Behavioral Simulations: Using agent-based modeling to understand policyholder behaviors

In managing insurance, traditional actuarial methods use past policyholder experience in quantifying future liabilities and risks. In modeling future expectations, many assumptions need to be established that are influenced by policyholder behavior. However, since human behavior is difficult to predict, the use of historical policyholder experience to model future policyholder behavior may not produce the most accurate results as future policyholders may not behave the same as past policyholders.

To expand our understanding of the theory of behavioral economics and its application to life and health insurance policyholder and annuitant behavior, the Society of Actuaries' Committee on Knowledge Extension Research, Committee on Life Insurance Research and the Financial Reporting Section issued a call for papers, inviting actuaries, academics, economists, psychologists, sociologists, researchers and other professionals to explore this topic from a variety of perspectives. The result is the attached paper, authored by Louis Lombardi, Mark Paich and Anand Rao of PricewaterhouseCoopers, which presents a new approach, called behavioral simulation, to model policyholder behavior. The opinions expressed and the conclusions reached by the authors are their own and do not represent any official position or opinion of the Society of Actuaries or its members. The Society of Actuaries makes no representation or warranty to the accuracy of the information.

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Behavioral Simulations: Using agent-based modeling to understand policyholder behaviors

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