Credibility for Pricing Loss Ratios and Loss Costs

This paper discusses how credibility can be applied to pricing loss ratios and loss costs. A method is also presented that can perform a credibility weighted allocation of losses without changing the overall average, which often occurs when applying credibility. Finally, it is shown how Generalized Linear Mixed Models can be used to credibility weight loss ratios while taking multiple dimensions into account. Workarounds are shown for some common pitfalls, and it is explained how to implement these models in spreadsheets.

Keywords: Bühlmann-Straub Credibility, Bayesian Credibility, Loss Ratios, Loss Costs, Generalized Linear Mixed Models