Credibility Methods for Individual Life Insurance

Yikai (Maxwell) Gong, Zhuangdi Li, Maria Milazzo, Kristen Moore and Matthew Provencher
Additional contact information
Yikai (Maxwell) Gong: BlueCrest Capital, New York, NY 10022, USA
Zhuangdi Li: PayPal, Inc., San Jose, CA 95131, USA
Maria Milazzo: Unum, Chattanooga, TN 37402, USA
Kristen Moore: Department of Mathematics, University of Michigan, Ann Arbor, MI 48109-1043, USA
Matthew Provencher: Mutual of Omaha Insurance Co., Omaha, NE 68175-1004, USA

Risks, 2018, vol. 6, issue 4, 1-16

Abstract: Credibility theory is used widely in group health and casualty insurance. However, it is generally not used in individual life and annuity business. With the introduction of principle-based reserving (PBR), which relies more heavily on company-specific experience, credibility theory is becoming increasingly important for life actuaries. In this paper, we review the two most commonly used credibility methods: limited fluctuation and greatest accuracy (Bühlmann) credibility. We apply the limited fluctuation method to M Financial Group’s experience data and describe some general qualitative observations. In addition, we use simulation to generate a universe of data and compute Limited Fluctuation and greatest accuracy credibility factors for actual-to-expected (A/E) mortality ratios. We also compare the two credibility factors to an intuitive benchmark credibility measure. We see that for our simulated data set, the limited fluctuation factors are significantly lower than the greatest accuracy factors, particularly for low numbers of claims. Thus, the limited fluctuation method may understate the credibility for companies with favorable mortality experience. The greatest accuracy method has a stronger mathematical foundation, but it generally cannot be applied in practice because of data constraints. The National Association of Insurance Commissioners (NAIC) recognizes and is addressing the need for life insurance experience data in support of PBR—this is an area of current work.

Keywords: credibility; principle-based reserving; simulation (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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