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How Machine Learning Will Affect What You Pay for Insurance

Data is a powerful tool. For decades, insurance companies have been using the data available to them to measure risk and determine pricing. But as technology evolves, so do the data practices insurers use to optimize pricing and risk. Machine learning is a new tool that goes beyond what an actuary can craft, and the impact it will have on what you pay for insurance is becoming noticeable. Understanding Machine Learning Machine learning enables computers to learn without human intervention. The computer acquires data and predicts outcomes without manual input. As machine learning gains more data and adapts to the past, its future predictions become more accurate. In insurance, machine learning can act like an underwriter. As a novice underwriter, you need loads of data to make a decision. As you gain data and analyze outcomes over time, you become better at assessing risk, predicting losses and calculating premiums. Machine learning in insurance is a tool that will help the underwriter make decisions with more precision. Optimization of Premium Dollars In 2017, the insurance industry accounted for 3.1 percent of the U.S. Gross Domestic Product (GDP), contributing more than $600 billion to the economy. With so much at stake, optimizing premium is pivotal. With machine learning, insurance companies can analyze immense amounts of data to create the ideal premium for each consumer. Think about your own personal auto insurance policy. There are many factors that impact your premium, including: Your car’s make, model and year The number of miles you drive Where you live Your history of accidents Your age The number of years you’ve had a driver’s license Machine learning can collect this data on millions of drivers and use it to recognize patterns and assess risks, which helps insurers craft tailored premiums for each consumer. Decreasing Premiums, Improving Combined Ratio Insurance companies are always working to improve their “combined ratios.” While this term may sound like industry jargon, it simply compares the amount of an insurance company’s payouts and expenses to the amount they brought in via premiums. For instance, if a company with a combined ratio of 99 percent, it means…

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