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Credibility theory based on trimming

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  • Kim, Joseph H.T.
  • Jeon, Yongho

Abstract

The classical credibility theory proposed by Bühlmann has been widely used in general insurance applications. In this paper we propose a credibility theory via truncation of the loss data, or the trimmed mean. The proposed framework contains the classical credibility theory as a special case and is based on the idea of varying the trimming threshold level to investigate the sensitivity of the credibility premium. After showing that the trimmed mean is not a coherent risk measure, we investigate some related asymptotic properties of the structural parameters in credibility. Later a numerical illustration shows that the proposed credibility models can successfully capture the tail risk of the underlying loss model, thus providing a better landscape of the overall risk that insurers assume.

Suggested Citation

  • Kim, Joseph H.T. & Jeon, Yongho, 2013. "Credibility theory based on trimming," Insurance: Mathematics and Economics, Elsevier, vol. 53(1), pages 36-47.
    • Handle: RePEc:eee:insuma:v:53:y:2013:i:1:p:36-47
    DOI: 10.1016/j.insmatheco.2013.03.012
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    Cited by:

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    2. Cheung, Ka Chun & Yam, Sheung Chi Phillip & Zhang, Yiying, 2022. "Satisficing credibility for heterogeneous risks," European Journal of Operational Research, Elsevier, vol. 298(2), pages 752-768.
    3. Chen, Yongzhao & Cheung, Ka Chun & Choi, Hugo Ming Cheung & Yam, Sheung Chi Phillip, 2020. "Evolutionary credibility risk premium," Insurance: Mathematics and Economics, Elsevier, vol. 93(C), pages 216-229.

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