Unified Spatial Clustering of Territory Risk to Uncover Impact of COVID-19 Pandemic on Major Coverages of Auto Insurance

Abstract

This research delves into the fusion of spatial clustering and predictive modeling within auto insurance data analytics. The primary focus of this research is on addressing challenges stemming from the dynamic nature of spatial patterns in multiple accident year claim data, by using spatially constrained clustering. The spatially constrained clustering is implemented under hierarchical clustering with a soft contiguity constraint. It is highly desirable for insurance companies and insurance regulators to be able to make meaningful comparisons of loss patterns obtained from multiple reporting years that summarize multiple accident year loss metrics. By integrating spatial clustering techniques, the study not only improves the credibility of predictive models but also introduces a strategic dimension reduction method that concurrently enhances the interpretability of predictive models used. The evolving nature of spatial patterns over time poses a significant barrier to a better understanding of complex insurance systems as these patterns transform due to various factors. While spatial clustering effectively identifies regions with similar loss data characteristics, maintaining up-to-date clusters is an ongoing challenge. This research underscores the importance of studying spatial patterns of auto insurance claim data across major insurance coverage types, including Accident Benefits (AB), Collision (CL), and Third-Party Liability (TPL). The research offers regulators valuable insights into distinct risk profiles associated with different coverage categories and territories. By leveraging spatial loss data from pre-pandemic and pandemic periods, this study also aims to uncover the impact of the COVID-19 pandemic on auto insurance claims of major coverage types. From this perspective, we observe a statistically significant increase in insurance premiums for CL coverage after the pandemic. The proposed unified spatial clustering method incorporates a relabeling strategy to standardize comparisons across different accident years, contributing to a more robust understanding of the pandemic effects on auto insurance claims. This innovative approach has the potential to significantly influence data visualization and pattern recognition, thereby improving the reliability and interpretability of clustering methods.