Isotonic Recalibration under a Low Signal-to-Noise Ratio

There are two seemingly unrelated problems in insurance pricing that we are going to tackle in this paper. First, an insurance pricing system should not have any systematic cross-financing between different price cohorts. Systematic cross-financing implicitly means that some parts of the portfolio are under-priced, and this is compensated by other parts of the portfolio that are over-priced. We can prevent systematic cross-financing between price cohorts by ensuring that the pricing system is auto-calibrated. We propose to apply isotonic recalibration which turns any regression function into an auto-calibrated pricing system.