Premium Rating by Geographic Area Using Spatial Models

This paper gives a method for premium rating by postcode area. The method is based on spatial models in a Bayesian framework and uses the Gibbs sampler for estimation. A summary of the theory of Bayes in spatial methods is given and the data which was analyzed by TAYLOR (1989) is reanalyzed. An indication is given of the wide range of models within this class which would be suitable for insurance data. The aim of the paper is to introduce the models and to show how they can be utilized in an insurance setting.