GLM Theory

7/17/19

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Course outline
 GLM theory
 Data preparation
 Emblem hands on
 Evaluation techniques

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Agenda – GLM theory
 Linear modeling
 Model parameterization
 GLM extensions to ordinary linear models
 Modeling diagnostics
 GLMs in Emblem

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Agenda – GLM theory
 Linear modeling
 Model parameterization
 GLM extensions to ordinary linear models
 Modeling diagnostics
M

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Linear modeling terminology
Y = 2 + 0.7 X + N(0, 0.2)

4.5
4.0
Observations
Response (Y)

3.5
Y

3.0
2.5

1.0 1.5 2.0 2.5 3.0

Predictor Variable (X)

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Classical linear regression
Yi = β0 + β1Xi + εi
4.5

 Yi is the response of the ith observation

4.0

 Xi is the value of the variable in the ith

3.5
Y

observation
3.0

ei  The relationship between Y and X is linear

2.5

 β0 (intercept, base) and β1 (slope) are

1.0 1.5 2.0 2.5 3.0
parameters to be estimated
X

E[Y] = b0 + b1X
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Classical linear regression – least squares
Yi = β0 + β1Xi + εi
4.5

 Yi is the response of the ith observation

4.0

 Xi is the value of the variable in the ith

3.5
Y

observation
3.0

 The relationship between Y and X is linear

2.5

 β0 (intercept) and β1 (slope) are

1.0 1.5 2.0 2.5 3.0
parameters to be estimated
X

 Model fit by minimizing sum of εi2

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 Classical linear regression – max. likelihood
Yi = β0 + β1Xi + εi
4.5

 Yi is the response of the ith observation

4.0

 Xi is the value of the variable in the ith

observation
3.5
Y

 The relationship between Y and X is linear

 β0 (intercept) and β1 (slope) are
3.0

parameters to be estimated\
 Model fit by minimizing product of f(εi)
2.5

1.0 1.5 2.0 2.5 3.0

Assumption: εi follows normal distribution with mean zero and constant variance
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Multiple linear regression
Yi = β0 + β1Xi1 + β2Xi2 + β3Xi3 + … + βnXin + εi

This model can now be written in vector notation as:

= ∙ +
Where:
 is a vector of our observed values (response)
 is our “Design Matrix”
 is the vector of indicated parameters
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Agenda – GLM theory
 Linear modeling
 Model parameterization
 GLM extensions to ordinary linear models
 Modeling d
M

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 


−

 Continuous/Numeric variables
− If a variable is continuous, we can instead define a variate which can reduce the
parameterization of the model, with each order of the variate being represented by one term
in the formula

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 Gender
Weight Av Severity This categorical variable requires a two-
parameter model.
M 2105 $ 2,093
F 2832 $ 1,733

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 Gender
Weight Av Severity This categorical variable requires a two-
parameter model.
M 2105 $ 2,093
F 2832 $ 1,733

E[Y ]  b 0  b1 X 1 Parameter Estimates

β0 = 1733
β1 = 360

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 Gender
Weight Av Severity This categorical variable requires a two-
parameter model.
M 2105 $ 2,093
F 2832 $ 1,733
Binary Variable: Parameter Estimates
Predicted Severity 1 for male, 0 for female
β0 = 1733
β1 = 360
E[Y ]  b 0  b1 X 1
Base (female) Severity Additional Severity for being male

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 Gender Area
Weight Av Severity Weight Av Severity
M 2105 $ 2,093 A 1181 $ 1,754
F 2832 $ 1,733 B 1021 $ 1,758
C 1493 $ 1,919
D 524 $ 1,739
E 413 $ 2,104
F 305 $ 2,629

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 Gender Area
Weight Av Severity Weight Av Severity
M 2105 $ 2,093 A 1181 $ 1,754
F 2832 $ 1,733 B 1021 $ 1,758
C 1493 $ 1,919
D 524 $ 1,739
E 413 $ 2,104
F 305 $ 2,629

E[Y ]  b 0  b1 X 1  b 2 X 2  b 3 X 3  b 4 X 4  b 5 X 5  b 6 X 6
β0: Base severity (Female from Area C)
X1: Binary variable (Male = 1, Female = 0) β1: Add’l severity from Male
X2: Binary variable (Area A = 1, else = 0) β2: Add’l severity from Area A
X3: Binary variable (Area B = 1, else = 0) β3: Add’l severity from Area B
X4: Binary variable (Area D = 1, else = 0) β4: Add’l severity from Area D
X5: Binary variable (Area E = 1, else = 0) β5: Add’l severity from Area E
X6: Binary variable (Area F = 1, else = 0) β6: Add’l severity from Area F

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 Gender Area
Weight Av Severity Weight Av Severity
M 2105 $ 2,093 A 1181 $ 1,754
F 2832 $ 1,733 B 1021 $ 1,758
C 1493 $ 1,919
D 524 $ 1,739
E 413 $ 2,104
F 305 $ 2,629

E[Y ]  b 0  b1 X 1  b 2 X 2  b 3 X 3  b 4 X 4  b 5 X 5  b 6 X 6
β0: Base severity (Female from Area C)
X1: Binary variable (Male = 1, Female = 0) β1: Add’l severity from Male
X2: Binary variable (Area A = 1, else = 0) β2: Add’l severity from Area A
X3: Binary variable (Area B = 1, else = 0) β3: Add’l severity from Area B
X4: Binary variable (Area D = 1, else = 0) β4: Add’l severity from Area D
X5: Binary variable (Area E = 1, else = 0) β5: Add’l severity from Area E
X6: Binary variable (Area F = 1, else = 0) β6: Add’l severity from Area F

Example: Female from Area F E[Y ]  b 0  b 6

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Categorical variables - custom factor
Gender
Weight Av Severity X1: Binary variable (Male = 1, Female = 0)
M 2105 $ 2,093
F 2832 $ 1,733 X2: Binary variable (Area A = 1, else = 0)
X3: Binary variable (Area B = 1, else = 0)
Area X4: Binary variable (Area D = 1, else = 0)
Weight Av Severity X5: Binary variable (Area E = 1, Area F = 1, else = 0)
A 1181 $ 1,754
B 1021 $ 1,758
C 1493 $ 1,919
D 524 $ 1,739
E 413 $ 2,104
F 305 $ 2,629 Group E and F together

E[Y] = β0 + β1X1 + β2X2 + β3X3 + β4X4 + β5X5

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 [GLM fit: Identity Link Function, Normal Error Structure]

Parameter Number Name Value Standard Error Standard Error (%) Weight Weight (%)
1 Mean 1,769.64 99.14477 5.6 4,937 100
- gender (F) 2,832 57.4
2 gender (M) 361.864 100.18706 27.7 2,105 42.6
3 area (A) -174.419 135.53147 77.7 1,181 23.9
4 area (B) -170.408 141.33498 82.9 1,021 20.7
- area (C) 1,493 30.2
5 area (D) -174.622 176.69103 101.2 524 10.6
6 area (E) 173.704 193.48309 111.4 413 8.4
7 area (F) 707.8558 218.65201 30.9 305 6.2

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Agenda – GLM theory
 Linear modeling
 Model parameterization
 GLM extensions to ordinary linear models
 Modeling diagnostics
M

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 Normal • Not restricted to be positive.
• Often inappropriate for insurance

error observations, how often do we have negative

claim counts or loss amounts?

Constant • In most real world data, the variance is some

variance function of the mean.

Additive • Only applies to certain situations and is not as

intuitive for insurance problems. Think about

structure how intuitive a multiplicative rating structure

seems compared to additive.

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Link Function, Equation with g( ) Inverse Link Equation with h( )
g( ) Function, h( )
identity, z = z Y = Xβ + 𝜀 identity, z = z Y = Xβ + 𝜀
log, ln(z) ln(Y) = Xβ + 𝜀 Exponential, 𝑒 Y = eXβ + 𝜀
logit, ln( ) ln( ) = Xβ + 𝜀 Inverse logit, Y = eXβ / (1 + eXβ ) + 𝜀

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Model output: normal error / log link
[GLM fit: Log Link Function, Normal Error Structure]

Parameter Number Name Value Standard Error Standard Error (%) Weight Weight (%) Exp(Value)
1 Mean 7.47 0.0539 0.7 4,937 100 1,749.90

- gender (F) 2,832 57.4

2 gender (M) 0.2051 0.05196 25.3 2,105 42.6 1.2277

3 area (A) -0.0959 0.07417 77.3 1,181 23.9 0.9085

4 area (B) -0.0918 0.0774 84.3 1,021 20.7 0.9123
- area (C) 1,493 30.2
5 area (D) -0.1069 0.09972 93.3 524 10.6 0.8986
6 area (E) 0.098 0.09284 94.7 413 8.4 1.103
7 area (F) 0.3303 0.08776 26.6 305 6.2 1.3914

E[Y] = exp(b1) · exp(b2X2) · exp(b3X3) · . . . · exp(b7X7)

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Model output: normal error / log link
[GLM fit: Log Link Function, Normal Error Structure]

Parameter Number Name Value Standard Error Standard Error (%) Weight Weight (%) Exp(Value)
1 Mean 7.47 0.0539 0.7 4,937 100 1,749.90

- gender (F) 2,832 57.4

2 gender (M) 0.2051 0.05196 25.3 2,105 42.6 1.2277

3 area (A) -0.0959 0.07417 77.3 1,181 23.9 0.9085

4 area (B) -0.0918 0.0774 84.3 1,021 20.7 0.9123
- area (C) 1,493 30.2
5 area (D) -0.1069 0.09972 93.3 524 10.6 0.8986
6 area (E) 0.098 0.09284 94.7 413 8.4 1.103
7 area (F) 0.3303 0.08776 26.6 305 6.2 1.3914

For Gender=F, Area=C

E[Y] = exp(b1) · exp(b2 · 0) · exp(b3 · 0) · . . . · exp(b7 · 0)

= exp(7.47) = 1,749.90
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Model output: normal error / log link
[GLM fit: Log Link Function, Normal Error Structure]

Parameter Number Name Value Standard Error Standard Error (%) Weight Weight (%) Exp(Value)
1 Mean 7.47 0.0539 0.7 4,937 100 1,749.90

- gender (F) 2,832 57.4

2 gender (M) 0.2051 0.05196 25.3 2,105 42.6 1.2277

3 area (A) -0.0959 0.07417 77.3 1,181 23.9 0.9085

4 area (B) -0.0918 0.0774 84.3 1,021 20.7 0.9123
- area (C) 1,493 30.2
5 area (D) -0.1069 0.09972 93.3 524 10.6 0.8986
6 area (E) 0.098 0.09284 94.7 413 8.4 1.103
7 area (F) 0.3303 0.08776 26.6 305 6.2 1.3914

For Gender=M, Area=A

E[Y] = exp(b1) · exp(b2 · 1) · exp(b3 · 1) ·. . . · exp(b7 · 0)

= exp(7.47) · exp(0.2051) · exp(-0.0959)

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= 1,749.90 · 1.2277 · .9085 = 1,951.78
 Normal • Not restricted to be positive.
• Often inappropriate for insurance

error observations, how often do we have negative

claim counts or loss amounts?

Constant • In most real world data, the variance is some

variance function of the mean.

Additive • Only applies to certain situations and is not as

intuitive for insurance problems. Think about

structure how intuitive a multiplicative rating structure

seems compared to additive.

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Generalizing the distribution of Y (error)
 We may assume that Y is distributed according to any member of
the Exponential family of distributions

 Two key features of the Exponential Family:

− The distribution is completely specified in terms of its mean and variance
− The variance of Yi is a function of the mean

 When we select a distribution for our model, we are making an

implicit assumption of how the mean and variance of Y are related

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 Classical linear regression – max. likelihood
4.5

Errors are normally

4.0

distributed
3.5
Y

3.0
2.5

1.0 1.5 2.0 2.5 3.0

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Generalizing the distribution of Y (error)
 We may assume that Y is distributed according to any member of
the Exponential family of distributions

 Two key features of the Exponential Family:

− The distribution is completely specified in terms of its mean and variance
− The variance of Yi is a function of the mean

 When we select a distribution for our model, we are making an

implicit assumption of how the mean and variance of Y are related

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Variance function
 Variance of an exponential family distribution is given by:

 Where:
Distribution V(x)
Normal 1
Poisson x
Gamma x2
Binomial x(1-x)
Inverse Gaussian x3

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Effect of variance function
4.5
4.0
3.5
Y

3.0
2.5

1.0 1.5 2.0 2.5 3.0

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Effect of variance function
4.5
4.0
3.5
Y

3.0
2.5

1.0 1.5 2.0 2.5 3.0

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Effect of variance function
4.5
Line of best fit
with assumed
constant
variance
4.0

Line of best fit

with assumed
increasing
variance
3.5
Y

3.0
2.5

1.0 1.5 2.0 2.5 3.0

X
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 Target Link Function Error
Claim Frequency Log Poisson,
Negative
Binomial
Claim Severity Log Gamma, Inverse
Gaussian
Loss Costs Log Tweedie
Combined Loss Costs Log Gamma
Large Claim Propensity Logit Binomial
Policy Renewal Probability Logit Binomial
Quote Conversion Probability Logit Binomial

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 
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
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 Assumption Linear Regression Generalized Linear
Model Model

Relationship between Y is a linear, additive Y is a function of a linear

X and Y combination of X combination of X

Any distribution from the

Distribution of Y Normal Exponential family of
distributions

Variance of Y Constant Need not be constant

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GLM assumptions
 Random Component (Distribution of Y, error function)
− Related to what you are trying to model
− What kind of distribution do you expect the process to follow? Poisson? Gamma?

 Systematic Component: The covariates are combined to give a linear predictor η:

− E[η] = Xβ

 Link Function
− What kind of relationship do you expect to exist between X and Y?
− Additive (Identity)? Multiplicative (Log)?

 Weight
− Claim frequency model: weight is earned exposure
− Claim Severity model: weight is claim count

 Finally, once the model is specified, we solve using Maximum Likelihood Estimation

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Agenda – GLM theory
 Linear modeling
 Model parameterization
 GLM extensions to ordinary linear models
 Modeling diagnostics


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Model diagnostics
 Variable level
− Does this variable or level make the model more predictive?

 Model level
− Do we have the right link and error function?

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 Standard Error(%) = ( Standard Error / Value ) x 100%

The Smaller Standard Error % is, the more significant this parameter will be
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 Deviance in
GLM, for
instance

Number of
parameters
in GLM
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Agenda – GLM theory
 Linear modeling
 Model parameterization
 GLM extensions to ordinary linear models
 Modeling diagnostics
 GLMs in Emblem

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· · ·...·

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· · ·...·

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· · ·...·

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Creating Emblem Files

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 %PrepFile(Dataset = final_table,
SAS factors = (
There are SAS macros that
random4
random100
create the emblem files.
random200
AY One must have columns of
. explanatory variables and a
. column with the weight and
/*Varialbe in emblem file*/ one with the response.
.
), FmtValue = all,
Store = GLMLIB.EmblemStore);

%CrteFile(Store=GLMLIB.EmblemStore,
Dataset = final_table,
Dirname = . . ./Intl/LI/Asia/India/Models,
Weight = claim_count,
Title = model_v9,
response = Total_losses);

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Open Emblem

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Questions???

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Modeling Competition

Build Models

There will be a
PRIZE!!!
Scored on holdout
data (random)

Lowest Deviance
wins!

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Organizing Variables

Edit categories Right Click: Add new Drop downs to select and change color

Enable categories

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Define Sample Sets

Select Define and

create your
sample sets

Rule of thumb
40/40/20

Random
Out of time

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Modeling Adapting

Modeling -> Miscellaneous -> Model Adapt

Navigate to the model you’d like to adapt

PUT THE LINK

HERE ON THE
PAGE!!!

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 Now We Are Ready
to MODEL!!!

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Hands on exercises
1. Open model
2. Organize
3. Make Sample Sets
4. Model adapt
5. Store reference model
6. Fit variable
7. Review fit
8. Reference model
9. Fit second variable
10. Review prior variable
11. Reference model
12. Modeling contest
13. Customer factors

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Select a thematic group of variables

Vehicle
Characteristics

Make Model Vehicle Age

Policy
Characteristics

New/Renewal Channel Discounts

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Review the Beta Page

Are you standard errors

good?
Do you have any
aliasing?
Are your betas
reasonable?

Rule of thumb: Green

means good.

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Compare metrics to the reference model

Log this to excel.

Remember to indicated
what was already in the
model. The order of
variables matters!

Does the deviance/AIC

suggest the variable was
important?

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Polished Fit

At this point we should feel

comfortable with how this
variable is fit.

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Hands on exercises
1. Open model
2. Organize
3. Make Sample Sets
4. Model adapt
5. Store reference model
6. Fit variable
7. Review fit
8. Reference model
9. Fit second variable
10. Review prior variable
11. Reference model
12. Modeling contest
13. Customer factors

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Compare to the reference model

Now it’s important to see if the

other variables in the model have
changed.

Did anything shift wildly? Is it

intuitive or expected?

Which variable is more valuable?

Do we need both of them?

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Check for consistency

Switch to the validation NOTE YOUR

data set. FINDINGS!
Is the patter consistent on
random data sets? What
about with time?

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