The HPSEVERITY Procedure

If you work in the risk management department of an insurance company or a bank, then one of your primary applications of severity loss distribution models is to predict the value-at-risk (VaR) so that there is a very low probability of experiencing a loss value that is greater than the VaR. The probability level at which VaR is measured is prescribed by industry regulations such as Basel III and Solvency II. The VaR level is usually specified in terms of , where is the probability that a loss value exceeds the VaR. Typical VaR levels are 0.95, 0.975, and 0.995.

In addition to predicting the VaR, which is regarded as an estimate of the worst-case loss, businesses are often interested in predicting the average loss by estimating either the mean or median of the distribution.

The estimation of the mean and VaR combined with the scale regression model is very potent tool for analyzing worst-case and average losses for various scenarios. For example, if the regressors that are used in a scale regression model represent some key macroeconomic and operational indicators, which are widely referred to as key risk indicators (KRIs), then you can analyze the VaR and mean loss estimates over various values for the KRIs to get a more comprehensive picture of the risk profile of your organization across various market and internal conditions.

This example illustrates the use of scoring functions to simplify the process of predicting the mean and VaR of scale regression models.

To compute the mean, you need to ensure that the function to compute the mean of a distribution is available in the function library. If you define and fit your own distribution and you want to compute its mean, then you need to use the FCMP procedure to define that function and you need to use the CMPLIB= system option to specify the location of that function. For your convenience, the dist_MEAN function (which computes the mean of the dist distribution) is already defined in the Sashelp.Svrtdist library for each of the 10 predefined distributions. The following statements display the definitions of MEAN functions of all distributions. Note that the MEAN functions for the Burr, Pareto, and generalized Pareto distributions check the existence of the first moment for specified parameter values.

/*--------- Definitions distribution functions that compute the mean ----------*/
proc fcmp library=sashelp.svrtdist outlib=work.means.scalemod;
   function BURR_MEAN(x, Theta, Alpha, Gamma);
      if not(Alpha * Gamma > 1) then
         return (.); /* first moment does not exist */
      return (Theta*gamma(1 + 1/Gamma)*gamma(Alpha - 1/Gamma)/gamma(Alpha));
   endsub;
   function EXP_MEAN(x, Theta);
      return (Theta);
   endsub;
   function GAMMA_MEAN(x, Theta, Alpha);
      return (Theta*Alpha);
   endsub;
   function GPD_MEAN(x, Theta, Xi);
      if not(Xi < 1) then
         return (.); /* first moment does not exist */
      return (Theta/(1 - Xi));
   endsub;
   function IGAUSS_MEAN(x, Theta, Alpha);
      return (Theta);
   endsub;
   function LOGN_MEAN(x, Mu, Sigma);
      return (exp(Mu + Sigma*Sigma/2.0));
   endsub;


   function PARETO_MEAN(x, Theta, Alpha);
      if not(Alpha > 1) then
         return (.); /* first moment does not exist */
      return (Theta/(Alpha - 1));
   endsub;
   function STWEEDIE_MEAN(x, Theta, Lambda, P);
      return (Theta* Lambda * (2 - P) / (P - 1));
   endsub;
   function TWEEDIE_MEAN(x, P, Mu, Phi);
      return (Mu);
   endsub;
   function WEIBULL_MEAN(x, Theta, Tau);
      return (Theta*gamma(1 + 1/Tau));
   endsub;
quit;

For your further convenience, the dist_QUANTILE function (which computes the quantile of the dist distribution) is also defined in the Sashelp.Svrtdist library for each of the 10 predefined distributions. Because the MEAN and QUANTILE functions satisfy the definition of a distribution function as described in the section Formal Description, you can submit the following PROC HPSEVERITY step to fit all regression-friendly predefined distributions and generate the scoring functions for the MEAN, QUANTILE, and other distribution functions:

/*----- Fit all distributions and generate scoring functions ------*/
proc hpseverity data=test_sev9 outest=est print=all;
   loss y;
   scalemodel x1-x5;
   dist _predefined_ stweedie;
   outscorelib outlib=scorefuncs commonpackage;
run;

The SAS statements that simulate the sample in the Work.Test_sev9 data set are available in the PROC HPSEVERITY sample program hsevex09.sas. The OUTLIB= option in the OUTSCORELIB statement requests that the scoring functions be written to the Work.Scorefuncs library, and the COMMONPACKAGE option in the OUTSCORELIB statement requests that all the functions be written to the same package. Upon completion, PROC HPSEVERITY sets the CMPLIB system option to the following value:

   (sashelp.svrtdist work.scorefuncs)

The "All Fit Statistics" table in Output 9.9.1 shows that the lognormal distribution’s scale model is the best and the inverse Gaussian’s scale model is a close second according to the likelihood-based statistics.

You can examine the scoring functions that are written to the Work.Scorefuncs library by using the FCMP Function Editor, which is available in the Display Manager session of Base SAS when you select SolutionsAnalysis from the main menu. For example, PROC HPSEVERITY automatically generates and submits the following PROC FCMP statements to define the scoring functions SEV_MEAN_LOGN and SEV_QUANTILE_IGAUSS:

proc fcmp library=(sashelp.svrtdist) outlib=work.scorefuncs.sevfit;
   function SEV_MEAN_LOGN(y, x{*});
      _logscale_=0;
      _logscale_ = _logscale_ + ( 7.64722278930350E-01 * x{1});
      _logscale_ = _logscale_ + ( 2.99209540369860E+00 * x{2});
      _logscale_ = _logscale_ + (-1.00788916253430E+00 * x{3});
      _logscale_ = _logscale_ + ( 2.58883602184890E-01 * x{4});
      _logscale_ = _logscale_ + ( 5.00927479793970E+00 * x{5});
      _logscale_ = _logscale_ + ( 9.95078833050690E-01);
      return (LOGN_MEAN(y, _logscale_,  2.31592981635590E-01));
   endsub;

   function SEV_QUANTILE_IGAUSS(y, x{*});
      _logscale_=0;
      _logscale_ = _logscale_ + ( 7.64581738373520E-01 * x{1});
      _logscale_ = _logscale_ + ( 2.99159055015310E+00 * x{2});
      _logscale_ = _logscale_ + (-1.00793496641510E+00 * x{3});
      _logscale_ = _logscale_ + ( 2.58870460543840E-01 * x{4});
      _logscale_ = _logscale_ + ( 5.00996884646730E+00 * x{5});
      _scale_ =  2.77854870591020E+00 * exp(_logscale_);
      return (IGAUSS_QUANTILE(y, _scale_,  1.81511227238720E+01));
   endsub;
quit;

PROC HPSEVERITY detects all the distribution functions that are available in the current CMPLIB= search path (which always includes the Sashelp.Svrtdist library) for the distributions that you specify in the DIST statement, and it creates the corresponding scoring functions. You can define any distribution function that has the desired signature to compute an estimate of your choice, include its library in the CMPLIB= system option, and then specify the OUTSCORELIB statement to generate the corresponding scoring functions. Specifying the COMMONPACKAGE option in the OUTSCORELIB statement causes the name of the scoring function to take the form SEV_function-suffix_dist. If you do not specify the COMMONPACKAGE option, PROC HPSEVERITY creates a scoring function named SEV_function-suffix in a package named dist. You can invoke functions from a specific package only inside the FCMP procedure. If you want to invoke the scoring functions from a DATA step, then it is recommended that you specify the COMMONPACKAGE option when you specify multiple distributions in the DIST statement.

To illustrate the use of scoring functions, let Work.Reginput contain the scoring data, where the values of regressors in each observation define one scenario. Scoring functions make it very easy to compute the mean and VaR of each distribution’s scale model for each of the scenarios, as the following steps illustrate for the lognormal and inverse Gaussian distributions:

/*--- Set VaR level ---*/
%let varLevel=0.975;

/*--- Compute scores (mean and var) for the       ---
  --- scoring data by using the scoring functions ---*/
data scores;
   array x{*} x1-x5;
   set reginput;

   igauss_mean = sev_mean_igauss(., x);
   igauss_var  = sev_quantile_igauss(&varLevel, x);
   logn_mean   = sev_mean_logn(., x);
   logn_var    = sev_quantile_logn(&varLevel, x);
run;

The preceding steps use a VaR level of 97.5%.

The following DATA step accomplishes the same task by reading the parameter estimates that were written to the Work.Est data set by the previous PROC HPSEVERITY step:

/*--- Compute scores (mean and var) for the       ---
  --- scoring data by using the OUTEST= data set  ---*/
data scoresWithOutest(keep=x1-x5 igauss_mean igauss_var logn_mean logn_var);
   array _x_{*} x1-x5;
   array _xparmIgauss_{5} _temporary_;
   array _xparmLogn_{5} _temporary_;

   retain _Theta0_ Alpha0;
   retain _Mu0_ Sigma0;
   *--- read parameter estimates for igauss and logn models ---*;
   if (_n_ = 1) then do;
      set est(where=(upcase(_MODEL_)='IGAUSS' and _TYPE_='EST'));
      _Theta0_ = Theta; Alpha0 = Alpha;
      do _i_=1 to dim(_x_);
         if (_x_(_i_) = .R) then _xparmIgauss_(_i_) = 0;
         else _xparmIgauss_(_i_) = _x_(_i_);
      end;

      set est(where=(upcase(_MODEL_)='LOGN' and _TYPE_='EST'));
      _Mu0_ = Mu; Sigma0 = Sigma;
      do _i_=1 to dim(_x_);
         if (_x_(_i_) = .R) then _xparmLogn_(_i_) = 0;
         else _xparmLogn_(_i_) = _x_(_i_);
      end;
   end;

   set reginput;

   *---  predict mean and VaR for inverse Gaussian  ---*;
   * first compute X'*beta for inverse Gaussian *;
   _xbeta_ = 0.0;
   do _i_ = 1 to dim(_x_);
      _xbeta_ = _xbeta_ + _xparmIgauss_(_i_) * _x_(_i_);
   end;
   * now compute scale for inverse Gaussian *;
   _SCALE_ = _Theta0_ * exp(_xbeta_);
   igauss_mean = igauss_mean(., _SCALE_, Alpha0);
   igauss_var = igauss_quantile(&varLevel, _SCALE_, Alpha0);

   *---  predict mean and VaR for lognormal         ---*;
   * first compute X'*beta for lognormal*;
   _xbeta_ = 0.0;
   do _i_ = 1 to dim(_x_);
      _xbeta_ = _xbeta_ + _xparmLogn_(_i_) * _x_(_i_);
   end;
   * now compute Mu=log(scale) for lognormal *;
   _MU_ = _Mu0_ + _xbeta_;
   logn_mean = logn_mean(., _MU_, Sigma0);
   logn_var = logn_quantile(&varLevel, _MU_, Sigma0);
run;

The "Values Comparison Summary" table in Output 9.9.2 shows that the difference between the estimates that are produced by both methods is within the acceptable machine precision. However, the comparison of the DATA step complexity of each method clearly shows that the method that uses the scoring functions is much easier because it saves a lot of programming effort. Further, new distribution functions, such as the dist_MEAN functions that are illustrated here, are automatically discovered and converted to scoring functions by PROC HPSEVERITY. That enables you to focus your efforts on writing the distribution function that computes your desired score, which needs to be done only once. Then, you can create and use the corresponding scoring functions multiple times with much less effort.

                             The COMPARE Procedure                              
              Comparison of WORK.SCORESWITHOUTEST with WORK.SCORES              
                  (Method=RELATIVE(0.0222), Criterion=1.0E-12)                  
                                                                                
NOTE: All values compared are within the equality criterion used. However, 40   
      of the values compared are not exactly equal.