Case Studies Using Panel Data Models

Authors:
  • EFEdward W. Frees
    Edward W. Frees
  • VYVirginia R. Young
    Virginia R. Young
  • YLYu Luo
    Yu Luo
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Abstract
In this paper, we examine case studies from three different areas of insurance practice: health care, workers’ compensation, and group term life. These different case studies illustrate how the broad class of panel data models can be applied to different functional areas and to data that have different features. Panel data, also known as longitudinal data, models are regression-type models that have been developed extensively in the biological and economic sciences. The data features that we discuss include heteroscedasticity, random and fixed effect covariates, outliers, serial correlation, and limited dependent variable bias. We demonstrate the process of identifying these features using graphical and numerical diagnostic tools from standard statistical software. Our motivation for examining these cases comes from credibility rate making, a technique for pricing certain types of health care, property and casualty, workers’ compensation, and group life coverages. It has been a part of actuarial practice since Mowbray’s (1914) fundamental contribution. In earlier work, we showed how many types of credibility models could be expressed as special cases of panel data models. This paper exploits this link by using tools developed in connection with panel data models for credibility rate-making purposes. In particular, special routines written for credibility rate-making purposes are not required.

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