On Pareto Conjugate Priors and Their Application to Large Claims Reinsurance Premium Calculation

José L. Vilar-Zanón and Cristina Lozano-Colomer

ASTIN Bulletin, 2007, vol. 37, issue 2, 405-428

Abstract: This paper addresses the Bayesian estimation of the shape parameter of Pareto distributions, and its application to premium calculation of large claims excess of loss (XL) reinsurance contracts. It studies the use of the generalized inverse Gaussian (GIG) as a Pareto prior conjugate, a family that contains as a particular case the gamma distribution. An exact credibility formula is deduced allowing the calculation of individual reinsurance premiums. These are premiums suited to the excesses history of a sole portfolio. A family of predictive distributions for the excesses is derived. We apply our exact credibility model to a sample of excesses arisen in ten Spanish portfolios of liability motor insurance from year 1992 to year 2001.

Date: 2007
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