Stochastic gradient boosting frequency-severity model of insurance claims.

Abstract

The standard GLM and GAM frequency-severity models assume independence between the claim frequency and severity. To overcome restrictions of linear or additive forms and to relax the independence assumption, we develop a data-driven dependent frequency-severity model, where we combine a stochastic gradient boosting algorithm and a profile likelihood approach to estimate parameters for both of the claim frequency and average claim severity distributions, and where we introduce the dependence between the claim frequency and severity by treating the claim frequency as a predictor in the regression model for the average claim severity. The model can flexibly capture the nonlinear relation between the claim frequency (severity) and predictors and complex interactions among predictors and can fully capture the nonlinear dependence between the claim frequency and severity. A simulation study shows excellent prediction performance of our model. Then, we demonstrate the application of our model with a French auto insurance claim data. The results show that our model is superior to other state-of-the-art models.