Predictive Modeling Applications in Actuarial Science

Chapter 11 - Spatial Modeling


Eike Brechmann | Technische Universität München

Claudia Czada | Technische Universität München

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This chapter presents statistical models that can handle spatial dependence among variables. Spatial dependence refers to the phenomenon that variables observed in areas close to each other are often related. Ignoring data heterogeneity due to such spatial dependence patterns may cause overdispersion and erroneous conclusions. In an actuarial context, spatial information is important to take into account in many cases such as in the insurance of buildings threatened by natural catastrophes, in health insurance, where diseases affect specific regions, and also in car insurance, as we discuss in an application.

In particular, we describe the most common spatial autoregressive models and show how to build a joint model for claim severity and claim frequency of individual policies based on generalized linear models with underlying spatial dependence. The results show the importance of explicitly considering spatial information in the rate making methodology.