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An EM algorithm for fitting a new class of mixed exponential regression models with varying dispersion

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  • Tzougas, George
  • Karlis, Dimitris

Abstract

Regression modelling involving heavy-tailed response distributions, which have heavier tails than the exponential distribution, has become increasingly popular in many insurance settings including non-life insurance. Mixed Exponential models can be considered as a natural choice for the distribution of heavy-tailed claim sizes since their tails are not exponentially bounded. This paper is concerned with introducing a general family of mixed Exponential regression models with varying dispersion which can efficiently capture the tail behaviour of losses. Our main achievement is that we present an Expectation-Maximization (EM)-type algorithm which can facilitate maximum likelihood (ML) estimation for our class of mixed Exponential models which allows for regression specifications for both the mean and dispersion parameters. Finally, a real data application based on motor insurance data is given to illustrate the versatility of the proposed EM-type algorithm.

Suggested Citation

  • Tzougas, George & Karlis, Dimitris, 2020. "An EM algorithm for fitting a new class of mixed exponential regression models with varying dispersion," LSE Research Online Documents on Economics 104027, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:104027
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    File URL: http://eprints.lse.ac.uk/104027/
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    References listed on IDEAS

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    1. Tzougas, George & Vrontos, Spyridon & Frangos, Nicholas, 2014. "Optimal Bonus-Malus Systems Using Finite Mixture Models," ASTIN Bulletin, Cambridge University Press, vol. 44(2), pages 417-444, May.
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    6. Tzougas, George & Yik, Woo Hee & Mustaqeem, Muhammad Waqar, 2019. "Insurance ratemaking using the Exponential-Lognormal regression model," LSE Research Online Documents on Economics 101729, London School of Economics and Political Science, LSE Library.
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    13. Tzougas, George & Vrontos, Spyridon & Frangos, Nicholas, 2014. "Optimal Bonus-Malus Systems using finite mixture models," LSE Research Online Documents on Economics 70919, London School of Economics and Political Science, LSE Library.
    14. Mencia, Javier F. & Sentana, Enrique, 2004. "Estimation and testing of dynamic models with generalised hyperbolic innovations," LSE Research Online Documents on Economics 24742, London School of Economics and Political Science, LSE Library.
    15. Tzougas, George & Vrontos, Spyridon & Frangos, Nicholas, 2018. "Bonus-Malus systems with two component mixture models arising from different parametric families," LSE Research Online Documents on Economics 84301, London School of Economics and Political Science, LSE Library.
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    19. George Tzougas & Spyridon Vrontos & Nicholas Frangos, 2018. "Bonus-Malus Systems with Two-Component Mixture Models Arising from Different Parametric Families," North American Actuarial Journal, Taylor & Francis Journals, vol. 22(1), pages 55-91, January.
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    Cited by:

    1. Tzougas, George & Jeong, Himchan, 2021. "An expectation-maximization algorithm for the exponential-generalized inverse Gaussian regression model with varying dispersion and shape for modelling the aggregate claim amount," LSE Research Online Documents on Economics 108210, London School of Economics and Political Science, LSE Library.
    2. Delong, Łukasz & Lindholm, Mathias & Wüthrich, Mario V., 2021. "Gamma Mixture Density Networks and their application to modelling insurance claim amounts," Insurance: Mathematics and Economics, Elsevier, vol. 101(PB), pages 240-261.
    3. George Tzougas, 2020. "EM Estimation for the Poisson-Inverse Gamma Regression Model with Varying Dispersion: An Application to Insurance Ratemaking," Risks, MDPI, vol. 8(3), pages 1-23, September.
    4. George Tzougas & Himchan Jeong, 2021. "An Expectation-Maximization Algorithm for the Exponential-Generalized Inverse Gaussian Regression Model with Varying Dispersion and Shape for Modelling the Aggregate Claim Amount," Risks, MDPI, vol. 9(1), pages 1-17, January.
    5. Gao, Guangyuan & Meng, Shengwang & Shi, Yanlin, 2021. "Dispersion modelling of outstanding claims with double Poisson regression models," Insurance: Mathematics and Economics, Elsevier, vol. 101(PB), pages 572-586.
    6. Tzougas, George, 2020. "EM estimation for the Poisson-Inverse Gamma regression model with varying dispersion: an application to insurance ratemaking," LSE Research Online Documents on Economics 106539, London School of Economics and Political Science, LSE Library.
    7. Pai, Jeffrey & Li, Yunxian & Yang, Aijun & Li, Chenxu, 2022. "Earthquake parametric insurance with Bayesian spatial quantile regression," Insurance: Mathematics and Economics, Elsevier, vol. 106(C), pages 1-12.

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    More about this item

    Keywords

    mixed exponential distributions; EM algorithm; regression models for the mean and dispersion parameters; non-life insurance; heavy-tailed losses;
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    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General

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