Convex and Lorenz orders under balance correction in nonlife insurance pricing: Review and new developments

Michel Denuit () and Julien Trufin ()
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Michel Denuit: Université catholique de Louvain, LIDAM/ISBA, Belgium
Julien Trufin: Université Libre de Bruxelles

No 2024020, LIDAM Reprints ISBA from Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA)

Abstract: By exploiting massive amounts of data, machine learning techniques provide actuaries with predictors exhibiting high correlation with claim frequencies and severities. However, these predictors generally fail to achieve financial equilibrium and thus do not qualify as pure premiums. Autocalibration effectively addresses this issue since it ensures that every group of policyholders paying the same premium is on average self-financing. Balance correction has been proposed as a way to make any candidate premium autocalibrated with the added advantage that it improves out-of-sample Bregman divergence and hence predictive Tweedie deviance. This paper proves that balance correction is also beneficial in terms of concentration curves and derives conditions ensuring that the initial predictor and its balance-corrected version are ordered in Lorenz order. Finally, criteria are proposed to rank the balance-corrected versions of two competing predictors in the convex order.

Keywords: Tweedie deviance; Bregman divergence; Financial equilibrium; Concentration curve; Convex order; Lorenz order (search for similar items in EconPapers)
Pages: 6
Date: 2024-06-28
Note: In: Insurance: Mathematics and Economics, 2024, vol. 118, p. 123-128
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Persistent link: https://EconPapers.repec.org/RePEc:aiz:louvar:2024020

DOI: 10.1016/j.insmatheco.2024.06.003

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