Download - Average Premium Model - SOA
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Average Premium ModelActuarial Research Conference
Brant Wipperman, FCAS FCIA MSc (SFU)
July 27, 2010
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Motivation
• Revenue Requirements
• Monitoring our book of business
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Basic On-Level Average Premium
600
605
610
615
620
625
630
2002 2003 2004 2005 2006
Avg.
Premium
(
$)
Year
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Personal TPL On-Level Avg. Premium
600
605
610
615
620
625
630
2005 2006 2007 2008 2009
Avg.
Premium
(
$)
Year
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Overview
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ExposureForecasts
AveragePremiumForecasts
PCA
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Exposure Model
• Historical exposure data– Split into Personal and Commercial– Further split into vehicle use, location, and
bonus-malus groups
• An econometric regression model is fit to each group– Demographic– Economy
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Vehicle Use Groups
• Personal
– Pleasure– Commute– Business– Senior– Motorcycle– Motor home– Collector
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Location Groups
• Lower Mainland• Ridge Meadows• Fraser Valley• Squamish/Whistler• Pemberton/Hope• Okanagan• Kootenays• Cariboo• Prince George• Peace River• North Coast• South Island• Mid Island• North Island
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Bonus-Malus Groups
• Claim Rated Scale
– Roadstar (43% discount)
– 25% to 40% discount
– 5% to 20% discount
– Base or surcharge
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Overview
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HistoricalExposure
Data
ExternalFactorsEconometric
Models FactorForecasts
ExposureForecasts
AveragePremiumForecasts
PCAExposure Model
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Historical Exposure Data
• Too many groups for the average premium model
• Need a dimension reduction technique
• Want to keep all of the groups
• Linear dependencies exist
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What is PCA?
• It transforms a number of correlated variables into a smaller number of uncorrelated variables
• Uses linear algebra
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PCA Notation
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)(1 ZZA Tn ⋅=
VVA λ=⋅
21−⋅= LVB
BZP ⋅= LBLVS ⋅=⋅= 2
1
TTTC ⋅=
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Eigen Decomposition
• Linear algebra problem• Done on correlation matrix of
explanatory variables• Eigenvectors are new explanatory
variables (i.e. principal components)• Each associated eigenvalue represents
variability of eigenvector (or PC)
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PCA Resolves the Issues
• Number of dimensions reduced• All groups ‘retained’• Linear dependencies eliminated
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PCA Process
• Step 1: Create new set of explanatory variables
• Step 2: Determine how many new explanatory variables to retain
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PCA
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How many components?
0%
5%
10%
15%
20%
25%
30%
35%
1 2 3 4 5 6 7 8 9 1011121314151617181920212223242526272829303132
%
of
Variance
Principal Component
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How many components?
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1 2 3 4 5 6 7 8 9 1011121314151617181920212223242526272829303132
%
of
Variance
Principal Component
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88% 94%
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Overview
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Chosen PCs
HistoricalExposure
Data
ExternalFactorsEconometric
Models FactorForecasts
ExposureForecasts
Exposure ModelPCA
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HistoricalExposure
Data30 correlated variables
Chosen PCs
Ortho-normaltransformation
PrincipalComponents 30 uncorrelated variables
ScreeProportion of varianceOther
6 uncorrelated variables
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Overview
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Chosen PCs
HistoricalExposure
Data
LinearRegression
Models
HistoricalAveragePremium
ExternalFactorsEconometric
Models FactorForecasts
ExposureForecasts
Chosen PCForecasts
AveragePremiumForecasts
PCAExposure Model
Average Premium Model
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Modeled vs. Actual – Personal TPL
580
600
620
640
660
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Avg.
Premium
(
$)
MonthModeled Actual
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Modeled vs. Actual – Personal TPL
600
605
610
615
620
625
630
2004 2005 2006 2007 2008 2009 2010 2011
Avg.
Premium
YearActual 6 PCs 4 PCs 8 PCs
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Recap - Advantages
• PCs uncorrelated
• PCs organized to reduce dimensionality
• Keeps most of original information
• Determine contribution of each variable
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Recap - Disadvantages
• PCA process not familiar
• PCs can be hard to interpret
• PC weights may change upon updating
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Is PCA Right For You?
• Does multi-collinearity roll off your tongue too easily?
• Are you confident in the set of explanatory variables?
• Do you want to reduce dimensionality without throwing away information?
• Have you been modeling for more than 4 consecutive hours?
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For More Information
• CAS Discussion Paper
– PCA and Partial Least Squares: Two Dimension Reduction Techniques for Regression
• http://www.casact.org/pubs/dpp/dpp08/08dpp76.pdf