Applying Economic Measures To Lapse Risk Management With Machine Learning Approaches

Modeling policyholders’ lapse behaviors is important to a life insurer, since lapses affect pricing, reserving, profitability, liquidity, risk management, and the solvency of the insurer. In this paper, we apply two machine learning methods to lapse modeling. Then, we evaluate the performance of these two methods along with two popular statistical methods by means of statistical accuracy and profitability measure. Moreover, we adopt an innovative point of view on the lapse prediction problem that comes from churn management. We transform the classification problem into a regression question and then perform optimization, which is new to lapse risk management. We apply the aforementioned four methods to a large real-world insurance dataset. The results show that Extreme Gradient Boosting (XGBoost) and support vector machine outperform logistic regression (LR) and classification and regression tree with respect to statistic accuracy, while LR performs as well as XGBoost in terms of retention gains. This highlights the importance of a proper validation metric when comparing different methods. The optimization after the transformation brings out significant and consistent increases in economic gains. Therefore, the insurer should conduct optimization on its economic objective to achieve optimal lapse management.