add_smoothing: Smooth grouped tariff relativities in a refinement workflow

In insurancerating: Actuarial Tools for Insurance Pricing Models

Smooth grouped tariff relativities in a refinement workflow

Description

Replace independently estimated relativities of an ordered, grouped model variable with a smooth tariff curve. This can reduce sampling variation between adjacent levels of risk factors such as age, vehicle age, insured value or bonus-malus years while retaining the broad effect estimated by the GLM.

Usage

add_smoothing(
  model,
  model_variable = NULL,
  source_variable = NULL,
  breaks,
  smoothing = "spline",
  k = NULL,
  degree = NULL,
  weights = NULL,
  tariff_class = NULL,
  rating_variable = NULL,
  x_cut = NULL,
  x_org = NULL
)

Arguments

model	Object of class rating_refinement, created with prepare_refinement(). A fitted GLM, including a model returned by refit(), is not accepted directly; retain and modify the corresponding refinement specification instead.
model_variable	Character string. Existing grouped or binned variable in the GLM. This is the model term that will be replaced by a smoothed tariff factor. The column must not contain missing values; remove or impute missing values before adding the smoothing step.
source_variable	Character string. Original numeric portfolio variable underlying model_variable. Its name is also used for the resulting smoothed tariff variable. The column must contain only finite, non-missing numeric values.
breaks	Numeric vector with the tariff segment boundaries to use after smoothing. These boundaries determine the final tariff segmentation, not the number of portfolio observations used to estimate the curve. Values must be finite, strictly increasing and cover every observed value of source_variable. A boundary may extend beyond the interval range represented by model_variable, for example to create a rounded final tariff class. This does not itself produce a message. A short message is shown only when a representative point of a new interval lies outside the fitted GLM range and its relativity therefore requires extrapolation. This argument is required.
smoothing	Character string selecting the smoothing method. Available values are "spline" (default), "poly", "gam", "increasing", "decreasing", "convex", "concave", "increasing_convex", "increasing_concave", "decreasing_convex" and "decreasing_concave". The former short SCOP codes remain accepted as compatibility aliases. See Details for the statistical interpretation and shape restrictions.
k	Optional single positive whole number. Basis dimension for smoothing methods "spline", "gam", "increasing", "decreasing", "convex", "concave" and the combined direction-curvature methods. It sets the maximum flexibility available to the smooth and is not necessarily equal to its estimated effective degrees of freedom. NULL uses the smaller of 10 and the number of unique grouped model points. At least three unique grouped values are required. The basis dimension cannot exceed the number of unique grouped covariate values available for fitting.
degree	Optional single whole number. Polynomial degree, used only by smoothing = "poly". The degree must be feasible for the number of unique grouped model points.
weights	Optional character string. Numeric volume column, usually exposure, used to weight the grouped GLM relativities during smoothing.
tariff_class, rating_variable	Deprecated. Use model_variable and source_variable instead.
x_cut, x_org	Deprecated. Use model_variable and source_variable instead.

Details

add_smoothing() stores a smoothing specification on a rating_refinement object. It does not alter the fitted GLM immediately. The smoothing is evaluated in the recorded step order and applied when refit() is called. The original GLM contains model_variable, usually a factor created by grouping a continuous risk factor. source_variable identifies the original numeric variable represented by those groups.

The smoother is estimated from the fitted GLM relativities at the midpoint of each model interval. Consequently, the amount of information available to the smoother is primarily determined by the number of grouped model levels, rather than by the number of individual portfolio records. Exposure or another volume measure can be supplied through weights so that model levels with more portfolio volume have greater influence on the fitted curve.

The fitted curve is evaluated using breaks and converted back to a grouped tariff variable. The original model term is replaced by that smoothed tariff variable during refitting.

Actuarial interpretation

Smoothing introduces a structural assumption: adjacent values of the source variable are expected to have related tariff effects. The selected method, basis dimension and breaks should therefore be assessed against exposure, observed experience, coefficient uncertainty and stability over time. A smooth curve should not be interpreted as evidence that the underlying risk relationship is itself known without uncertainty.

Smoothing methods

The available methods represent different assumptions about the shape of the tariff effect:

"spline"

The general-purpose default. Fits an unconstrained penalized cubic regression spline. It is suitable when the tariff effect should be smooth but no monotonicity or curvature restriction is justified.

"poly"

Fits a global polynomial through the grouped GLM relativities. degree determines its order. A low degree gives a compact parametric trend; higher degrees can follow more local variation but may oscillate, particularly near the boundaries.

"increasing" and "decreasing"

Fit monotone smooths. These methods constrain the tariff effect to move in one direction, without imposing how quickly its slope changes. They are often the most directly interpretable constrained specifications when actuarial reasoning supports a consistently increasing or decreasing risk effect.

"convex" and "concave"

Constrain curvature but not direction. For a convex curve, the slope increases as the source variable increases; for a concave curve, the slope decreases. A convex curve may therefore be U-shaped and a concave curve may be inverted U-shaped. These are advanced choices when curvature itself has a defensible interpretation.

"increasing_convex" and "increasing_concave"

Fit increasing curves with an additional curvature constraint. An increasing convex effect rises at an increasing rate, for example when upper-tail risk causes marginal cost to accelerate. An increasing concave effect rises at a decreasing rate and gradually flattens, for example when risk cost rises with insured value but less than proportionally.

"decreasing_convex" and "decreasing_concave"

Fit decreasing curves with an additional curvature constraint. A decreasing convex effect becomes less steep and tends to flatten. A decreasing concave effect becomes progressively steeper.

"gam"

Fits an unconstrained thin-plate regression spline with mgcv::gam(). It is mainly intended as a flexible reference when comparing the general spline and shape-constrained specifications. It does not impose the actuarial shape assumptions represented by the constrained methods.

The shape-constrained methods are fitted with scam::scam(). Monotonicity concerns the direction of the effect, whereas convexity and concavity concern how its slope changes. In most tariff applications, a directional assumption is easier to substantiate than a curvature assumption. A constraint should reflect an actuarial or pricing assumption that is defensible for the risk factor; it should not be selected solely because it produces a smoother visual result. The combined monotonicity and curvature methods are advanced specifications and are most appropriate when both assumptions can be supported independently.

The former short codes "mpi", "mpd", "cx", "cv", "micx", "micv", "mdcx" and "mdcv" remain accepted as compatibility aliases. New code should use the readable method names above. Both forms produce the same smoothing specification.

Basis dimension and polynomial degree

For "spline", "gam" and the shape-constrained methods, k specifies the basis dimension. It controls the maximum flexibility available to the smooth, but it is not the final effective degrees of freedom of the fitted curve. The estimated smoothing penalty can reduce the effective degrees of freedom below this maximum.

A smaller k restricts the curve to broad movements. A larger k permits more local variation, but requires enough distinct grouped covariate values and may be unstable when only a few tariff levels are available. If k is NULL, the function uses the smaller of 10 and the number of unique grouped model points. Spline, GAM and shape-constrained smoothing require at least three unique grouped values. The function checks this dimension before fitting and reports the observed number of unique values when the requested complexity is not feasible.

For "poly", degree has the corresponding complexity role. A polynomial of degree d requires at least d + 1 unique grouped values. When degree is omitted, the existing behaviour uses the highest degree supported by the grouped model points. In practice, an explicit low degree is generally preferable when a stable global trend is intended.

degree is only accepted for smoothing = "poly". Conversely, k is only accepted for "spline", "gam" and the shape-constrained methods. This separation prevents a complexity argument from being supplied but silently ignored.

The deprecated smooth_coef() wrapper remains available for backwards compatibility.

Value

An object of class rating_refinement containing the stored smoothing specification. The pricing GLM is not fitted again until refit() is called.

Author(s)

Martin Haringa

See Also

prepare_refinement(), edit_smoothing(), add_restriction(), add_shrinkage(), add_rebasing(), add_relativities(), refit(), risk_factor_gam()

Examples

## Not run: 
library(dplyr)

age_policyholder_frequency <- risk_factor_gam(
  data = MTPL,
  claim_count = "nclaims",
  risk_factor = "age_policyholder",
  exposure = "exposure"
)

age_segments_freq <- derive_tariff_segments(
  age_policyholder_frequency,
  segmentation_penalty = 10,
  seed = 1
)

dat <- MTPL |>
  add_tariff_segments(age_segments_freq, name = "age_policyholder_freq_cat") |>
  mutate(across(where(is.character), as.factor)) |>
  mutate(across(where(is.factor), ~ set_reference_level(., exposure)))

freq <- glm(
  nclaims ~ bm + age_policyholder_freq_cat,
  offset = log(exposure),
  family = poisson(),
  data = dat
)

sev <- glm(
  amount ~ zip,
  weights = nclaims,
  family = Gamma(link = "log"),
  data = dat |> filter(amount > 0)
)

premium_df <- dat |>
  add_prediction(freq, sev) |>
  mutate(premium = pred_nclaims_freq * pred_amount_sev)

burn_unrestricted <- glm(
  premium ~ zip + bm + age_policyholder_freq_cat,
  weights = exposure,
  family = Gamma(link = "log"),
  data = premium_df
)

ref <- prepare_refinement(burn_unrestricted) |>
  add_smoothing(
    model_variable = "age_policyholder_freq_cat",
    source_variable = "age_policyholder",
    breaks = c(seq(18, 93, 5), 95),
    smoothing = "spline",
    k = 6,
    weights = "exposure"
  )

# When the tariff effect must not decrease, use the readable constrained
# method name. The former value "mpi" remains accepted for compatibility.
increasing_ref <- prepare_refinement(burn_unrestricted) |>
  add_smoothing(
    model_variable = "age_policyholder_freq_cat",
    source_variable = "age_policyholder",
    breaks = c(seq(18, 93, 5), 95),
    smoothing = "increasing",
    k = 6,
    weights = "exposure"
  )

# Limit the visible range without changing the fitted smoothing curve.
autoplot(ref, x_max = 80, y_max = 1.5)


## End(Not run)

insurancerating documentation built on Sept. 1, 2026, 5:08 p.m.