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Convex and Lorenz orders under balance correction in nonlife insurance pricing: Review and new developments

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  • Denuit, Michel
  • Trufin, Julien

Abstract

By exploiting massive amounts of data, machine learning techniques provide actuaries with predictors exhibiting high correlation with claim frequencies and severities. However, these predictors generally fail to achieve financial equilibrium and thus do not qualify as pure premiums. Autocalibration effectively addresses this issue since it ensures that every group of policyholders paying the same premium is on average self-financing. Balance correction has been proposed as a way to make any candidate premium autocalibrated with the added advantage that it improves out-of-sample Bregman divergence and hence predictive Tweedie deviance. This paper proves that balance correction is also beneficial in terms of concentration curves and derives conditions ensuring that the initial predictor and its balance-corrected version are ordered in Lorenz order. Finally, criteria are proposed to rank the balance-corrected versions of two competing predictors in the convex order.

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  • Denuit, Michel & Trufin, Julien, 2024. "Convex and Lorenz orders under balance correction in nonlife insurance pricing: Review and new developments," Insurance: Mathematics and Economics, Elsevier, vol. 118(C), pages 123-128.
    • Handle: RePEc:eee:insuma:v:118:y:2024:i:c:p:123-128
    DOI: 10.1016/j.insmatheco.2024.06.003
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    References listed on IDEAS

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    1. Michel Denuit & Arthur Charpentier & Julien Trufin, 2021. "Autocalibration and Tweedie-dominance for Insurance Pricing with Machine Learning," Papers 2103.03635, arXiv.org, revised Jul 2021.
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