October 2014
Intermediate to advanced
584 pages
22h 2m
English
Content preview from Pricing in General Insurance
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464 Pricing in General Insurance
Without loss of generality, we can assume that a categorical variable X with L levels
is a variable that can take one of the integer values from 0 to L − 1: X ∈ {0,1 …L − 1}. If
X has no interactions with other variables, it can be included in the model as the linear
combination
Ψ()
()XX
jj
j
L
=+
=
−
∑
ββ
δ
0
1
1
(26.11)
where
δ
j
:{,}
→
01
is the function such that δ
j
(X) = 1 if X = j, 0 otherwise.* Note that this
is equivalent to writing:
Ψ(X) = β
j
if (and only if) X = j
(For example, if X represents occupation, with X = 0 standing for ‘clerical’ and X = 1 for
‘m a n u a l’, Ψ(X) will have the value β
0
for a customer emplo ...
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