Investigating dependence between frequency and severity via simple generalized linear models

Woojoo Lee, Sojung C. Park, Jae Youn Ahn

Research output: Contribution to journalArticlepeer-review

6 Scopus citations

Abstract

Recently, a body of literature proposed new models relaxing a widely-used but controversial assumption of independence between claim frequency and severity in non-life insurance rate making. This paper critically reviews a generalized linear model approach, where a dependence between claim frequency and severity is introduced by treating frequency as a covariate in a regression model for severity. As an extension of this approach, we propose a dispersion model for severity. For this model, the information loss caused by using average severity rather than individual severity is examined in detail and the parameter estimators suffering from low efficiency are identified. We also provide analytical solutions for the aggregate sum to help rate making. We show that the simple functional form used in current research may not properly reflect the real underlying dependence structure. A real data analysis is given to explain our analytical findings.

Original languageEnglish
Pages (from-to)13-28
Number of pages16
JournalJournal of the Korean Statistical Society
Volume48
Issue number1
DOIs
StatePublished - Mar 2019

Keywords

  • Dependence
  • Dispersion parameter
  • Generalized linear model
  • Rate making

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