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Bayesian Hierarchical Risk Premium Modeling with Model Risk: Addressing Non-Differential Berkson Error

Kim, Minkun, Bezbradica, Marija orcid logoORCID: 0000-0001-9366-5113 and Crane, Martin orcid logoORCID: 0000-0001-7598-3126 (2024) Bayesian Hierarchical Risk Premium Modeling with Model Risk: Addressing Non-Differential Berkson Error. Applied Sciences, 15 (210). pp. 1-38. ISSN 2076-3417

For general insurance pricing, aligning losses with accurate premiums is crucial for insurance companies’ competitiveness. Traditional actuarial models often face challenges like data heterogeneity and mismeasured covariates, leading to misspecification bias. This paper addresses these issues from a Bayesian perspective, exploring connections between Bayesian hierarchical modeling, partial pooling techniques, and the Gustafson correction method for mismeasured covariates. We focus on Non-Differential Berkson (NDB) mismeasurement and propose an approach that corrects such errors without relying on gold standard data. We discover the unique prior knowledge regarding the variance of the NDB errors, and utilize it to adjust the biased parameter estimates built upon the NDB covariate. Using simulated datasets developed with varying error rate scenarios, we demonstrate the superiority of Bayesian methods in correcting parameter estimates. However, our modeling process highlights the challenge in accurately identifying the variance of NDB errors. This emphasizes the need for a thorough sensitivity analysis of the relationship between our prior knowledge of NDB error variance and varying error rate scenarios.
Item Type:Article (Published)
Refereed:Yes
Uncontrolled Keywords:Bayesian hierarchical model; heterogeneity; non-differential Berkson measurement error; aggregate insurance claim; risk premium; partial pooling; Gustafson correction
Subjects:Computer Science > Computer engineering
Computer Science > Computer security
Computer Science > Software engineering
DCU Faculties and Centres:DCU Faculties and Schools > Faculty of Engineering and Computing
DCU Faculties and Schools > Faculty of Engineering and Computing > School of Computing
Research Institutes and Centres > ADAPT
Publisher:MDPI AG
Official URL:https://www.mdpi.com/2076-3417/15/1/210
Copyright Information:Authors
ID Code:30668
Deposited On:17 Jan 2025 14:40 by Gordon Kennedy . Last Modified 17 Jan 2025 14:40

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