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Unraveling the Predictive Power of Telematics Data in Car Insurance Pricing

36 Pages Posted: 18 Nov 2016 Last revised: 17 May 2017

Verbelen Roel

KU Leuven

Katrien Antonio

KU Leuven; University of Amsterdam

Gerda Claeskens

Katholieke Universiteit Leuven (KUL)

Date Written: January 18, 2017

Abstract

A data set from a Belgian telematics product aimed at young drivers is used to identify how car insurance premiums can be designed based on the telematics data collected by a black box installed in the vehicle. In traditional pricing models for car insurance, the premium depends on self-reported rating variables (e.g. age, postal code) which capture characteristics of the policy(holder) and the insured vehicle and are often only indirectly related to the accident risk. Using telematics technology enables tailor-made car insurance pricing based on the driving behavior of the policyholder. We develop a statistical modeling approach using generalized additive models and compositional predictors to quantify and interpret the effect of telematics variables on the expected claim frequency. We find that such variables increase the predictive power and render the use of gender as a discriminating rating variable redundant.

Keywords: Pay-as-you-drive insurance, Usage-based insurance, Risk classification, Generalized additive models, Compositional predictors, Structural zeros

Suggested Citation

Roel, Verbelen and Antonio, Katrien and Claeskens, Gerda, Unraveling the Predictive Power of Telematics Data in Car Insurance Pricing (January 18, 2017). Available at SSRN: https://ssrn.com/abstract=2872112 or http://dx.doi.org/10.2139/ssrn.2872112

Verbelen Roel (Contact Author)

KU Leuven ( email )

Naamsestraat 69
B-3000 Leuven, Vlaams-Brabant 3000
Belgium

Katrien Antonio

KU Leuven ( email )

Leuven, Vlaams-Brabant

HOME PAGE: http://www.econ.kuleuven.be/katrien.antonio

University of Amsterdam ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Gerda Claeskens

Katholieke Universiteit Leuven (KUL) ( email )

Leuven, B-3000
Belgium

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