AS462_Lec07 - ACTSC 462/862 P&C Insurance Ratemaking...

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1 ACTSC 462/862 P&C Insurance Ratemaking Lecture 7
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2 Previous Lecture > Basic Ratemaking – Chapter 10 Circumstances that led to the adoption of multivariate approaches in classification ratemaking •T h e overall benefits of multivariate approaches Minimum bias examples •A basic explanation of the mathematical foundation of one particular multivariate method, generalized linear models (GLMs) sample of GLM output •E x a m p l e s of statistical diagnostics associated with GLMs
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3 Basic Ratemaking Chapter 11: Special Classification
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4 Basic Ratemaking – Chapter 11 > Chapter covers: • Territorial boundary analysis • Increased limits factors • Deductibles • Workers compensation size of risk • Insurance to value/Coinsurance
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5 Basic Ratemaking – Chapter 11 > Territorial Ratemaking: Geography is considered one of the primary drivers of claims experience Territorial ratemaking poses some interesting challenges: 1. location tends to be heavily correlated with other rating variables 2. the data in each individual territory is sparse Territorial ratemaking generally involves two phases: 1. Establishing territorial boundaries 2. Determining rate relativities for the territories
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6 Basic Ratemaking – Chapter 11 > Establishing Territorial Boundaries: •I n the past, companies had few rating territories and typically used the same or very similar territorial boundaries Companies are now applying more advanced methods such as geo spatial techniques to develop or refine territorial boundaries •S t e p 1: Determining Geographic Unit: –The unit should be refined enough to be relatively homogenous with respect to geographic differences while still having some observations in most units –the actuary’s objective next is to estimate the geographic risk associated with each unit
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7 Basic Ratemaking – Chapter 11 > Establishing Territorial Boundaries: Step 2: Calculating the Geographic Estimator –A c t u a r y traditionally used univariate techniques (e.g., pure premium approach) to develop an estimator for each geographic unit –T w o major issues with this approach: 1. the geographic estimator in this approach reflects both the signal and the noise 2. since location tends to be highly correlated with other non geographic factors, the resulting estimator is biased more sophisticated approach involves building a multivariate model (e.g., a GLM) on loss cost data using a variety of non geographic and geographic explanatory variables
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8 Basic Ratemaking – Chapter 11 > Establishing Territorial Boundaries: •S t e p 2: Calculating the Geographic Estimator –T h e very nature of the multivariate modeling process enables the actuary to isolate the signal from the noise in the data h e parameters from each of the various geographic predictors, including a predictor variable for the geographic residual variation, can be combined to form one composite risk index or score that represents the geographic signal for each geographic unit
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AS462_Lec07 - ACTSC 462/862 P&C Insurance Ratemaking...

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