Summary and Info
Credibility theory prov1des us with techn1ques to determine insurancepremiums for contracts that belong to a more or less heterogeneousportfolio, in case there is limited or irregular claims exper1ence foreach contract but ample claims experience for the portfolio. It is the artand sc1ence of using both kinds of experience to adjust the insurancepremiums and to improve their accuracy.The general and by now famous credibility formulaC = (1 - Z) .B + Z.Aoriginated in the United States during the years before World War I andwas suggested in the field of workmen's compensation insurance.The industry- wide premium rate charged for a particular occupational classis represented by B. But an employer having a favourable record w1th thisclass tries to lower his premium to A, the rate based on his ownexperience. Because observat1ons of one employer are to a large extendruled by random fluctuations, Whitney [1918) suggested a balance C betweenthe two extremes A and B.Some 70 years ago he wrote:"The problem of experience rating arises out of the necess1ty , fromthe standpoint of equity to the individual risk , of stnk1ng abalance between class-experience on the one hand and risk exper1enceon the other" .It was felt that the mixing-factor Z should reflect the volume of theemployer's experience. The larger this volume, the more credib1lity, bymeans of a high value of Z, is attached to the desired premium A. Thus itbecame common parlance to denote Z as "the credibility factor" or simply"the credibility". The theory of credibility 1s concerned w1th thequest1on of how much weight should be g1ven to th1s actual cla1msexperience. Of course , not only downward but also upward sh1fts 1nindividual premiums are possible, although the employer's pressure 1n suchcases will not be felt strongly.
More About the Author
Govert (or Govaert) Teuniszoon Flinck (25 January 1615 – 2 February 1660) was a Dutch painter of the Dutch Golden Age.
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