Abstract
In insurance rate-making, the use of statistical machine learning techniques such as artificial neural networks (ANN) is an emerging approach, and many insurance companies have been using them for pricing. However, due to the complexity of model specification and its implementation, model explainability may be essential to meet insurance pricing transparency for rate regulation purposes. This requirement may imply the need for estimating or evaluating the variable importance when complicated models are used. Furthermore, from both rate-making and rate-regulation perspectives, it is critical to investigate the impact of major risk factors on the response variables, such as claim frequency or claim severity. In this work, we consider the modelling problems of how claim counts, claim amounts and average loss per claim are related to major risk factors. ANN models are applied to meet this goal, and variable importance is measured to improve the model’s explainability due to the models’ complex nature. The results obtained from different variable importance measurements are compared, and dominant risk factors are identified. The contribution of this work is in making advanced mathematical models possible for applications in auto insurance rate regulation. This study focuses on analyzing major risks only, but the proposed method can be applied to more general insurance pricing problems when additional risk factors are being considered. In addition, the proposed methodology is useful for other business applications where statistical machine learning techniques are used.
Subject
Strategy and Management,Economics, Econometrics and Finance (miscellaneous),Accounting
Cited by
6 articles.
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