Dependent frequency–severity modeling of insurance claims

Peng Shi, Xiaoping Feng and Anastasia Ivantsova

Insurance: Mathematics and Economics, 2015, vol. 64, issue C, 417-428

Abstract: Standard ratemaking techniques in non-life insurance assume independence between the number and size of claims. Relaxing the independence assumption, this article explores methods that allow for the correlation among frequency and severity components for micro-level insurance data. To introduce granular dependence, we rely on a hurdle modeling framework where the hurdle component concerns the occurrence of claims and the conditional component looks into the number and size of claims given occurrence. We propose two strategies to correlate the number of claims and the average claim size in the conditional component. The first is based on conditional probability decomposition and treats the number of claims as a covariate in the regression model for the average claim size, the second employed a mixed copula approach to formulate the joint distribution of the number and size of claims. We perform a simulation study to evaluate the performance of the two approaches and then demonstrate their application using a U.S. auto insurance dataset. The hold-out sample validation shows that the proposed model is superior to the industry benchmarks including the Tweedie and the two-part generalized linear models.

Keywords: Hurdle model; Conditional decomposition; Copula; Out-of-sample validation; Portfolio risk (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0167668715001183
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:64:y:2015:i:c:p:417-428

DOI: 10.1016/j.insmatheco.2015.07.006

Access Statistics for this article

Insurance: Mathematics and Economics is currently edited by R. Kaas, Hansjoerg Albrecher, M. J. Goovaerts and E. S. W. Shiu

More articles in Insurance: Mathematics and Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().