Insurance Ratemaking and a Gini Index

Edward W. (Jed) Frees, Glenn Meyers and A. David Cummings

Journal of Risk & Insurance, 2014, vol. 81, issue 2, 335-366

Abstract: type="main" xml:lang="en">

Welfare economics uses Lorenz curves to display skewed income distributions and Gini indices to summarize the skewness. This article extends the Lorenz curve and Gini index by ordering insurance risks; the ordering variable is a risk-based score relative to price, known as a relativity. The new relativity-based measures can cope with adverse selection and quantify potential profit. Specifically, we show that the Gini index is proportional to a correlation between the relativity and an out-of-sample profit (price in excess of loss). A detailed example using homeowners insurance demonstrates the utility of these new measures.

Date: 2014
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