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7 - Bühlmann credibility

from Part III - Credibility

Published online by Cambridge University Press:  05 June 2012

Yiu-Kuen Tse
Affiliation:
Singapore Management University
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Summary

While the classical credibility theory addresses the important problem of combining claim experience and prior information to update the prediction for loss, it does not provide a very satisfactory solution. The method is based on arbitrary selection of the coverage probability and the accuracy parameter. Furthermore, for tractability some restrictive assumptions about the loss distribution have to be imposed.

Bühlmann credibility theory sets the problem in a rigorous statistical framework of optimal prediction, using the least mean squared error criterion. It is flexible enough to incorporate various distributional assumptions of loss variables. The approach is further extended to enable the claim experience of different blocks of policies with different exposures to be combined for improved forecast through the Bühlmann–Straub model.

The Bühlmann and Bühlmann–Straub models recognize the interaction of two sources of variability in the data, namely the variation due to between-group differences and variation due to within-group fluctuations. We begin this chapter with the set-up of the Bühlmann credibility model, and a review of how the variance of the loss variable is decomposed into between-group and within-group variations. We derive the Bühlmann credibility factor and updating formula as the minimum mean squared error predictor. The approach is then extended to the Bühlmann–Straub model, in which the loss random variables have different exposures.

Type
Chapter
Information
Nonlife Actuarial Models
Theory, Methods and Evaluation
, pp. 190 - 222
Publisher: Cambridge University Press
Print publication year: 2009

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  • Bühlmann credibility
  • Yiu-Kuen Tse, Singapore Management University
  • Book: Nonlife Actuarial Models
  • Online publication: 05 June 2012
  • Chapter DOI: https://doi.org/10.1017/CBO9780511812156.012
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  • Bühlmann credibility
  • Yiu-Kuen Tse, Singapore Management University
  • Book: Nonlife Actuarial Models
  • Online publication: 05 June 2012
  • Chapter DOI: https://doi.org/10.1017/CBO9780511812156.012
Available formats
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Save book to Google Drive

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Google Drive.

  • Bühlmann credibility
  • Yiu-Kuen Tse, Singapore Management University
  • Book: Nonlife Actuarial Models
  • Online publication: 05 June 2012
  • Chapter DOI: https://doi.org/10.1017/CBO9780511812156.012
Available formats
×