Insurance Ratemaking and a Gini Index

32 Pages Posted: 17 May 2014

See all articles by Edward W. Frees

Edward W. Frees

University of Wisconsin - Madison

Glenn Meyers

ISO Innovative Analytics

A. David Cummings

ISO Innovative Analytics

Date Written: June 2014

Abstract

Welfare economics uses Lorenz curves to display skewed income distributions and Gini indices to summarize the skewness. This article extends the Lorenz curve and Gini index by ordering insurance risks; the ordering variable is a risk‐based score relative to price, known as a relativity. The new relativity‐based measures can cope with adverse selection and quantify potential profit. Specifically, we show that the Gini index is proportional to a correlation between the relativity and an out‐of‐sample profit (price in excess of loss). A detailed example using homeowners insurance demonstrates the utility of these new measures.

Suggested Citation

Frees, Edward (Jed) W. and Meyers, Glenn and Cummings, A. David, Insurance Ratemaking and a Gini Index (June 2014). Journal of Risk and Insurance, Vol. 81, Issue 2, pp. 335-366, 2014. Available at SSRN: https://ssrn.com/abstract=2438129 or http://dx.doi.org/10.1111/j.1539-6975.2012.01507.x

Edward (Jed) W. Frees (Contact Author)

University of Wisconsin - Madison ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

Glenn Meyers

ISO Innovative Analytics ( email )

San Francisco, CA
United States

A. David Cummings

ISO Innovative Analytics ( email )

San Francisco, CA
United States

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