subject matter experts
• Uses statistical analysis of data
• May include using methods to “fill in”
missing values
• Final result of SDE is clean data as well as
summary of underlying causes of errors
Step 0
Data
Requirements
Step 1
EDA: Overview
Data Collection
Step 2
Transformations
Aggregations
Step 3
Analysis
Step 4
Presentation of
Results
Final Step
Decisions
• Typically first step in analyzing data
• Purpose:
– Explore structure of the data
– Find outliers and errors
• Uses simple statistics and graphical
techniques
• Examples include histograms, descriptive
statistics and frequency tables
Step 0
Data
Requirements
Step 1
Data Collection
Step 2
Transformations
Aggregations
Step 3
Analysis
Step 4
Presentation of
Results
Final Step
Decisions
EDA: Histograms
Data Educational Materials Working
Party Formation
• The closest thing to data quality on the
CAS syllabus are introductions to
statistical plans
• The CAS Data Management and
Information Committee realized that SOX
and Predictive Modeling have increased
the need for quality data
• So they formed the CAS Data
Management Educational Materials
working party to find and gather
materials to educate actuaries
CAS Data Management Educational
Materials Working Party Publications
• Book reviews of data management and data
quality texts in the CAS Actuarial Review
starting with the August 2006 edition
• These reviews are combined and compared in
“Survey of Data Management and Data Quality
Texts,” CAS Forum, Winter 2007,
www.casact.org
• “Actuarial IQ (Information Quality)” published in
the Winter 2008 edition of the CAS Forum:
http://www.casact.org/pubs/forum/08wforum/
Step 0
Data
Requirements
Step 1
Data Collection
Step 2
Transformations
Aggregations
Step 3
Analysis
Step 4
Presentation of
Results
Final Step
Decisions
Data Flow
Information Quality involves all steps:
 Data Requirements
 Data Collection
 Transformations & Aggregations
 Actuarial Analysis
 Presentation of Results
To improve Final Step:
 Making Decisions
Data Augmentation
• Add information from Internal data
• Add information from external data
• For overview of inexpensive sources of
data see: “Free and Cheap Sources of
Data”, 2007 Predictive modeling
seminar and “External Data Sources”
at 2008 Ratemaking Seminar
Data Augmentation – Internal
Data
• Create aggregated statistics from
internal data sources
– Number of lawyers per zip
– Claim frequency rate per zip
– Frequency of back claims per state
• Use unstructured data
– Text Mining
Data Augmentation – External
Data
•
•
•
•
•
Census data: Household type per zip
Industry data: California DOI data, IRC
Marketing data: Third party vendors
IRC Data: Auto Injury data
ISO data:??
Data Adjustments
• Trend
– Adjust all records to common cost level
– Use model to estimate trend
• Development
– Adjust all losses to ultimate
– Adjust all losses to a common age
– Use model to estimate future
development
Analytic Model Development
• Rule # 1: Use appropriate tool
• Rule #2: There are no other rules
Shameless Advertisement
• Derrig, R.A. and Francis, L.A. 2008
Distinguishing the Forest from the
Trees, Next VARIANCE and CAS Seattle
Computers advance