Pricing in General Insurance

437Credibility Theory

As for φ

m

, we assume that this comes from an exposure rating exercise based on the

knowledge of the client’s portfolio of properties and of its loss ratio. It will not have escaped

you that this is hardly a market estimate – it is based on the client’s characteristics, but also

on exposure curves that have been derived by a number of different clients, such as the

Swiss Re curves, so this is a rather hybrid measure. Although this is not in itself a problem

because the main idea of credibility is that we are comparing an observation-based esti-

mate with an independent benchmark estimate based on other clients but with a sim ...