Statistics: Quiz 3

Instructor: Karthik Sriram

Type: This is a take home. A hard copy of the main answer sheet should be submitted to
the FPM office by the due date/time and any details such as codes, excel file etc. should
be emailed to me. The formulations, approach and reasoning should be clearly explained
while answering. Just writing down final numbers is not acceptable.
Due Date: 1-12-2014, before 5 pm, submit to FPM office.
The data for this question is adapted from the book Regression Modelling with
Actuarial and Financial Applications by Edward Frees. The excerpt from the book
describing the data is given below. Using the data provided to you, answer the
questions that follow.

1. A basic formulation to model severity per claim, is as follows:

= .
The index

(0,

is for the rows in the data.

a. (5 Marks) Derive the formula to estimate

using Least Squares Regression (or
equivalently MLE) for this model? (Note that there is NO intercept)
b. (5 Marks) Derive the formula to estimate standard error of
c. (5 Marks) Derive the ML Estimator of
d. (5 Marks) How would you estimate

? Is it unbiased?
unbiasedly? Justify the answer.

e. (5 Marks) Using the above answers compute a 95% confidence interval for
the average severity per claim.

, i.e.

f. The above model assumes that average severity is the same for all distance
categories 1-5 ( as in the variable Kilometers). An actuary suggests that the
average severity is proportional to the value of the distance category. i.e. If
average severity for distance category 1 is , then the average severities for
distance categories 2,3,4 and 5 are 2 , 3 , 4
5 respectively.
(5 Marks) How would you reformulate the model based on this
(i)
information?.
(ii)
(10 Marks) Estimate this model using a package, say Minitab or R or SPSS
and obtain a 95% confidence interval for average claim severity of a
vehicle in distance category 2.