RISK SCORING MODELS AND THEIR ACCURACY By Darleen

RISK SCORING MODELS AND THEIR ACCURACY By Darleen Ziege

WHAT IS A RISK SCORING MODEL?

TERMINO LOGY Prospective risk models Concurrent risk models

GOODNESS OF FIT We can analyze the accuracy of various Risk Scoring Models utilizing predictive accuracy measures: R-Squared, Mean Absolute Error (MAE), and predictive ratios R-Squared and MAE - individual risk levels Predictive Ratios - a snapshot of a specific subgroup

R-SQUARED The percentage of model variation in the dependent variable that is explained by the specified model.

R-SQUARED EXAMPLES

WHAT’S YOUR R-SQUARED ESTIMATE?

DANGERS OF R-SQUARED Anscombe’s Quartet Francis Anscombe in 1973 Demonstrates the importance of graphing data before analysis and the effects of outliers on statistical properties

MEAN ABSOLUTE ERROR (MAE) Used to measure how close a prediction is to the outcome.

PREDICTIVE RATIOS The mean risk score divided by the mean actual cost for a subgroup of individuals from the sample population, with both values scaled to 1. 0 over the entire population. A predictive ratio of 100% indicated that a model on average, is perfectly unbiased for that group of individuals.

R-SQUARED AND MAE FOR CONCURREN T AND PROSPECTIV

R-SQUARED AND MAE FOR CONCURREN T AND PROSPECTIV E MODELS (GROUP

PREDICTIVE RATIOS FOR CURRENT AND PROSPECTIVE MODELS

RSQUARED, MAE, AND PREDICTI VE RATIOS IN VARIOUS FIELDS Insurance Modeling Finance Machine Learning Biology Economics … The possibilities are endless, all you need is lots of data and the potential for error

BIBLIOGRAPHY • Parikh, Ravi. “Anscombe’s Quartet, and Why Summary Statistics Don’t Tell the Whole Story. ” Heap. April 21, 2014. Retrieved September 2020. • “Anscombe’s Quartet. ” Matplotlib. org. April 8, 2020. Retrieved September 2020. • “What is an Actuary? ” beanactuary. org. 2020. Retrieved September 2020. • Ogee, A. & Ellis, M. & et. al. “Regression Analysis: How Do I Interpret Rsquared and Assess the Goodness-of-Fit? ” The Minitab Blog. May 30, 2013. Retrieved September 2020. • Hileman, G. & Steele, S. “Accuracy of Claims-Based Risk Scoring Models. ” Society of Actuaries. October 2016. Retrieved September 2020.