ESTIMATION OF AGGREGATE LOSSES OF SECONDARY CANCER USING PH-OPPL AND PH-TPPL DISTRIBUTIONS

Abstract

Kenyan insurance firms have introduced insurance policies of chronic illnesses like cancer; however, they have faced a huge challenge in the pricing of these policies as cancer can transit into different stages, which consequently leads to variation in the cost of treatment. This has made the estimation of aggregate losses of diseases which have multiple stages of transitions such as cancer, an area of interest of many insurance firms. Mixture phase type distributions can be used to solve this setback as they can in-cooperate the transition in the estimation of claim frequency while also in-cooperating the heterogeneity aspect of claim data. In this paper, we estimate the aggregate losses of secondary cancer cases in Kenya using mixture phase type Poisson Lindley distributions. Phase type (PH) distributions for one and two parameter Poisson Lindley are developed as well their compound distributions. The matrix parameters of the PH distributions are estimated using continuous Chapman Kolmogorov equations as the disease process of cancer is continuous while severity is modeled using Pareto, Generalized Pareto and Weibull distributions. This study shows that aggregate losses for Kenyan data are best estimated using PH-OPPL-Weibull model in the case of PH-OPPL distribution models and PH-TPPL-Generalized Pareto model in the case of PH-TPPL distribution models. Comparing the two best models, PH-OPPL-Weibull model provided the best fit for secondary cancer cases in Kenya. This model is also recommended for different diseases which are dynamic in nature like cancer.