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arXiv · 2109.01413

Frequency-Severity Experience Rating based on Latent Markovian Risk Profiles

Robert Matthijs Verschuren
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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.

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Robert Matthijs Verschuren. 2021-09-03. Frequency-Severity Experience Rating based on Latent Markovian Risk Profiles. https://doi.org/10.1016/j.insmatheco.2022.09.007

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