1. INTRODUCTION
ESTIMATING AUTO INSURANCE PREMIUM USING GENERALISED LINEAR MODELS
1.1 BACKGROUND INFORMATION AND PROBLEM STATEMEENT The basic role of insurance is to pool fortuitous losses together, provide financial protection, offering a means of transferring the risk of losses in exchange of an insurance premium. Insured’s pose varying level of risks to an insurer. It is rational that the rates charged correspond to individual risk levels. The non-uniform rates charged are emphasized by the non-homogenous nature of insurance portfolio which brings about the phenomenon of anti-selection. This basically implies charging same rates for the entire portfolio, meaning that the unfavorable risks are also insured at a lower rate and as a negative effect, it discourages insuring medium risks. According to Ohlsson and Johansen (2010), the idea is that if an insurance company charges too high a premium for some policies, these will be lost to a competitor with a fairer price. Suppose that a company charges too little for young drivers and too much for old drivers; then they will tend to loose old drivers to competitors while attracting young drivers; this adverse selection will result in economic loss both ways: by losing profitable and gaining underpriced policies. Therefore, non-life-insurance pricing techniques are mainly employed to combat the phenomenon of anti-selection by dividing the insurance portfolio into sub-portfolios based on certain influence
ESTIMATING AUTO INSURANCE PREMIUM USING GENERALISED LINEAR MODELS
1.1 BACKGROUND INFORMATION AND PROBLEM STATEMEENT The basic role of insurance is to pool fortuitous losses together, provide financial protection, offering a means of transferring the risk of losses in exchange of an insurance premium. Insured’s pose varying level of risks to an insurer. It is rational that the rates charged correspond to individual risk levels. The non-uniform rates charged are emphasized by the non-homogenous nature of insurance portfolio which brings about the phenomenon of anti-selection. This basically implies charging same rates for the entire portfolio, meaning that the unfavorable risks are also insured at a lower rate and as a negative effect, it discourages insuring medium risks. According to Ohlsson and Johansen (2010), the idea is that if an insurance company charges too high a premium for some policies, these will be lost to a competitor with a fairer price. Suppose that a company charges too little for young drivers and too much for old drivers; then they will tend to loose old drivers to competitors while attracting young drivers; this adverse selection will result in economic loss both ways: by losing profitable and gaining underpriced policies. Therefore, non-life-insurance pricing techniques are mainly employed to combat the phenomenon of anti-selection by dividing the insurance portfolio into sub-portfolios based on certain influence