On the ordering of credibility factors
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Publication:2665880
Abstract: Traditional credibility analysis of risks in insurance is based on the random effects model, where the heterogeneity across the policyholders is assumed to be time-invariant. One popular extension is the dynamic random effects (or state-space) model. However, while the latter allows for time-varying heterogeneity, its application to the credibility analysis should be conducted with care due to the possibility of negative credibilities per period [see Pinquet (2020a)]. Another important but under-explored topic is the ordering of the credibility factors in a monotonous manner -- recent claims ought to have larger weights than the old ones. This paper shows that the ordering of the covariance structure of the random effects in the dynamic random effects model does not necessarily imply that of the credibility factors. Subsequently, we show that the state-space model, with AR(1)-type autocorrelation function, guarantees the ordering of the credibility factors. Simulation experiments and a case study with a real dataset are conducted to show the relevance in insurance applications.
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Cited in
(9)- Poisson models with dynamic random effects and nonnegative credibilities per period
- A simple Bayesian state-space approach to the collective risk models
- Diagnostic tests before modeling longitudinal actuarial data
- Tweedie multivariate semi-parametric credibility with the exchangeable correlation
- Effective experience rating for large insurance portfolios via surrogate modeling
- Applications of population sampling to insurance ratemaking and reserving
- Multivariate claim count regression model with varying dispersion and dependence parameters
- Experience rating of risk premium for Esscher premium principle
- An observation-driven state-space model for claims size modelling
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