Stochastic Claims Reserving in Insurance Using Random Effects

Michal Gerthofer and Michal Pešta

Prague Economic Papers, 2017, vol. 2017, issue 5, 542-560

Abstract: Estimation of claims reserves, which should be held by the insurer so as to be able to meet expected future claims arising from policies currently in force and policies written in the past, presents an important task for insurance companies to predict their liabilities. A common approach to the reser-ving problem is based on generalized linear models (GLM). In this article, the application of genera-lized linear mixed models (GLMM) - an extension of the GLM - for estimation of the loss reserves is shown. Since the GLMM allows incorporating a random effect instead of several fixed effects corresponding to the accident years as in case of the GLM, volatility of the prediction is reduced. This allows more flexible risk valuation, which is a crucial element of risk management and capital allocation practices of non-life insurers. A real data example together with diagnostics for the model selection are provided as an illustration of the potential benefits of the presented approach.

Keywords: claims reserving; non-life insurance; dependency modelling; random effects; mixed models; GLM; GLMM; panel data (search for similar items in EconPapers)
JEL-codes: C13 C18 C23 C33 C51 G22 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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DOI: 10.18267/j.pep.625

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