Credibility ratemaking using collateral information

Yu Luo, Virginia R. Young and Edward W. Frees

Scandinavian Actuarial Journal, 2004, vol. 2004, issue 6, 448-461

Abstract: Credibility ratemaking is a technique used in pricing health care, property and casualty, workers’ compensation, and group life coverages. It has been a part of actuarial practice since the time of Mowbray's (1914) contribution. In earlier work, we showed how many types of credibility models could be expressed as special cases of mixed linear models. This article extends this approach to credibility by formally introducing collateral information through the use of Bayesian methods. Specifically, we derive credibility estimators and mean square errors for normal hierarchical linear models. We provide intuition for the credibility estimators by establishing the link between these estimators and homogeneous and inhomogeneous estimators that appear in non-Bayesian credibility theory.

Date: 2004
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DOI: 10.1080/03461230310017513

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