Explaining functional principal component analysis to actuarial science with an example on vehicle insurance

Given the high competitiveness in the vehicle insurance market, the need arises for an adequate pricing policy. To this end, insurance companies must select risks in a way that allows the expected claims ratio to come as close as possible to the real claims ratio. The use of new analytical tools whi...

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Bibliographic Details
Published in:Insurance, mathematics & economics mathematics & economics, 2009-10, Vol.45 (2), p.278-285
Main Authors: Segovia-Gonzalez, M.M., Guerrero, F.M., Herranz, P.
Format: Article
Language:English
Subjects:
Actuarial science
Automobile insurance
Claims ratio
Competitiveness
Functional analysis
Functional principal component analysis
Insurance
Pricing
Pricing policies
Principal components analysis
Risk
Spain
Studies
Vehicle insurance
Vehicle insurance Claims ratio Functional principal component analysis
Vehicles
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Summary:Given the high competitiveness in the vehicle insurance market, the need arises for an adequate pricing policy. To this end, insurance companies must select risks in a way that allows the expected claims ratio to come as close as possible to the real claims ratio. The use of new analytical tools which provide more information is of great interest. In this paper it is shown how functional principal component analysis can be useful in actuarial science. An empirical study is carried out with data from a Spanish insurance company to estimate the risk of occurrence of a claim in terms of the driver’s age, whilst taking into account other relevant variables.
ISSN:0167-6687
1873-5959
DOI:10.1016/j.insmatheco.2009.07.003