Excess Claims and Data Trimming in the Context of Credibility Rating Procedures,
CALIFORNIA UNIV BERKELEY
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In Ratemaking and in Experience Rating, one is often confronted with the dilemma of whether or not to fully charge very large claims to the claims load of small risk groups or of individual risks. Practitioners typically use an a posteriori argument in this situation If such large claims should be fully charged then the rates obtained would become ridiculous, hence it should not be done. This paper aims at explaining this practical attitude from first principles. Credibility Theory in its standard form makes the first step in the good direction. It explains to use that all claims should not be fully charged but only with the constant fraction of the credibility weight. In many applications, however, it is still felt that the fraction of this charge should depend on the size of a claim. This leads very naturally to the idea of combining credibility procedures and data trimming.
- Economics and Cost Analysis
- Statistics and Probability