Detra Note 2022-1

We are pleased to share with you our first Detra Note of the year on "Insurance analytics with K-means and extensions".

The k-means algorithm and its variants are popular techniques of clustering. Their purpose is to uncover group structures in a dataset. In actuarial applications, these methods detect clusters of policies with similar features and allow to draw a map of dominant risks. This working note starts with a review of the k-means algorithm and develops next two extensions to manage categorical features. We develop a mini-batch version that keeps computation time under control when analysing a high-dimensional dataset. We next introduce the fuzzy k-means in which policies can belong to multiple clusters. Finally, we conclude by a detailed introduction to spectral clustering.