SOA 2012 Life & Annuity Symposium
May 21-22, 2012
Session 28 PD, Using an Artificial Society (a
Complexity Science Tool) to Project Life
Insurance Sales
Moderator:
Benjamin Steward Wadsley, FSA, MAAA
Presenters:
Ben H Wolzenski, FSA, MAAA
Walter H. Zultowski, Ph.D.
MAIN EVENTS in the
Life Insurance Marketplace
Walter H. Zultowski, Ph.D. WZ Research + Consulting, LLC SOA Life and Annuity Symposium
May 21, 2012
Business 101: Successful businesses are those that respond efficiently and effectively to changes in their external environment.
External Environmental Influences
The Life Insurance Marketplace
More Predictable Less Predictable Demographics
Technology Regulation
The Economy
Demographics
• Retirement Security
• Health Care and Long-Term-Care 1) Continued Aging of the Baby-Boomers
• Theoretically, should be a boom for life insurance 2) Gen X and Gen Y Coming to the Forefront
Demographics (cont’d)
• Continued decline of husband-wife families • Growth of non-traditional families of all types
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3) Changing Family Structures
• Hispanics and women
• Immigration and population heterogeneity 4) Increasing Diversity
Demographics (cont’d)
• Greying of the sales force; succession planning • Difficulty attracting Gen X and Y to the business • A force driving interest in non-agent distribution
channels
Technology
• A tool for information vs. direct selling? • High tech vs. high touch
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1) Continued Pervasiveness of the Internet
• A tool for recruiting vs. direct selling? • Democratization of information and opinion
• The need to get marketing and compliance on the same side of the table
2) Social Networking
Technology (cont’d)
• Would seem to address the high tech/high touch challenge • Not new: “Is the agent of the future human?” (Zultowski)
“Comp-phone-a-vision” (Baranoff) • An issue of critical mass of the technology itself 3) Hybrid Technologies
Technology (contd’)
• Longevity (has it peaked?) • Genetic testing
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5) Medical Technology
The Economy
• Uncertainty
• Continued low interest rate environment • Market volatility; cost of hedging
1) Hangover from the Past Decade (at the company level)
• Job instability, wage stagnation, loss of confidence, desire for guarantees
• Disappearance of government and employer-based safety nets • Changing views on investments (a positive?)
• “The New Retirement: Working”1
2) Hangover from the Past Decade (at the consumer level)
The Economy (cont’d)
• At the corporate level (e.g., exiting certain lines of business)
• At the product level
– Stagnant product lines (e.g., fixed annuities)
– Disappearance of product lines (e.g., financial guarantees, standalone LTC)
– Growth in hybrid products (e.g., life/LTC combos)
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3) “Rationalization” of the Business
• Internationalization of regulation (e.g., Solvency II) • New market opportunities
4) Results of Industry Globalization
The Technology (cont’d)
• Debt crises, defaults of economies, wars, political upheavals, new international powers, nuclear proliferation, price of oil, etc., etc., etc.
Regulation
• Gridlock in Washington • Undoing of actions taken
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1) Political Uncertainty
• New sources of revenue: taxation of the inside build-up 2) Budget Deficits
Regulation (cont’d)
• Cost
• Impact on the health insurance business • Potential source of new life agents? 3) National Health Care
• 2010 tax law expires in 2012
• If no action, returns to $1M exemption and 55% tax rate • Unlikely, but stranger things have happened
Regulation (cont’d)
• European models
• New York State Regulation 194
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5) Commission Disclosure
USING AN ARTIFICIAL SOCIETY (A COMPLEXITY SCIENCE TOOL) TO PROJECT
LIFE INSURANCE SALES
Presenter: Ben Wolzenski, FSA, MAAA
Managing Member - Actuarial Innovations, LLC
Primary Competency: Technical Skills &
Analytical Problem Solving
§ Complexity Science
§ Agent-based models
§ Artificial societies
§ Sugarscape
→Original and latest online versions →Interpretative adaptation to model life
insurance sales
§ Practical considerations
From Complexity Science to Life
Insurance Sales
§ Complexity Science – An Introduction (and invitation) for actuaries, by Alan Mills, FSA, ND
→ http://www.soa.org/research/research-projects/health/research-complexity-science.aspx
§ Agent-based models
→Artificial societies
§ Schelling segregation model § Sugarscape
Complexity Science
§ Also known as virtual worlds
§ A form of agent-based computer model
§ Agents
§ Behavior rules § Relationship rules
§ Environment
§ Modeler defines
→Agent behavior and relationship rules →Environmental rules
§ …then lets the model run
§ At successive time periods
→Agents may prosper, die, engage in specific activities
→Environment changes
Artificial Societies
§ Growing Artificial Societies – Social Science from the Bottom Up (1996), by
Joshua M. Epstein & Robert Axtell
§ Simplest version
→Environment: grid with two piles of sugar →Agents distributed [randomly]
§ Environment →Sugar grows § Agents →Eat sugar →See nearby →Move
→Accumulate wealth (sugar)
→Die
§ http://sugarscape.sourceforge.net
§ Applet to demo the program
§ Documentation
§ Link to download the source code
§ Released under the GNU General Public
License
Sugarscape Version 2.44.1 LL
by Abraham Kannankeril
Enhanced environment
§ Variable size of grid (environment)
§ Sugar and spice
§ Pollution created and dispersed
§ Summer and winter seasons
§ Variable duration § Variable fertility
Sugarscape Version 2.44.1 LL
by Abraham Kannankeril
Enhanced agents (citizens)
§ Random life expectancy
§ Age groups
§ Inherited and acquired characteristics
§ Cultural group membership
§ Risk taking/aversion
Sugarscape Version 2.44.1 LL
by Abraham Kannankeril
Enhanced agents, continued
§ Barter goods
§ Diseases and immunities
§ Find mate(s)
§ Have children
Sugarscape Version 2.44.1 LL
by Abraham Kannankeril
Sugarscape Version 2.44.1 LL
by Abraham Kannankeril
Interpretation of environment
§ Environment (grid) = area containing
citizens who may purchase life insurance
§ Sugar + spice = financial resources
§ Summer / winter = economic cycles
§ Pollution = economic inefficiency or friction
Interpretative Adaptation of
Interpretation of agents (citizens)
§ Realistic age, life span
§ Mate, procreate, accumulate wealth
§ Diseases and immunities
§ Characteristics and group membership
§ Engage in financial transactions (barter)
§ Leave inheritance
Interpretative Adaptation of
Sugarscape Version 2.44.1 LL
Newborn child initial wealth options
§ #1 – Newborn children are given half of
the wealth that each parent had at his or her own birth.
→Since this applies from the outset, all new citizens start with wealth in a narrow range
Interpretative Adaptation of
Sugarscape Version 2.44.1 LL
0 50 100 150 200 250 300 350 400 450 500 0 1 2 3 4 5 6 7 8 9 10 Option #1 Option #2
Distribution of wealth under
Option #1 vs. Option #2
Number of financial transactions
§ Influenced by environment
→Economic cycles
→Degree of economic inefficiency
§ Influenced by population
→Absolute size →Density
Interpretative Adaptation of
Sugarscape Version 2.44.1 LL
§ Some financial transactions are life insurance purchases
§ A percentage of citizens, varying by
Interpretative Adaptation of
Sugarscape Version 2.44.1 LL
The chance that any financial transaction is a life insurance purchase varies based on the citizen’s:
§ Age bracket
→0-17,18-24,25-34,35-44,45-54,55-64,65+
§ Wealth bracket
§ Cultural group membership
→and
Interpretative Adaptation of
Sugarscape Version 2.44.1 LL
The chance that any financial transaction is a life insurance purchase varies based on:
§ Whether the client has children
§ Whether the client has any diseases
§ Whether the client already has life insurance
§ Whether the other party to the transaction is a life insurance agent
Interpretative Adaptation of
Sugarscape Version 2.44.1 LL
0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00 2003 2004 2005 2006 2007 2008 2009 2010
Policies per 100 population
Policies per 100 population
Individual life insurance purchases in
the U.S. per 100 residents
Baseline model: establish model
parameters so that:
§ The citizen population is relatively stable after the start-up period
§ The average number of policies purchased
Interpretative Adaptation of
Sugarscape Version 2.44.1 LL
First variation:
§ Increase “unemployment” by 25%
§ Over the extension periods, how would
you expect this to change: →the average population,
→the average # of life insurance purchases per capita, and
→the variability of the # of life insurance purchases per capita?
Interpretative Adaptation of
Sugarscape Version 2.44.1 LL
§ 3. The average population decreased 14% AND
§ the average # of life insurance purchases
per capita decreased 3% AND
§ the variability of outcomes increased 19%.
Answer to audience question #3
Second variation:
§ Increase the age at which citizens can have children from 18 to 25
§ How would you expect this to change:
→the average population,
Interpretative Adaptation of
Sugarscape Version 2.44.1 LL
§ The average population was lower for a while but increased more steadily and was just over 1% higher over the entire period.
§ The average # of life insurance purchases
per capita increased 12%.
Third variation:
§ Increase productivity (of goods) by 50%
§ Effect on average population:
→None (less than 0.1% change)
§ Effect on per capita life insurance purchases:
→Increased by 8%
Interpretative Adaptation of
Sugarscape Version 2.44.1 LL
Fourth variation:
§ Combine all 3 prior variations
§ Increase “unemployment” by 25%
§ Increase the age at which citizens can have children from 18 to 25
Interpretative Adaptation of
Sugarscape Version 2.44.1 LL
Population & purchase effects combined outside the model:
§ Average population (down 14%, up 1%, no
change) = down 13%
§ Average # life insurance purchases per
citizen (down 3%, up 12%, up 8%) = up 17%
§ Average # life insurance purchases per
population (down 13%, up 17%) = up 2%
Interpretative Adaptation of
Sugarscape Version 2.44.1 LL
Population & purchase effects combined
inside the model:
§ Average population: down 14%
§ Average # life insurance purchases per
citizen: up 18%
§ Average # life insurance purchases per
population: up 2%
Interpretative Adaptation of
Sugarscape Version 2.44.1 LL
Population & purchase effects combined
inside the model:
§ Also of interest…
§ The variability of the # of life insurance purchases per capita more than doubled – an increase of 142%!
Interpretative Adaptation of
Sugarscape Version 2.44.1 LL
0% 10% 20% 30% 40% 50% 60% 70% 80%% households with income >= $25,000
% households with income >= $25,000
Individual life ownership by Ethnicity
-Guaranteed Uncertainty, LIMRA & SOA
§ Today’s results illustrative
§ Artificial society applications
→Non-equilibrium economics, epidemic dynamics, healthcare decisions
§ Requirements – starting with Sugarscape
→Java programming
→Research regarding environmental and behavioral factors
Questions for the audience
§ What enhancements do you think would
be needed to make this example a practical model?
§ What other applications of artificial society models do you see?
§ What are your questions?