Actuarial pricing, capital modelling and reserving

Pricing Squad

Issue 4 -- June 2016

Welcome back to Pricing Squad!

Pricing Squad is a newsletter for fellow pricing practitioners and actuaries in general insurance. Enjoy, and let me know your comments and ideas for future issues.

Today's issue is about by-peril lost cost GLMs, and why most of the time, you probably don't need them.

Do you need by-peril GLMs?

Most personal line insurers model loss cost by peril.

For example, a private motor loss cost can be modelled with eight models, namely one frequency and one severity model for each major peril: own damage, third-party property damage, third-party bodily injury, fire and theft. Additional minor perils and propensity of large claims are also frequently modelled.

Household has been recorded as being modelled with up to 32 GLMs!

Real-life example

An actual private motor portfolio was modelled using 11 GLMs, resulting in 597 estimated parameters in total. It took one and a half months to make these models. These were good quality models, built and used by a reputable company and peer-reviewed by a dominant UK GI pricing consultancy.

Then a single burning cost model was fitted to the same data with only 119 estimated parameters. It took two hours to make this cursory single model.

Finally, out-of-sample data was scored using the 11 GLMs and the single burning cost model to produce the comparison chart below.


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