Here we bring together the GC Capital Ideas two part series on periodic payment orders authored by Victoria Jenkins:
Time Off for Certain Behavior, Part I: Behavioral economics is a fascinating field and one which actuaries should be aware of in their everyday work. It is the study of inherent biases in human decision-making. Many examples of these biases have been cited in connection with the financial crisis, and increasingly the implications for insurance are being examined.
Time Off for Certain Behavior, Part II: Our experience in doing this has led to an “actuarial hunch” that PPO claims converted to their Ogden equivalents are not from the same underlying statistical distribution as traditional lump sum values. Fitting severity distributions to these claims in among the traditional lump sums can feel a bit like fitting to “apples and oranges.”