An Accurate Asymptotic Approximation for Experience Rated Premiums

Riccardo Gatto

ASTIN Bulletin, 2004, vol. 34, issue 1, 113-124

Abstract: In the Bayesian approach, the experience rated premium is the value which minimizes an expected loss with respect to a posterior distribution. The posterior distribution is conditioned on the claim experience of the risk insured, represented by a n-tuple of observations. An exact analytical calculation for the experience rated premium is possible under restrictive circumstances only, regarding the prior distribution, the likelihood function, and the loss function. In this article we provide an analytical asymptotic approximation as n → ∞ for the experience rated premium. This approximation can be obtained under more general circumstances, it is simple to compute, and it inherits the good accuracy of the Laplace approximation on which it is based. In contrast with numerical methods, this approximation allows for analytical interpretations. When exact calculations are possible, some analytical comparisons confirm the good accuracy of this approximation, which can even lead to the exact experience rated premium.

Date: 2004
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