Role of Generalised Linear Model in non-life pricing Phase3

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Before reading this article, make sure that you read phase1 and phase2. Here are the link:
Phase1: http://www.actuarysense.com/2018/10/role-of-generalised-linear-model-in-non.html
Phase2: http://www.actuarysense.com/2018/11/role-of-generalised-linear-model-in-non.html So we know that the purpose of GLM is to find the relationship between mean of the response variable and covariates.

In this Article we are going to talk about Linear Predictors.
Linear Predictor: Let’s denote it with, “η” (eta). So, linear predictor is actually a function of covariates. For example, in the normal linear model where function is Y = B0 + B1x. So linear predictor will be η = B0 + B1x. Always note that linear predictor has to be linear in its parameter. In this case parameters are B0 and B1. But still the question is how I came up with B0 + B1x as a function? First of all, note that broadly there are two types of Covariates. 1. Variables: It takes the numerical value. For example: age of policyholder, years of ex…

What is Insurance and how it works ?

Definition:


  • A promise of Compensation for specific Potential future losses in exchange for a periodic payment.
  • A Contract Between Two parties whereby one party agrees to undertake the risk of another in exchange for consideration known as premium and promises to pay a fixed sum of money to the other party  on happening of an uncertain event(death) or expiry of certain period (in case of life insurance) or to indemnify the other party on happening of an uncertain event(in case of general insurance)

How Insurance works:
  • Sharing of risks by pooling of funds
  • When pool is managed by individuals , it is called  Mutual Insurance
  • When it is managed by a company, it is called general/life insurance


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