Actuarial Science Seminar: Mixture of Experts Regression Models for Insurance Ratemaking and Reserving

Understanding the effect of policyholders' risk profile on the number and the amount of claims, as well as the dependence among different types of claims, are critical to insurance ratemaking and IBNR-type reserving. To accurately quantify such features, it is essential to develop a regression model which is flexible, interpretable and statistically tractable.

In this presentation, I will discuss a highly flexible nonlinear regression model we have recently developed, namely the logit-weighted reduced mixture of experts (LRMoE) models, for multivariate claim frequencies or severities distributions. The LRMoE model is interpretable as it has two components: Gating functions to classify policyholders into various latent sub-classes and Expert functions to govern the distributional properties of the claims. The model is also flexible to fit any types of claim data accurately and hence minimize the issue of model selection.

Model implementation is illustrated in two ways using a real automobile insurance dataset from a major European insurance company. We first fit the multivariate claim frequencies using an Erlang count expert function. Apart from showing excellent fitting results, we can interpret the fitted model in an insurance perspective and visualize the relationship between policyholders' information and their risk level. We further demonstrate how the fitted model may be useful for insurance ratemaking. The second illustration deals with insurance loss severity data that often exhibits heavy-tail behavior. Using a Transformed Gamma expert function, our model is applicable to fit the severity and reporting delay components of the dataset, which is ultimately shown to be useful and crucial for an adequate prediction of IBNR reserve.

This project is joint work with Andrei Badescu and Sheldon Lin.