Predictive modeling can also be used to identify high risk fraud candidates in

Predictive modeling can also be used to identify high

This preview shows page 39 - 42 out of 237 pages.

Predictive modeling can also be used to identify high-risk fraud candidates in business or the public sector. Mark Nigrini developed a risk-scoring method to identify audit targets. He describes the use of this approach to detect fraud in the franchisee sales reports of an international fast-food chain. Each location is scored using 10 predictors. The 10 scores are then weighted to give one final overall risk score for each location. The same scoring approach was also used to identify high- risk check kiting accounts, potentially fraudulent travel agents, and questionable vendors. A reasonably complex model was used to identify fraudulent monthly reports submitted by divisional controllers (Nigrini, 2011). The Internal Revenue Service (IRS) of the United States also uses predictive analytics to mine tax returns and identify tax fraud (Schiff, 2012).
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17 Recent advancements in technology have also introduced predictive behavior analysis for web fraud detection. This type of solution utilizes heuristics in order to study normal web user behavior and detect anomalies indicating fraud attempts. Portfolio, product or economy-level prediction Often the focus of analysis is not the consumer but the product, portfolio, firm, industry or even the economy. For example, a retailer might be interested in predicting store-level demand for inventory management purposes. Or the Federal Reserve Board might be interested in predicting the unemployment rate for the next year. These types of problems can be addressed by predictive analytics using time series techniques (see Chapter 18). They can also be addressed via machine learning approaches which transform the original time series into a feature vector space, where the learning algorithm finds patterns that have predictive power. Risk management When employing risk management techniques, the results are always to predict and benefit from a future scenario. The Capital asset pricing model (CAM-P) and Probabilistic Risk Assessment (PRA) examples of approaches that can extend from project to market, and from near to long term. CAP- M (Chong, Jin, & Phillips, 2013) “predicts” the best portfolio to maximize return. PRA, when combined with mini-Delphi Techniques and statistical approaches, yields accurate forecasts (Parry, 1996). @Risk is an Excel add-in used for modeling and simulating risks (Strickland, 2005). Underwriting (see below) and other business approaches identify risk management as a predictive method. Underwriting Many businesses have to account for risk exposure due to their different services and determine the cost needed to cover the risk. For example, auto insurance providers need to accurately determine the amount of premium to charge to cover each automobile and driver. A financial company needs to assess a borrower's potential and ability to pay before granting a loan. For a health insurance provider, predictive analytics can
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18 analyze a few years of past medical claims data, as well as lab, pharmacy and other records where available, to predict how expensive an enrollee is likely to be in the future. Predictive analytics can help underwrite
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