An example: Insurance pricing

A key issue in generating insurance rates is that if premiums are too high, consumers will turn to other companies to purchase insurance. Conversely, if premiums are too low, companies will not earn enough premiums to cover claims.

Image credit: Baystreet.ca

In deciding these rates, therefore, companies need to have an adequate estimation of the expected amount a policyholder might claim in case of an accident. To appropriately set the prices for customers, one crucial task is to predict the size of actual claims. One particular difficulty in predicting such claims is that there are many policyholder’s with no accidents and consequently, no…

Sathesan Thavabalasingam

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