Specification Tests for Families of Discrete Distributions with Applications to Insurance Claims Data

Families of distributions are commonly used to model insurance claims data that require flexible distributional forms in a satisfactory manner, but the specification problem to assess the goodness-of-fit of the hypothesized model can sometimes be a challenge due to the complexity of the likelihood function of the family of distributions involved. The previous work shows that these specification problems can be attacked by means of semi-parametric tests based on generalized method of moment (GMM) estimators. While the approach can be directly applied to both discrete and continuous families of distributions, the paper focuses on developing a testing strategy within a framework of discrete families of distributions. Both the local power analysis and the approximate slope method demonstrate the excellent performance of these tests. The finite-sample performance of the tests, based on both asymptotic and bootstrap critical values, are also discussed and are compared with established methods that require the complete specification of likelihood functions.