📝 SummarXiv

Abstract

This paper studies how insurers can chose which claims to investigate for fraud. Given a prediction model, typically only claims with the highest predicted propability of being fraudulent are investigated. We argue that this can lead to inconsistent learning and propose a randomized alternative. More generally, we draw a parallel with the multi-arm bandit literature and argue that, in the presence of selection, the obtained observations are not iid. Hence, dependence on past observations should be accounted for when updating parameter estimates. We formalize selection in a binary regression framework and show that model updating and maximum-likelihood estimation can be implemented as if claims were investigated at random. Then, we define consistency of selection strategies and conjecture sufficient conditions for consistency. Our simulations suggest that the often-used selection strategy can be inconsistent while the proposed randomized alternative is consistent. Finally, we compare our randomized selection strategy with Thompson sampling, a standard multi-arm bandit heuristic. Our simulations suggest that the latter can be inefficient in learning low fraud probabilities.