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Risks 2017, 5(4), 54; doi:10.3390/risks5040054

Exposure as Duration and Distance in Telematics Motor Insurance Using Generalized Additive Models

1
Département de Mathématiques, Université du Québec à Montréal (UQAM); Montréal, QC H3C 3P8, Canada
2
Department of Econometrics, Riskcenter-IREA, Universitat de Barcelona, 08007 Barcelona, Spain
*
Author to whom correspondence should be addressed.
Received: 16 July 2017 / Revised: 2 September 2017 / Accepted: 22 September 2017 / Published: 25 September 2017
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Abstract

In Pay-As-You-Drive (PAYD) automobile insurance, the premium is fixed based on the distance traveled, while in usage-based insurance (UBI) the driving patterns of the policyholder are also considered. In those schemes, drivers who drive more pay a higher premium compared to those with the same characteristics who drive only occasionally, because the former are more exposed to the risk of accident. In this paper, we analyze the simultaneous effect of the distance traveled and exposure time on the risk of accident by using Generalized Additive Models (GAM). We carry out an empirical application and show that the expected number of claims (1) stabilizes once a certain number of accumulated distance-driven is reached and (2) it is not proportional to the duration of the contract, which is in contradiction to insurance practice. Finally, we propose to use a rating system that takes into account simultaneously exposure time and distance traveled in the premium calculation. We think that this is the trend the automobile insurance market is going to follow with the eruption of telematics data. View Full-Text
Keywords: pricing; statistical inference; GAM models; pay-as-you-drive; usage-based insurance; GPS-based insurance; accident risk pricing; statistical inference; GAM models; pay-as-you-drive; usage-based insurance; GPS-based insurance; accident risk
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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

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Boucher, J.-P.; Côté, S.; Guillen, M. Exposure as Duration and Distance in Telematics Motor Insurance Using Generalized Additive Models. Risks 2017, 5, 54.

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