Frequency-Severity Experience Rating based on Latent Markovian Risk Profiles
Abstract
Bonus-Malus Systems traditionally consider a customer's number of claims irrespective of their sizes, even though these components are dependent in practice. We propose a novel joint experience rating approach based on latent Markovian risk profiles to allow for a positive or negative individual frequency-severity dependence. The latent profiles evolve over time in a Hidden Markov Model to capture updates in a customer's claims experience, making claim counts and sizes conditionally independent. We show that the resulting risk premia lead to a dynamic, claims experience-weighted mixture of standard credibility premia. The proposed approach is applied to a Dutch automobile insurance portfolio and identifies customer risk profiles with distinctive claiming behavior. These profiles, in turn, enable us to better distinguish between customer risks.
Cite
@article{arxiv.2109.01413,
title = {Frequency-Severity Experience Rating based on Latent Markovian Risk Profiles},
author = {Robert Matthijs Verschuren},
journal= {arXiv preprint arXiv:2109.01413},
year = {2022}
}