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Distributions

Limited Fluctuation Credibility Theory

Tutorial 1

1 / 19

Review

I Sample mean: X = X1 ++X

n

n

, where X1 , . . . , Xn are past

experiences (number of claims, amount of claim, et al.) on

the individual;

I Manual premium: M, which totally ignores the past

experiences.

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Review

The premium will be charged by

I X , if the standard for full credibility is satisfied;

I M, if not satisfied.

The premium will be charged by Z X + (1 Z )M, where Z is the

credibility factor.

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Full credibility

Full credibility will be assigned if

P(|X | r ) p,

general, r is small but p is large (e.g., r = 0.05, p = 0.9).

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Full credibility: X denotes claim amount

In this case, the standard of full credibility reduces to

2

Var [X ]

n 0 = 0 ,

(E[X ])2

where

- n is the number of past observations

- Var [X ] = 2 , E[X ] =

- coefficient of variation =

n o

- yp = miny P |X |

y p

/ n

- 0 = (yp /r )2 (remember this!)

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Full credibility: X denotes claim amount

Calculation of 0

Upon using the Central Limit Theorem (CLT), we have

1 p + 1

yp = .

2

Furthermore, y 2

p

0 = .

r

Specifically, if we take p = 0.9, r = 0.05, then

yp = 1.645, 0 = 1082.41.

q Pn

2

i=1 (Xi X )

Estimating , : = X and = n1

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Full credibility: X denotes claim count

parameter , the standard of full credibility can be rewritten as

Var [N] 0

n 0 2

= ,

(E[N])

or

n 0 ,

where n is the number of exposure units, and n is the

expected number of claims.

If = n1 ni=1 Ni , an estimator of , then the standard of full

P

I

credibility is

Xn

n = Ni 0 .

i=1

7 / 19

Full credibility: X denotes compound Poisson claim

amounts

random variable with parameter , and the severity of the j-th

claim is denoted as Yi,j . Then, the total claim amounts in year i is

Ni

X

Xi = Yij , i = 1, 2, . . . , n.

j=1

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(i) Standard of full credibility: numbers of exposure periods

" #

Y 2

Var [X ] 0

n 0 = 1+

(E[X ])2 Y

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(ii) Standard of full credibility: number of claims

" 2 #

Y

n 0 1 + .

Y

Given real data, check that

n

" 2 #

X Y

Ni 0 1 + .

Y

i=1

10 / 19

(iii) Standard of full credibility: total amount of claims

Y2

nY 0 Y + .

Y

Given real data, check that

n

Y2

X

Xi 0 Y + .

Y

i=1

11 / 19

One typo on Page 8 of lecture notes

By the formula n E[Y ] 5412.05, which means that the total

amount of claims should be larger than 5412.05. Therefore, it

should be said that the number 5412.05 (not 5142) satisfies with

the standard!

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Problem 1

Determine the number of claims required for full credibility, given

the following information,

I the number of claims (N) is Poisson distributed;

I the severity distribution (Y ) has mean 1000 and variance

2700000; and

I the full credibility standard is to be 90% certain that the total

claim amount is within 5% of the true mean.

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Solution 1

In this compound Poisson model, the full credibility standard is

" #

Y 2

n 0 1 + .

Y

" #

Y 2

2700000

0 1 + = 1082.41 1 + = 4004.92,

Y 10002

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Problem 2

Suppose that the total claim amount is compound Poisson

distributed. Let A be the number of claims needed for full

credibility, if the estimate of the total claim amount is to be within

5% of the true value with a 90% probability. Let B to be the

similar number using 10% rather than 5%. What is the ratio of

A/B?

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Solution 2

In this compound Poisson model, the full credibility standard is

" 2 # " 2 #

y 2 y 2

p p

A= 1+ = 1+ .

r 0.05

Similarly, "

y 2 2 #

p

B= 1+ .

0.1

Hence 2

A 0.1

= = 4.

B 0.05

16 / 19

Problem 3

You have determined that 2670 claims are necessary for full

credibility on the total claim amount under a compound Poisson

model with constant severity C . If severities are log-normal

distributed with mean 1000 and variance 1500000, how many

claims are needed for full credibility?

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Solution 3

In the compound Poisson model, the full credibility standard is

" #

Y 2

n 0 1 + .

Y

Therefore, we have

" 2 # " 2 #

Y 0

2670 = 0 1 + = 0 1+ ,

Y C

which indicates

0 = 2670.

18 / 19

When severities are log-normal distributed with mean 1000 and

variance 1500000, we have

" #

Y 2

1500000

n 0 1 + = 2670 1 + = 6675.

Y 10002

19 / 19

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