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INNOVATION | 02.01.2024

Synthetic data: a strategic asset in the field of insurance

Jose Mendiola Zuriarrain

Jose Mendiola Zuriarrain

Economista, periodista y autor

The emergence of artificial intelligence has sparked a revolutionary transformation in the way information is managed and leveraged. Not too long ago, conducting simulations for strategic planning on complex scenarios posed significant challenges. Today, with just a click of a button, managers—including data scientists, programmers, and various other professionals—have access to all the information displayed on their screens. Nevertheless, this convenience faces a once insurmountable obstacle: data privacy. How can scenarios be simulated when the assets involved are customers with their full names?

Legislation in this domain is understandably stringent, restricting the use of real customer data to the contracted purpose. This is where synthetic data comes into play, but what exactly does it entail? Synthetic data are information generated artificially through algorithms and advanced computational techniques, designed to emulate real data. Unlike data obtained through direct observations or measurements, synthetic data are created using models that closely mirror the statistical characteristics of genuine datasets. These data confer a notable advantage over real ones: they are unlimited, vastly expanding the possibilities for emulations.

The “engine” behind synthetic data relies on artificial intelligence (AI) algorithms, particularly systems employing machine learning and neural networks. These algorithms analyze behavioral patterns using real data and subsequently generate new data that preserves the statistical properties of the original set without replicating specific information. This is the primary benefit of employing synthetic data: the preservation of privacy and anonymity, as they do not contain genuine personal information.

Four strategic advantages of synthetic data

Leveraging real data for simulations faces significant constraints, particularly due to privacy regulations like the GDPR in the European context. Synthetic data is a highly beneficial solution, providing four essential strategic advantages for companies and organizations:

  1. Privacy protection and regulatory compliance

Synthetic data, being completely dissociated from specific individuals, ensures both respect for privacy and strict regulatory compliance. This holds particular significance in industries such as healthcare, finance, and insurance, where protecting information is of utmost importance.

  1. Enhanced simulation quality for new product development

The product creation process, especially in industries like insurance, requires simulating a wide range of potential scenarios. The ability of synthetic data to be generated in volume and specifically modeled for extreme situations creates a broader testing base. This freedom from constraints associated with real data results in high levels of precision in the development of new products, as they have been tested in a broader spectrum of conditions.

  1. Increased innovation capacity

By sparing companies from the resource-intensive process of collecting authentic data, synthetic data facilitates immediate access to tailored information for analysis. This acceleration in research and development processes empowers companies to experiment with new models and algorithms at an unparalleled pace, positioning them as leaders in their respective markets.

  1. Access to otherwise unobtainable data

Certain market sectors face challenges in simulating new developments with real data due to ethical and privacy concerns. Synthetic data serves as a valuable alternative, enabling scenario simulations and trend analyses without compromising ethics or confidentiality. Working with fictional data removes all development limitations, paving the way for groundbreaking advancements compared to the inherent constraints of real data.

How the insurance industry can leverage synthetic data for benefits

Optimizing the development and fine-tuning of predictive models

Predictive models are vital in the insurance sector, influencing premium determination and risk assessment significantly. Synthetic data are a facilitator in securely and effectively creating and adjusting these models, ensuring the privacy of customer information. This approach leads to the creation of more accurate and valuable models, contributing to efficient fraud detection and precise risk evaluation.

Detailed simulation of risk scenarios

Catastrophic or high-risk events are rare, but they can have a decisive impact on the insurance industry. Leveraging synthetic data allows for the highly precise simulation of such scenarios, enabling insurers to anticipate and plan for these situations, reducing their exposure to risk.

Regulatory compliance and stress testing

As mentioned, regulations in the insurance industry are stringent. Synthetic data is an ideal solution for organizations dealing with private customer information, proving invaluable for conducting stress tests, simulating an organization’s ability to navigate extreme situations without compromising confidential data. This strategic approach ensures companies not only comply with existing regulations but also maintain the confidentiality of customer information.

Synthetic data are becoming a fundamental element in the transformation of the insurance industry, enhancing the accuracy of risk assessments, refining personalization in insurance offerings, and ensuring strict compliance with privacy regulations. This type of information faithfully replicates real datasets, enabling insurers to conduct precise stress analyses, develop more accurate predictive models, and explore innovative avenues in product development. In the short term, a significant expansion of the impact of synthetic data in the insurance industry is anticipated, with the diversification of its applications.