Hierarchical random effects model for insurance pricing of vehicles belonging to a fleet

61 Pages Posted: 23 Feb 2021

See all articles by Denise Desjardins

Denise Desjardins

University of Montreal - Center for Research on Transportation

Georges Dionne

HEC Montreal - Department of Finance

Yang Lu

Dept. Maths & Statis, Concordia University

Date Written: February 18, 2021

Abstract

We propose a hierarchical random effect model for the posterior insurance ratemaking of vehicles belonging to a fleet by allowing random effects for fleet, vehicle, and time. The model is an alternative to the gamma-Dirichlet model of Angers et al (2018), which does not allow for a closed form posterior ratemaking formula. Our theoretical extension derives a simple and tractable closed form ratemaking formula based on a hierarchical random effects specification. We estimate the corresponding econometric model and compute insurance premiums in relation to the past experience of both the vehicle and the fleet. Our econometric model can also be applied to any other dynamic count modeling application with random individual, time, and common effects, such as labor contracting, chirurgical accidents, or any other random event implying principals and many agents.

Keywords: Hierarchical model, vehicle insurance pricing, posterior ratemaking, random effect, hierarchical random effects, panel data.

JEL Classification: C23, C25, C55, G22.

Suggested Citation

Desjardins, Denise and Dionne, Georges and Lu, Yang, Hierarchical random effects model for insurance pricing of vehicles belonging to a fleet (February 18, 2021). Available at SSRN: https://ssrn.com/abstract=3788515 or http://dx.doi.org/10.2139/ssrn.3788515

Denise Desjardins

University of Montreal - Center for Research on Transportation ( email )

C.P. 6128, Succ. Centre-Ville
Montreal, Quebec H3C 3J7
Canada

Georges Dionne (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-6596 (Phone)
514-340-5019 (Fax)

HOME PAGE: http://www.hec.ca/gestiondesrisques/

Yang Lu

Dept. Maths & Statis, Concordia University ( email )

Blvd. maisonneuve
Montreal, H4R 3B3
Canada

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