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Regression Modeling with Actuarial and Financial Applications by Edward W. Frees

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16

Frequency-Severity Models

Chapter Preview. Many datasets feature dependent variables that have a large proportion of zeros. This chapter introduces a standard econometric tool, known as a tobit model, for handling such data. The tobit model is based on observing a left-censored dependent variable, such as sales of a product or claim on a health-care policy, where it is known that the dependent variable cannot be less than zero. Although this standard tool can be useful, many actuarial datasets that feature a large proportion of zeros are better modeled in “two parts,” one part for frequency and one part for severity. This chapter introduces ...

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