Pricing in General Insurance

442 Pricing in General Insurance

25.4.2 Bayesian Credibility

Credibility has a natural interpretation in the context of Bayesian theory: the ‘market pre-

mium’ can be interpreted as a prior value for the premium, and one can say that the pre-

miums of different clients are positioned around the market premium according to a prior

distribution of the premiums.

Also, for each policyholder, we will have past losses X

1

, X

2

…X

n

(X

j

is a random variable

that may represent the number of losses in year j, the revalued amounts of all losses, the

revalued total claims in each year/period, or the loss ratio in each year/period, etc.; the

actual values are denoted ...