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Explaining functional principal component analysis to actuarial science with an example on vehicle insurance

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  • Segovia-Gonzalez, M.M.
  • Guerrero, F.M.
  • Herranz, P.

Abstract

Given the high competitiveness in the vehicle insurance market, the need arises for an adequate pricing policy. To this end, insurance companies must select risks in a way that allows the expected claims ratio to come as close as possible to the real claims ratio. The use of new analytical tools which provide more information is of great interest. In this paper it is shown how functional principal component analysis can be useful in actuarial science. An empirical study is carried out with data from a Spanish insurance company to estimate the risk of occurrence of a claim in terms of the driver's age, whilst taking into account other relevant variables.

Suggested Citation

  • Segovia-Gonzalez, M.M. & Guerrero, F.M. & Herranz, P., 2009. "Explaining functional principal component analysis to actuarial science with an example on vehicle insurance," Insurance: Mathematics and Economics, Elsevier, vol. 45(2), pages 278-285, October.
    • Handle: RePEc:eee:insuma:v:45:y:2009:i:2:p:278-285
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    References listed on IDEAS

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    1. Georges Dionne & Christian Gourieroux & Charles Vanasse, 2001. "Testing for Evidence of Adverse Selection in the Automobile Insurance Market: A Comment," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 444-473, April.
    2. Philippe Besse & J. Ramsay, 1986. "Principal components analysis of sampled functions," Psychometrika, Springer;The Psychometric Society, vol. 51(2), pages 285-311, June.
    3. Artis, Manuel & Ayuso, Mercedes & Guillen, Montserrat, 1999. "Modelling different types of automobile insurance fraud behaviour in the Spanish market," Insurance: Mathematics and Economics, Elsevier, vol. 24(1-2), pages 67-81, March.
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