Claims Reserving using GAMLSS

Gian Paolo Clemente

Giorgio Spedicato

Catholic University, Milan, Italy

Abstract
The assessment of predictive distribution of outstanding claims is a key
issue for non-life insurers in order to quantify both the economic balance
sheet and the solvency capital requirement. To this aim generalized linear
models (GLM) have been applied by England and Verrall ([10]). Through
an over-dispersed Poisson framework, they obtain an estimation of the
prediction error of the point estimate of claims reserve derived through a
standard Chain-Ladder. This approach paves the way toward stochastic
claims reserve and it is extensively used in practice. The aim of this paper
is to introduce the General Additive Models for Location, Shape and Scale
(GAMLSS) within the stochastic loss reserving framework and to revise
the approach proposed by England and Verrall. The GAMLSS regression
[21] provides extended capabilities compared to GLM by allowing all the
parameters of the dependent variable to be modelled as functions of co-
variates. Formulas for loss reserving derived under a GLM framework can
be extended using GAMLSS in order to estimate the variability of unpaid
claim estimate. The dispersion parameter of the dependent variable can
be indeed expressed as function of explanatory variables, as accident, de-
velopment or calendar years. Numerical examples found in [10] will be
reviewed under the GAMLSS reserving framework as well as prospective
enhancements and limitations of GAMLSS reserving will be discussed. R
[18] software and ChainLadder R package [13] will be used throughout
examples.
Keywords: Claims Reserving; GAMLSS models; GLM models.

corresponding author, Dipartimento di Discipline Matematiche, Finanza Matematica,

Econometria. Via Necchi 9, 20123 Milan. gianpaolo.clemente@unicatt.it

PhD, ACAS, spedicato giorgio@yahoo.it

1
1 INTRODUCTION AND EXISTING LITERATURE
1 Introduction and existing literature
The estimation of claims reserve plays a central role in the economics of insur-
ance business and many algorithmic methods have been developed from decades
to obtain an estimated value of claims reserve, the so - called best estimate
(BE). Recently, stochastic models for outstanding claims evaluation have been
developed with the aim to assess not only the BE value, but also the variability
of the reserve distribution, that may be measured by statistics like the Coe-
cient of Variation, CV. Furthermore, the claim reserve BE and its variability
estimate allow a rst assessment of the insurers solvency position with respect
to Reserve Risk (see [5] and [12] for the European and US solvency approach
respectively).
Mack [16] proposed a rst approximate approach to quantify the standard error
of the chain-ladder reserve. A distribution-free formula has been derived with
the aim to allow for the uncertainty arising both from the reserve development
intrinsic variability (Process Error) and from the uncertainty of parameters
estimation of the selected model (Estimation Error). A dierent way based
on regression has been analysed by Zehnwirth [3] by developing a log-normal
regression model to assess the claim reserves. Wright and Renshaw ([28] and
[19]) focused on a log-linear approach typical of GLM that has been properly
extended by England and Verrall. Furthermore, Generalized Additive Models
(GAM) were used in some regression equations shown by England and Verral
papers ([10] and [27]) to model the eect of either accident or development year
using a exible non - parametric term within the link function.
A new class of statistical models, namely GAMLSS, has been introduced
by [21] with the aim to provide a exible regression framework. These models
allow to describe not only the mean (or location) but also the other parame-
ters of the distribution underlying to the dependent variable, as functions of
explanatory variables using parametric and/or additive nonparametric terms
within the equation. Moreover, a wide choice of marginal distribution for the
response variable in the GAMLSS framework can be selected (up to 60 as of
current version of the R package) that are not bounded to the exponential fam-
ily. GAMLSS framework provides tools to assess the adequacy of the dependent
variable distribution form, the adequacy of the functional relationship expressed
in the regression equation and the overall goodness of t of the model.
Few applications of GAMLSS in the actuarial elds and none in stochastic loss
reserving have been found at the time this paper is being written. Venter ([26])
applied GAMLSS to model mortality trend, whilst claim cost distribution has
been described by GAMLSS in [14]. Finally, these models has been used in [24]
in order to quantify premium risk capital requirement for a MTPL portfolio.
Therefore this paper aims to apply GAMLSS framework in stochastic loss re-
serving in order to assess both the BE and the distribution of claims reserve.
All calculations underlying the exemplied numerical application will be per-
formed by the aid of open - source R statistical software [18] and the ChainLad-
der package [13].
The paper will be organized as follows: section 2 will review underlying sta-
2
2 THE USE OF GLM IN STOCHASTIC LOSS RESERVING
tistical and actuarial theory, focusing on the approach proposed by England and
Verrall, while section 3 will introduce a dierent approach based on GAMLSS
models. In section 4 an applied example will be shown, in order to compare
GLM based and GAMLSS based results. Finally section 5 will discuss results
and draft conclusions. Models logs will be shown in the appendix.
2 The use of GLM in stochastic loss reserving
Several approaches have been proposed by actuarial literature with the aim
to obtain the variability or the full distribution of claims reserve. GLM have
been already introduced in early works (see [15], [20] and [28]). As well known,
GLM generalize ordinary least square (OLS) regression allowing distributions
other than gaussian for the dependent variable. The mean and variance of the
response variable ( y
i
, i = 1, ...N ) are expressed as functions of covariates x
i
as
Equation 1 shows:

E [ y
i
] =
i
= g
1
(
i
) = f (x
i
)
var [ y
i
] =
V (i)
i
(1)
where g
1
() is the link function, V (
i
), the variance function, is a function
of the mean specic for the distribution family, is a constant that can be
estimated from the data and
i
a prior weight of the i-th observatio, that can
be set equal to one for all cases (see [1] and [17] for details). However, standard
GLM framework leads to restrictive modeling for the variance of y
i
since it
depends on
i
as expressed within the variance function.
Focusing now on claims reserve, we can consider a generic loss development
triangle with dimension (I, J) where rows (i = 1, . . . , I) represent the claims
accident years and columns (with j = 1, . . . , J) describe development years for
payments. It needs to be emphasized that the number of columns may dier
from the number of rows, for example due to a tail in payments development.
We dene now P
ij
as the incremental paid estimate.
Renshaw and Verrall ([20]) casted the chain ladder method into the framework
of GLM with an over-dispersed Poisson model for incremental payments as
Equation 2 shows:

E [P
ij
] = m
ij
var [P
ij
] = m
ij
m
ij
= x
i
y
j
ln (m
ij
) =
ij
= c +
i
+
j
(2)
This approach is based on an over-dispersed Poisson framework since it assumes
the incremental claims P
ij
to be distributed as independent over-dispersed Pois-
son random variables, with mean and variance dened by previous relations.
Here, x
i
represents the expected ultimate claims and y
j
represents the propor-
tion of ultimate claims to emerge in each development year (with the constraint
3
2 THE USE OF GLM IN STOCHASTIC LOSS RESERVING

J
j=1
y
j
= 1). The over-dispersion is introduced by the parameter , which is a-
priori unknown and estimated from the data. The allowance for over-dispersion
does not aect estimation of the parameters, but it yields to increase their stan-
dard errors.
A exible framework, within which previous model could be regarded as
a special case, is reported in Equation 3 (see [10]). The rst two items in
Equation 3 bundle the claim reserving within the GAM framework. The choice
of dependent variables distribution is driven by the parameter, being Normal,
Poisson, Gamma and Inverse Gaussian specied by setting equal to either 0,
1, 2, or 3, respectively. The predictor is linked to the expected value of the
response by means of the logarithmic link function. The last item of Equation 3
denes the central estimate as a function of accident and development years.
This relation extends the last term in Equation 2 by introducing two optional
terms (the oset, u
ij
, and the ination, t) and by taking into account the eect
of the accident year i and the development year j by means of smoothing splines.
It is worth to be noted that the accident and development years are treated as
factors (as Equation 2 shows) when both
j
and
i
are set equal to zero.

E [P
ij
] = m
ij
var [P
ij
] = m

ij
ln (m
ij
) =
ij
= u
ij
+ t + c + s
i
(i) + s
j
(j) + s
i
(ln (j))
(3)
Within this framework, the authors derive the prediction error of the single
incremental payments P
ij
through the square root of the next formula:
E

P
ij


P
ij

ij
+ m
2
ij
V ar (
ij
) . (4)
The estimation variance (second component in Equation 4) is usually com-
puted directly by the implementation of the model, letting the prediction error
to be evaluate.
Let D = {P
ij
, i + j > I + 1, 1 < j < J} denote the missing part of the tri-
angle, the mean square error of prediction (see [19]) of the claims reserve R =

I
i=1
R
i
can be derived as:
E

R

R

i,jD
m

ij
+

i,jD
m
2
ij
V ar (
ij
)
+ 2

i
1
, j
1
D
i
2
, j
2
D
i
1
, j
1
= i
2
, j
2
m
i1j1
m
i2j2
Cov(
i1j1
,
i2j2
).
(5)
An alternative approach to estimate the prediction error is based on the use
of bootstrap, where the scaled Pearson residuals are commonly used (for further
details see [8] and [11]). However, bootstrap analysis accounts only for the esti-
mation variance. The process variance contribution is then computed through
4
3 GAMLSS FOR STOCHASTIC LOSS RESERVING
a closed formula [8] or an additional step based on a simulation of payments
by the process distribution [7]. According to the ODP framework, the process
error can be obtained by simulating the forecasted value from an overdispersed
Poisson with mean

P
ij
and variance

P
ij

, where

P
ij
is the incremental value
in the lower part of the triangle derived by the bootstrap procedure and

is
obtained as the ratio between the sum of squared pearson residuals and the
degrees of freedom. England [7] makes several suggestions to achieve this goal.
Finally, recent approaches are based on a non-constant scale parameter

j
(see
[11]), the use of generalized linear mixed models (see [2]) and a reparameterized
version of original GLM (see [4]).
3 GAMLSS for stochastic loss reserving
GAMLSS is a general class of univariate regression models where the exponen-
tial family assumption is relaxed and replaced by a general distribution family.
The systematic part of the model allows all the parameters of the conditional
distribution of the response variable y
i
to be modelled as parametric or non-
parametric functions of explanatory variables within the framework.
Let
T
= (
1
,
2
, ...,
p
) the p parameters of a probability density function
f (y
i
|) modelled using an additive model.
T
i
= (
i,1
,
i,2
, ...,
i,p
) is a vector of
p parameters related to explanatory variables, where the rst two parameters

i,1
and
i,2
are usually characterized as location
i
and scale
i
. The remaining
parameters, if any, are characterized as shape parameters. For many families of
population distributions, a maximum of two shape parameters
i
and
i
suces
(i.e. p = 4).
Under this condition, we can derive the following model:

g
1
() =
1
= X
1

1
g
2
() =
2
= X
2

2
g
3
() =
3
= X
3

3
g
4
() =
4
= X
4

4
(6)
where we consider only the parametric part (see [21] for an extension of the
model), and where
T
k
=

1,k
,
2,k
, ...,
J

k
,k

is a parameter vector of length

J

k
and X
k
is a known design matrix of size n J

k
.
In particular, Equation 6 implies that the moments of response variable in
each cell can be directly expressed as a function of covariates after a convenient
parametrization.
Considering now the claims reserve framework, we can identify the incremental
payments P
i,j
as response variables and derive the following structure:

E [P
i,j
] = g
1
1
(
1,i,j
)
var [P
i,j
] = g
1
2
(
2,i,j
)
(7)
5
4 NUMERICAL RESULTS
At this regard, GAMLSS R package [23] supports more than 60 distribu-
tions, non-linear and non-parametric relationships (e.g. cubic splines and non
parametric smoothers), random eect modeling, etc. The [22] paper widely
deals with GAMLSS models estimation and selection. The selection process
consists of comparing many dierent competing models that vary by dierent
combinations of either distribution of the response variable, set of link function
for distribution parameters and set of predictor terms. Within the GAMLSS
package, a full set of diagnostic tools is available for checking models assump-
tions. In particular, the Generalized Akaike Information Criterion (GAIC) can
be used to compare alternative models and the normalized randomized quantile
residuals (see Dunn and Smyth, [6]) can be used to check the adequacy of the
model, for example regarding the distribution of the response variable. These
residuals are given by r
i,j
=
1
( u
i,j
) where
1
is the inverse cumulative dis-
tribution function of a standard normal distribution and u
i,j
= F(P
i,j
|

i,j
) is
derived by the assumed cumulative distribution for the cell (i, j).
The procedure to assess the stochastic distribution of loss reserve proposed
by the literature for GLM models can be therefore adapted to GAMLSS as
follows:
1. dene the GAMLSS model underlying the claims development triangle,
M;
2. compute the residuals r
i,j
=
1
[F(P
i,j
|

i,j
];
3. generate N upper triangles of residuals r
k
i,j
with k = 1, . . . , N by sample
with replacement;
4. derive N upper triangles of pseudo-incremental payments from the gamlss
model by the inverse relation: P
k
i,j
= F
1
[( r
k
i,j
)|

i,j
];
5. ret the gamlss model, M;
6. for each cell of the lower part of the triangle simulate from the process
distribution whose parameters are tted from M;
7. sum the simulated payments in the lower triangle by origin year and overall
to compute the origin year and total reserve estimates, respectively.
This approach leads to the full distribution of claims reserve denition and
to the assessment of both the process and the estimation error.
Finally, normality of residuals needs to be veried in order to apply the method-
ology. In the following numerical results the Shapiro-Wilk test has been used.
4 Numerical results
As done in [9] example, the Taylor-Ashe triangle [25], TA, available in the
ChainLadder package (see GenIns triangle in [13]), has been used. TA triangle,
a 10x10 incremental payments triangle, has been used in order to assess both
6
4 NUMERICAL RESULTS
the BE and the distribution of claims reserve in order to compare the proposed
GAMLSS approach to the classic ODP methodology.
Table 1 shows key gures derived by the use of two classical approaches
based on Chain-Ladder method. In particular, the BE and the CV derived
by using Mack formula and GLM ODP model are compared. Furthermore the
comparison is extended to a GLM based on a Gamma distribution. Finally, the
99.5 quantile is obtained under a LogNormal assumption for the Mack formula
and by applying a classical bootstrapping methodology (10.000 simulations) for
the GLM approaches. GLM has been applied here by following England and
Verral [11] approach without any judgement in claims reserve evaluation.
model BE CV Quant
Mack 18680856 0.13 25919050
ODP GLM 18680856 0.16 27912402
Gamma GLM 18085805 0.15 27710864
Table 1: Classical stochastic reserving methods results on Taylor-Ashe triangle
BE and CV are here reported only for comparison with GAMLSS results
and values are equivalent to that derived in [8] and [11].
Then, several GAMLSS models were t on the same triangle and compared
by GAIC index. A wide range of conditional distributions, much more beyond
the classical exponential family, were tested. As expected the GAIC derived
by using a GAMLSS with a Gamma distribution is almost equal to the AIC
(roughly 1500) derived by GLM based on the same distribution.
Table 2 shows the GAIC t index and the relating degrees of freedom of various
GAMLSS models applied on triangle. Table 3 conrms results in terms of BE
models df GAIC
Weibull 20 1495.04
NegativeBinomial TypeII 20 1495.25
NegativeBinomial 20 1500.77
Gamma 20 1500.77
Gumbel 20 1515.18
InverseGaussian 20 1515.69
Exponential 19 1599.88
Table 2: GAMLSS regression ts on Taylor-Ashe triangle
assessment using GAMLSS to be similar to the ones that would be derived
following a straight GLM approach (see Table 1).
The greatest advantage of GAMLSS in reserving application is that more
than one distribution parameter can be explicitely modeled as function of co-
variates.
For the TA triangle, the dispersion parameter of incremental payments has been
assumed as a function of either origin or development year in order to assure
7
4 NUMERICAL RESULTS
distribution BE
WEI 19939326
GAMMA 18085822
IG 17364127
NB 18085841
GU 23467287
NB2 18995459
EXP 18085822
Table 3: Best estimates using GAMLSS models
a better tting on data. The latter one could be described by the following
Equation when the Gamma distribution is considered:

E [P
i,j
] = exp(c +
i
+
j
)
var [P
i,j
] = exp (d + e
j
)
(8)
The analysis showed that the best tting model with varying dispersion
parameter to be when incremental payments follow a Gamma distribution. In
particular, Table 4 shows GAIC values determined by assuming the dispersion
parameter to vary by development year or by accident year. Figures show that
assuming dispersion to vary by development year signicantly enhances the
GAIC t, also with respect to models shown in Table 3.
Figure 1 displays the diagnostics plot as given by GAMLSS R package for the
model where dispersion varies by development year. The well behaviour of
residuals can be shown since no sistematic trend with respect to tted value or
position appears as well as the shape of normalized quantile residuals can be
well approximated by a Normal distribution as plots in lower section show.
model GAIC BE
origin, factor 1380.79 20387778
development, factor 1239.41 20277356
Table 4: GAIC and Best estimates using GAMLSS models with dierent models
for dispersion parameters
8
4 NUMERICAL RESULTS
*******************************************************************
Summary of the Quantile Residuals
mean = -0.0004790768
variance = 0.8516852
coef. of skewness = 0.1062681
coef. of kurtosis = 2.586916
Filliben correlation coefficient = 0.9900941
*******************************************************************
200000 800000 1400000

1
0
1
2
Against Fitted Values
Fitted Values
Q
u
a
n
t
i
l
e

R
e
s
i
d
u
a
l
s
0 10 20 30 40 50

1
0
1
2
Against index
index
Q
u
a
n
t
i
l
e

R
e
s
i
d
u
a
l
s
3 1 0 1 2 3
0
.
0
0
.
2
0
.
4
Density Estimate
Quantile. Residuals
D
e
n
s
i
t
y
2 1 0 1 2

1
0
1
2
Normal QQ Plot
Theoretical Quantiles
S
a
m
p
l
e

Q
u
a
n
t
i
l
e
s
Figure 1: GAMLSS model diagnostic plot for nal model
model BE
Mean 20250642.78
CV 0.09
Skewness 0.36
99.5 Quantile 25807705.98
Table 5: Main characteristics of Claims Reserve using GAMLSS models
Table 5 shows key gures of Claims Reserve distribution derived by the
GAMLSS model where the conditional distribution follows a Gamma and the
9
4 NUMERICAL RESULTS
dispersion parameter varies as a function of development year. Lower variability
and greater skewness than classical models come forth. Furthermore, it could
be noted that the variability coecient is roughly equal to the value derived on
the same triangle by England and Verrall [11] where an Over Dispersed Poisson
Model with a non-constant scale parameters was used. Finally Figure 2 and
3 show the simulated distributions (10,000 simulations) obtained by combining
bootstrap to an additional step to incorporate the process error for classical
Gamma model and GAMLSS Gamma model with varying by development year
dispersion parameter respectively.
Claims Reserve (Gamma GLM)
Reserve
F
r
e
q
u
e
n
c
y
1.0e+07 1.5e+07 2.0e+07 2.5e+07 3.0e+07
0
2
0
0
4
0
0
6
0
0
8
0
0
Figure 2: Claim reserve distribution obtained by a Gamma GLM
10
5 CONCLUSIONS
Claims Reserve (Gamma GAMLSS)
Reserve
F
r
e
q
u
e
n
c
y
1.0e+07 1.5e+07 2.0e+07 2.5e+07 3.0e+07
0
2
0
0
4
0
0
6
0
0
8
0
0
Figure 3: Claim reserve distribution obtained by a GAMLSS model with a
Gamma distribution
5 Conclusions
This paper aims to propose a methodology to assess the claims reserve distri-
bution based on a gamlss framework. The approach appears more exible than
classical GLM since it tries to describe the variance eect as a function of avail-
able covariates, either accident or development year. Furthermore GAMLSS
methodology allows a wide range of response variable distribution to be used,
not bounded to exponential family. Similarly it permits exibility in specify
the regression relationship for example allowing the use of non - parametric
smoothers.
A numerical exemplication was performed by testing the well-known Taylor-
Ashe triangle. The best tting model for such triangle is assuming Gamma
distribution for incremental payment where dispersion parameter varies as a
function of development year.
While it is dicult to make any nal conclusions from the single triangle which
has been analyzed in this paper, it is interesting to note the improvement in the
GAIC t when the variance is explicitly described. Further areas of research
lie in extending to gamlss the analytical expression of the estimation variance
as derived for GLM in [20]. Finally it is noteworthy that despite the exibility
of GAMLSS, this methodology could result overparameterized when few data
(small triangles) are considered.
11
A MODEL LOGS
Appendix
A Model logs
The selected GAMLSS model used to compute reserve distribution is reported
in R log below shown.
*******************************************************************
Family: c("GA", "Gamma")
Call:
gamlss(formula = value ~ factor(origin) + factor(dev), sigma.formula = ~factor(dev),
family = GA, data = GenInsDF, control = con)
Fitting method: RS()
-------------------------------------------------------------------
Mu link function: log
Mu Coefficients:
Estimate Std. Error t value Pr(>|t|)
(Intercept) 12.412282 7.331e-02 1.693e+02 7.802e-54
factor(origin)2 0.425016 1.588e-07 2.677e+06 5.507e-205
factor(origin)3 0.416764 1.588e-07 2.625e+06 1.116e-204
factor(origin)4 0.240049 1.588e-07 1.512e+06 4.707e-196
factor(origin)5 0.485359 1.588e-07 3.057e+06 4.626e-207
factor(origin)6 0.327941 1.588e-07 2.065e+06 6.235e-201
factor(origin)7 0.616862 1.588e-07 3.885e+06 8.255e-211
factor(origin)8 0.860389 1.588e-07 5.419e+06 5.182e-216
factor(origin)9 0.449620 1.669e-01 2.695e+00 1.064e-02
factor(origin)10 0.336155 2.251e-01 1.494e+00 1.440e-01
factor(dev)2 0.913387 1.053e-01 8.671e+00 2.426e-10
factor(dev)3 0.909820 7.331e-02 1.241e+01 1.442e-14
factor(dev)4 1.022382 1.409e-01 7.258e+00 1.510e-08
factor(dev)5 0.464730 1.530e-01 3.037e+00 4.424e-03
factor(dev)6 0.163759 2.541e-01 6.445e-01 5.234e-01
factor(dev)7 -0.002649 2.046e-01 -1.295e-02 9.897e-01
factor(dev)8 -0.390936 1.000e-01 -3.908e+00 3.937e-04
factor(dev)9 0.027096 1.021e-01 2.655e-01 7.922e-01
factor(dev)10 -1.285784 7.331e-02 -1.754e+01 3.220e-19
-------------------------------------------------------------------
Sigma link function: log
Sigma Coefficients:
Estimate Std. Error t value Pr(>|t|)
(Intercept) -1.54747 0.2219 -6.9725 1.119e-08
factor(dev)2 0.09349 0.3222 0.2902 7.730e-01
12
A MODEL LOGS
factor(dev)3 -14.45481 0.3319 -43.5454 1.966e-38
factor(dev)4 0.40252 0.3440 1.1700 2.482e-01
factor(dev)5 0.43574 0.3601 1.2099 2.326e-01
factor(dev)6 0.93870 0.3747 2.5051 1.593e-02
factor(dev)7 0.58500 0.4105 1.4252 1.610e-01
factor(dev)8 -0.59069 0.4638 -1.2735 2.094e-01
factor(dev)9 -0.75070 0.5463 -1.3742 1.762e-01
factor(dev)10 -14.68125 0.7337 -20.0091 4.969e-24
-------------------------------------------------------------------
No. of observations in the fit: 55
Degrees of Freedom for the fit: 29
Residual Deg. of Freedom: 26
at cycle: 10
Global Deviance: 1181.415
AIC: 1239.415
SBC: 1297.628
*******************************************************************
13
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