Insurance ratemaking using the Exponential-Lognormal regression model

George Tzougas, Woo Hee Yik, Muhammad Waqar Mustaqeem

Research output: Contribution to journalArticlepeer-review

4 Citations (Scopus)

Abstract

This paper is concerned with presenting the Exponential-Lognormal (ELN) regression model as a competitive alternative to the Pareto, or Exponential-Inverse Gamma, regression model that has been used in a wide range of areas, including insurance ratemaking. This is the first time that the ELN regression model is used in a statistical or actuarial context. The main contribution of the study is that we illustrate how maximum likelihood estimation of the ELN regression model, which does not have a density in closed form, can be accomplished relatively easily via an Expectation-Maximisation type algorithm. A real data application based on motor insurance data is examined in order to emphasise the versatility of the proposed algorithm. Finally, assuming that the number of claims is distributed according to the classic Negative Binomial and Poisson-Inverse Gaussian regression models, both the a priori and a posteriori, or Bonus-Malus, premium rates resulting from the ELN regression model are calculated via the net premium principle and compared to those determined by the Pareto regression model that has been traditionally used for modelling claim sizes.

Original languageEnglish
Pages (from-to)42-71
Number of pages30
JournalAnnals of Actuarial Science
Volume14
Issue number1
Early online date26 Jun 2019
DOIs
Publication statusPublished - Mar 2020

Keywords

  • EM Algorithm
  • Exponential-Lognormal regression model
  • Motor Third Party Liability Insurance
  • ratemaking

ASJC Scopus subject areas

  • Statistics and Probability
  • Economics and Econometrics
  • Statistics, Probability and Uncertainty

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