Applying the Tweedie model for improved microinsurance pricing
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Applying the Tweedie model for improved microinsurance pricing Inmaculada Peña‑Sanchez1 Received: 12 June 2018 / Accepted: 13 March 2019 / Published online: 29 May 2019 © The Geneva Association 2019
Abstract Microinsurance usually involves basic rate making due to the scarcity of data and the lack of actuarial skills, causing microinsurers to add significant charges to premiums to compensate for unexpected variations in risk assessment. The situation could be improved by applying predictive modelling techniques to enable better pricing in the microinsurance market. This paper proposes the application of a generalised linear model with the Tweedie compound Poisson–Gamma distribution for a bundled microinsurance in the Philippines. The risk factors considered are mainly derived from the available database and are related to the features of the insured. The results of the predictive analysis point out that there are three predictors that best fit the model: age of the insured, policy age, and population density. The application of the Tweedie model provides fair and accurate risk premiums that outperform the model currently applied by the company and enhance its risk control. Keywords Microinsurance · Pricing · Generalised linear model · Tweedie model · Risk premium · Inclusive
Introduction This paper deals with enhancing the pricing methodology of microinsurance products. More sophisticated pricing can contribute to both actuarial accuracy and improved access to a more suitably priced product. On a high level of policy objectives, such an improvement in methodology contributes to the enhancement of inclusive financial systems, i.e., by reducing price barriers to financial services that benefit the poor and other vulnerable groups (Allen et al. 2016; Demirguc-Kunt and Electronic supplementary material The online version of this article (https://doi.org/10.1057/s4128 8-019-00130-0) contains supplementary material, which is available to authorized users. * Inmaculada Peña‑Sanchez [email protected] 1
Madrid, Spain Vol.:(0123456789)
366 I. Peña‑Sanchez
Klapper 2012). The providers of microinsurance products to resource-poor populations are at present mainly regulated financial institutions, such as microfinance institutions, medium-sized local stock and mutual organisations, cooperatives, nongovernmental organisations and governmental agencies. In addition, a growing number of informal providers, such as community-based organisations, are becoming providers at grassroots level (Barbin et al. 2002; Biener et al. 2014; Churchill 2006; IAA 2018). Some insurers offering microinsurance products do so, at least in the short term, to demonstrate positive corporate social responsibility rather than to gain an attractive return on investments. However, microinsurance could contribute to the social and economic development of emerging countries by diversifying the risk pool, for example in new market niches such as providing access to insurance for people on a low income. In the long term, adding this market segmen
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