Allowance for the Age of Claims in Bonus-Malus Systems

Abstract

AbstractThe purpose of the paper is to use the age of claims in the prediction of risks. A dynamic random effects model on longitudinal count data is presented, and estimated on the portfolio of a major Spanish insurance company. The estimated autocorrelation coefficients of stationary random effects are decreasing. A consequence is that the predictive ability of a claim decreases with the lag between the period of risk prediction and the period of occurrence. There is a wide gap between the long term properties of actuarial and real-world experience rating schemes. This gap can be partly filled if the age of claims is taken into account in the actuarial model.