COTOR Training Session II

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# COTOR Training Session II - PowerPoint PPT Presentation

COTOR Training Session II. GL Data: Long Tails, Volatility, Data Transforms September 11, 2006. COTOR Session II Presenters. Doug Ryan MBA Actuaries, Inc. Phil Heckman Heckman Actuarial Consulting. Assumptions and Verification. Behavior of mean, variance, distribution (sometimes)

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### COTOR Training Session II

GL Data: Long Tails, Volatility, Data Transforms

September 11, 2006

COTOR Session II Presenters

Doug Ryan

MBA Actuaries, Inc.

Phil Heckman

Heckman Actuarial Consulting

Assumptions and Verification
• Behavior of mean, variance, distribution (sometimes)
• Verify by examining
• Descriptive statistics
• Regression diagnostics
• Scatter plots
• Residual plots
What are they?
• Slope standard error
• R square: Percentage of variance explained by regression
• Intercept standard error
• Degrees of Freedom: # Observations - # Parameters
A Key Diagnostic: Standard Residual
• Standardize by subtracting mean (should be zero) and divide by standard deviation
• A z-score
• Z = (x – mean)/sd
Two Factor Model
• One factor model: incremental loss =f(prior cumulative)
• Compute separate function for each development age
• Can use Excel regression functions
• Two factor model: incremental loss = f(accident period, development age)
• Bornhuetter-Ferguson is an example
• Nonlinear function, Use solver
Why use logarithms?
• Descriptive statistics indicate data not normal
• A-priori belief that model is mutiplicative
• Residuals increase with value of dependent variable
Iterative Least Squares