A Class of Conjugate Priors for Log‐Normal Claims Based on Conditional Specification

José María Sarabia (), Enrique Castillo, Emilio Gómez‐Déniz and Francisco J. Vázquez‐Polo

Journal of Risk & Insurance, 2005, vol. 72, issue 3, 479-495

Abstract: In this article, a new methodology for obtaining a premium based on a broad class of conjugate prior distributions, assuming lognormal claims, is presented. The new class of prior distributions arise in a natural way, using the conditional specification technique introduced by Arnold, Castillo, and Sarabia (1998, 1999). The new family of prior distributions is very flexible and contains, as particular cases, many other distributions proposed in the literature. Together with its flexibility, the main advantage of this distribution is that, due to its dependence on a large number of hyperparameters, it allows incorporating a wide amount of prior information. Several methods for hyperparameter elicitation are proposed. Finally, some examples with real and simulated data are given.

Date: 2005
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