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Transcript of MULTIPLE TRIANGLE MODELLING ( or MPTF ) APPLICATIONS MULTIPLE LINES OF BUSINESS- DIVERSIFICATION?...
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MULTIPLE TRIANGLE MODELLING ( or MPTF )
APPLICATIONS
• MULTIPLE LINES OF BUSINESS- DIVERSIFICATION?
• MULTIPLE SEGMENTS
– MEDICAL VERSUS INDEMNITY
– SAME LINE, DIFFERENT STATES
– GROSS VERSUS NET OF REINSURANCE
– LAYERS
• CREDIBILITY MODELLING
– ONLY A FEW YEARS OF DATA AVAILABLE
– HIGH PROCESS VARIABILITY MAKES IT DIFFICULT TO
ESTIMATE TRENDS
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BENEFITS
• Level of Diversification- optimal capital allocation by LOB
• Mergers/Acquisitions
• Writing new business- how is it related to what is already on the books?
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More information will be available at the St. James Room
4th floor 7 – 11 pm.
ICRFS-ELRF will be available for FREE!
![Page 4: MULTIPLE TRIANGLE MODELLING ( or MPTF ) APPLICATIONS MULTIPLE LINES OF BUSINESS- DIVERSIFICATION? MULTIPLE SEGMENTS –MEDICAL VERSUS INDEMNITY –SAME LINE,](https://reader036.fdocuments.us/reader036/viewer/2022070410/56649ea95503460f94bada92/html5/thumbnails/4.jpg)
Model Displays for LOB1 and LOB3
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LOB1 and LOB3 Weighted Residual Plots for Calendar Year
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Pictures shown above correspond to two linear models, which described
by the following equations
Without loss of sense and generality two models in (1) could be considered as one linear model:
;),cov(),( Cεεεε 21T21 E;2,1, iE 0ε i
Rεε 21 ),(corr
)1(,
,
2222
1111
εβXy
εβXy
)2(
2
1
2
1
2
1
2
1
ε
ε
β
β
X0
0X
y
y
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For illustration of the most simple case we suppose that size of vectors y
in models (1) are the same and equal to n, also we suppose that
In this case
εXβy
;2,1,)var()( 2 iE iniTii Iεε,ε 12nIC
2212
1221)var(
nn
nn
II
IIΣε
Which could be rewritten as
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For example, when n = 3
2212
2212
2212
1221
1221
1221
0000
0000
0000
0000
0000
0000
Σ
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There is a big difference between linear models in (1) and linear model (2), as in (1) we consider models separately and could not use additional information, from dependency of these models, what we can do in model (2). To extract this additional information we need to use proper methods to estimate vector of parameters . The estimation
which derived by ordinary least square (OLS) method, does not provide any advantage, as covariance matrix is not participating in estimations. Only general least square (GLS) estimation
yXXXβ TT 1)(ˆ
yΣXXΣXβ 1T1T 1)(~
could help to achieve better results.
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However, it is necessary immediately to underline that we do not know elements of the matrix and we have to estimate them as well. So, practically, we should build iterative process of estimations
and this process will stop, when we reach estimations with satisfactory statistical properties.
)()( ~,
~ mm Σβ
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There are some cases, when model (2) provides the same results as
models in (1). They are: 1. Design matrices in (1) have the same structure ( they are the same
or proportional to each other ).
2. Models in (1) are non-correlated, another words
012
However in situation when two models in (1) have common regressors model (2) again will have advantages in spite of the same structure of design matrices.
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Correlation and Linearity The idea of correlation arises naturally for two random variables that have a joint distribution that is bivariate normal. For each individual variable, two parameters a mean and standard deviation are sufficient to fully describe its probability distribution. For the joint distribution, a single additional parameter is required the correlation.
If X and Y have a bivariate normal distribution, the relationship between them is linear: the mean of Y, given X, is a linear function of X ie:
βXαY|XE
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The slope is determined by the correlation , and the standard deviations and :
The correlation between Y and X is zero if and only if the slope is zero.
Also note that, when Y and X have a bivariate normal distribution, the conditional variance of Y, given X, is constant ie not a function of X:
XY β
2|XYY|XVar
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This is why, in the usual linear regression model Y = + X + the variance of the "error" term does not depend on X.However, not all variables are linearly related. Suppose we have two random variables related by the equation
where T is normally distributed with mean zero and variance 1.
What is the correlation between S and T ?
2TS
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Linear correlation is a measure of how close two random variables are to being linearly related.
In fact, if we know that the linear correlation is +1 or -1, then there must be a deterministic linear relationship Y = + X between Y and X (and vice versa).
If Y and X are linearly related, and f and g are functions, the relationship between f( Y ) and g( X ) is not necessarily linear, so we should not expect the linear correlation between f( Y ) and g( X ) to be the same as between Y and X.
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A common misconception with correlated
lognormals Actuaries frequently need to find covariances or correlations between variables such as when finding the variance of a sum of forecasts (for example in P&C reserving, when combining territories or lines of business, or computing the benefit from diversification).
Correlated normal random variables are well understood. The usual multivariate distribution used for analysis of related normals is the multivariate normal, where correlated variables are linearly related. In this circumstance, the usual linear correlation ( the Pearson correlation ) makes sense.
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However, when dealing with lognormal random variables (whose logs are normally distributed), if the underlying normal variables are linearly correlated, then the correlation of lognormals changes as the variance parameters change, even though the correlation of the underlying normal does not.
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All three lognormals below are based on normal variables with correlation 0.78, as shown left, but with different standard deviations.
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We cannot measure the correlation on the log-scale and apply that correlation directly to the dollar scale, because the correlation is not the same on that scale.
Additionally, if the relationship is linear on the log scale (the normal variables are multivariate normal) the relationship is no longer linear on the original scale, so the correlation is no longer linear correlation. The relationship between the variables in general becomes a curve:
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Weighted Residual Plots for LOB1 and LOB3 versus Calendar Years
What does correlation mean?
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Model Displays for LOB1 and LOB3 for Calendar Years
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Model for individual iota parameters
0321.0ˆ;0814.0ˆ;,~ˆ
0331.0ˆ;1194.0ˆ;,~ˆ
222222
112111
N
N
001027.0000344.0
000344.0001097.0ˆ,0814.0
1194.0ˆ,,~
2
1 ΣμΣμN
359013.0ˆ),,( 21 corr
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There are two types of correlations involved in calculations of reserve distributions.
Weighted Residual Correlations between datasets:
0.359013 – is weighted residual correlation between datasets LOB1 and LOB3;
Correlations in parameter estimates:0.324188 – is correlation between iota
parameters in LOB1 and LOB3.
These two types of correlations induce correlations between triangle cells and within triangle cells.
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Common iota parameter in both triangles
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Two effects:
Same parameter for each LOB increases correlations and CV of aggregates
Single parameter with lower CV reduces CV of aggregates
0267.0ˆ;0996.0ˆ;,~ 2 N
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Forecasted reserves by accident year, calendar year and total are correlated
Indicates dependency through residuals’ and parameters’ correlations
Indicates dependency through parameter estimate correlations only
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Dependency of aggregates in aggregate table
Var(Aggregate) >> Var(LOB1) + Var(LOB2).
In each forecast cell and in aggregates by accident year and
calendar year (and total)
Correlation between reserve distributions is 0.833812
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HistogramKernelLognormalGamma
Density Comparisons (Acc. Year: Total)
1 Unit = $1,000,000,0001.2 1.4 1.6 1.8 2 2.2 2.4 2.6 2.8 3
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
Simulations from lognormals correlated within LOB and between LOBs
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GROSS VERSUS NET
Model Display -1
Is your outward reinsurance program optimal?
6% stable trend in calendar year
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Model Display – 2
Zero trend in calendar year.Therefore ceding part that is growing!
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Weighted Residual Covariances Between Datasets
Weighted Residual Correlations Between Datasets
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Weighted Residuals versus Accident Year
Gross
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Net
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Weighted Residual Normality Plot
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Accident Year Summary
CV Net > CV Gross – Why? It is not good for cedant?
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MODELING LAYERS
• Similar Structure• Highly Correlated• Surprise Finding!
CV of reserves limited to $1M is the same as CV of reserves limited to $2M !
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Model Display for All 1M: PL(I)
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Model Display for All 2M: PL(I)
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Model Display for All 1Mxs1M: PL(I)
Note that All 1Mxs1M has zero inflation, and All 2M has lower inflation than All 1M, and distributions of parameters going forward are correlated
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Residual displays vs calendar years show high correlations between three triangles.
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Weighted Residual Covariances Between Datasets
Weighted Residual Correlations Between Datasets
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Compare Accident Year Summary
Consistent forecasts based on composite model.
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If we compare forecast by accident year for Limited 1M and limited 2M t is easy to see that CV is the same.
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More information will be available at the St. James Room
4th floor 7 – 11 pm.
ICRFS-ELRF will be available for FREE!