Non-Life Insurance Pricing with Generalized Linear Models

Abstract

As described in the previous section, the goal of a tariff analysis is to determine how one or more key ratios Y vary with a number of rating factors. This is reminiscent of analyzing how the dependent variable Y varies with the covariates (explanatory variables) x in a multiple linear regression. Linear regression, or the slightly larger general linear model, is not fully suitable for non-life insurance pricing, though, since: (i) it assumes normally distributed random errors, while the number of insur- ance claims follows a discrete probability distribution on the non-negative integers, and claim costs are non-negative and often skewed to the right; (ii) in linear mod- els, the mean is a linear function of the covariates, while multiplicative models are usually more reasonable for pricing, cf. Sect. 1.3. Generalized