Oscar Potts: Reassessing the Duration Effects in Non-Life Insurance Pricing: The effect of detrimental claims and suitable adjustments for over-dispersion

Abstract.

Assuming that the observed duration of a non-life insurance policy is linear towards the underlying risk has been shown to induce spurious over-dispersion, see [5]. This over-dispersion can distort pricing models by introducing variance where there is none and create inaccurate insurance premiums. This paper shows through simulation that said over-dispersion may arise from detrimental claims which are claims that cancel the need for coverage and, in effect, terminate the policy prematurely. Further, through parametric assumptions on duration, a method of adjusting for detrimental claims is proposed. This method shows to remove over-dispersion and maintain accurate model estimates in a simulated setting with improved performance in an applied setting.

Keywords: Duration Effects, Non-Life Insurance, Actuarial Pricing, Actuarial Sciences