A Hidden Markov Approach to Disability Insurance

DOI10.1080/10920277.2017.1387570MaRDI QIDQ4567964zbMATH OpenOpenAlexFDO

Authors Boualem Djehiche, Björn Löfdahl

Publication date 20 June 2018

Published in North American Actuarial Journal (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1412.7334

zbMATH Keywords

expectation-maximization algorithmdisability insurancehidden Markov approach

Mathematics Subject Classification ID

Markov processes: estimation; hidden Markov models (62M05) Applications of statistics to actuarial sciences and financial mathematics (62P05)

Abstract: Point and interval estimation of future disability inception and recovery rates are predominantly carried out by combining generalized linear models (GLM) with time series forecasting techniques into a two-step method involving parameter estimation from historical data and subsequent calibration of a time series model. This approach may in fact lead to both conceptual and numerical problems since any time trend components of the model are incoherently treated as both model parameters and realizations of a stochastic process. We suggest that this general two-step approach can be improved in the following way: First, we assume a stochastic process form for the time trend component. The corresponding transition densities are then incorporated into the likelihood, and the model parameters are estimated using the Expectation-Maximization algorithm. We illustrate the modelling procedure by fitting the model to Swedish disability claims data.

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Cited in

(2)

• Exact long time behavior of some regime switching stochastic processes
• Stochastic modelling of disability insurance in a multi-period framework

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