Application of Burr XII Mixture Distributions to Model Unemployment Duration in Pricing Unemployment Insurance Assuming USA Data

Abstract

The objective of this research is to consider varying unemployment duration in the pricing of unemployment insurance with application to USA data. The study assumes that unemployment duration follows Burr XII mixture distribution while the discount rate to use in the pricing of the scheme will be determined by fitting market data into the capital asset pricing model. The Burr XII mixture distribution has been used to model unemployment duration in order to allow for heterogeniety in the unemployment duration of the insured employees. The results yield a mean unemployment duration of approximately 16 weeks and premium contribution rate of 5.10% of the taxable wage base per month for a benefit of 45% of the taxable wage base per month payable on weekly basis during spells of unemployment.