Modelling Dependence in Insurance Claims Processes with Lévy Copulas
ASTIN Bulletin, Vol. 41, No. 2, pp. 575-609
25 Pages Posted: 3 Aug 2011 Last revised: 6 Jan 2012
Date Written: August 3, 2011
In this paper we investigate the potential of Lévy copulas as a tool for modelling dependence between compound Poisson processes and their applications in insurance. We analyse characteristics regarding the dependence in frequency and dependence in severity allowed by various Lévy copula models. Through the introduction of new Lévy copulas and comparison with the Clayton Lévy copula, we show that Lévy copulas allow for a great range of dependence structures.
Procedures for analysing the fit of Lévy copula models are illustrated by fitting a number of Lévy copulas to a set of real data from Swiss workers compensation insurance. How to assess the fit of these models with respect to the dependence structure exhibited by the dataset is also discussed.
Finally, we provide a decomposition of the trivariate compound Poisson process and discuss how trivariate Lévy copulas model dependence in this multivariate setting.
Keywords: Lévy Copula, Dependence, Compound Poisson Process, Insurance, Real Data
JEL Classification: G22, C46, C51, C52
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