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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…

Role of Generalised Linear Model in Non Life Pricing - Phase1

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We will cover a series of topics relating to how Non Life Pricing is done through GLM.
But first let's see what is GLM

Generalised Linear Model Before Jumping on to what is GLM, let’s see what is Linear models 1.Linear Models:
Let’s take the example of Weight (Y) and Height (X). The aim of linear models is to find the line of best fit through the data points.



      Here is your X axis is Height and Y axis is your Weight. Y = B0­ + B1x
Line of Best Fit is B0­ + B1x where B0 is intercept on Y axis and B1 is the gradient.
Now the question is how that line comes?
Well, line is chosen in such a way to minimize the sum of squared error terms where error terms are distances from data points to straight line, error terms are normally distributed with mean 0 and variance σ2.


2.Multiple Linear Regression:
We can extend our model to allow for other predictive variables. For example, we can decide that Weight can depend on height and calories consumed per day both. So here we cannot find the line of b…

Explanation of Motor Insurance

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Motor Insurance or Vehicle Insurance: Motor insurance is an insurance policy that protects the owner of the vehicle against any financial loss arising out of damage or theft of vehicle.
Motor vehicle coverage also includes damage caused to third party or property.
Motor Insurance is mandatory in India.
Motor Insurance is available for both cars and two wheelers. Now the premium will be lower for two-wheeler as compared to Car wheeler, as we know the more the sum insured, the more will be the premium, keeping all things constant.
Generally there are two types of Vehicle Insurance: 1.)Third-Party Car Insurance 2.)Comprehensive Car Insurance
Third Party Car Insurance: 1.Provides coverage against any legal liability arising out of injuries to a third party when the policyholder is at fault. 2.Third party cover does not pay for repair of damage to your car or if you suffer any car-related injuries. 3.It is mandatory for every motor vehicle owner to buy at least third-party insurance coverage in In…