Linear goal programming and experience rating

Antonio José Heras Martínez, José Luis Vilar Zanón, José Antonio Fana and Pilar García Pineda
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Antonio José Heras Martínez: Departamento de Economía Financiera y Contabilidad I (Economía Financiera y Actuarial). Universidad Complutense de Madrid., https://www.ucm.es/economia-financiera-y-actuarial
José Luis Vilar Zanón: Departamento de Economía Financiera y Contabilidad I (Economía Financiera y Actuarial). Universidad Complutense de Madrid., https://www.ucm.es/economia-financiera-y-actuarial
José Antonio Fana: Departamento de Economía Financiera y Contabilidad I (Economía Financiera y Actuarial). Universidad Complutense de Madrid., https://www.ucm.es/economia-financiera-y-actuarial
Pilar García Pineda: Departamento de Economía Financiera y Contabilidad I (Economía Financiera y Actuarial). Universidad Complutense de Madrid., https://www.ucm.es/economia-financiera-y-actuarial

No 01-17, Documentos de trabajo de la Facultad de Ciencias Económicas y Empresariales from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales

Abstract: This paper is devoted to the explanation of a new methodology in bonus malus system design, capable of taking into account very well known theoretical conditions like fairness and …nancial equilibrium of the portfolio, in addition to market conditions that could …t the resulting scale of premiums into competitive commercial settings. This is done through the resolution of a classical Bayesian decision problem, by means of minimization of the absolute error instead of the classical quadratic error. It is at this stage that we apply Goal Programming methods, which are linear thanks to the equivalence between the minimization of the absolute error and the minimization of the sum of some deviation variables which have a natural interpretation as rating errors. We show in an example how does the new methodology work. All the linear programs have been solved using the simplex method.

Keywords: Programación lineal; Goal Programming; Simplexmethod; Bonus-malus system; Bayes. scale, Rating error, Bayesian decision. (search for similar items in EconPapers)
Pages: 32 pages
Date: 2001
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