North American Actuarial JournalVolume 16, Issue 2, 2012Tze Leung Lai & Kevin Haoyu Sun
The conventional approach to evolutionary credibility theory assumes a linear state-space model for the longitudinal claims data so that Kalman filters can be used to estimate the claims’ expected values, which are assumed to form an autoregressive time series. We propose a class of linear mixed models as an alternative to linear state-space models for evolutionary credibility and show that the predictive performance is comparable to that of the Kalman filter when the claims are generated by a linear state-space model. More importantly, this approach can be readily extended to generalized linear mixed models for the longitudinal claims data. We illustrate its applications by addressing the “excess zeros” issue that a substantial fraction of policies does not have claims at various times in the period under consideration.
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