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ACTL3003 Assignment

Part A

Approach 1

Table 1: Losses and Units of Volume 1

Year 1 2 3 4 5 6 7 8 9 10
Contract 1 Aggregate Claim Amount 0 1345 1846 10159 7364 5972 23524 14976 10824 17601
Volume 2 2 3 4 6 6 8 5 6 6
Contract 2 Aggregate Claim Amount 0 0 0 0 0 0 0 0 6344 10556
Volume 0 0 0 0 0 0 0 0 9 11
Contract 3 Aggregate Claim Amount 0 0 0 0 0 5854 6008 1390 1393 0
Volume 0 0 0 0 0 3 4 2 3 2
Contract 4 Aggregate Claim Amount 0 0 0 15016 0 526 750 2436 362 552
Volume 0 0 0 3 3 2 2 2 2 3

Intermediary results:

1 48.00 1950.23 1462.61 0.6541 1739.59


2 20.00 845.00 0.4406 1122.64
3 14.00 1046.07 0.3554 1236.40
4 17.00 1155.41 0.4011 1266.78

2

4098169 1341 161418

Approach 2

Year 1 2 3 4 5 6 7 8 9 10
Contract 1 Aggregate Claim Amount 0 1345 1846 10159 7364 5972 23524 14976 10824 17601
Volume 0 2 3 4 7 4 9 8 5 5
Contract 2 Aggregate Claim Amount 0 0 0 0 0 0 0 0 6344 10556
Volume 0 0 0 0 0 0 0 0 7 9
Contract 3 Aggregate Claim Amount 0 0 0 0 0 5854 6008 1390 1393 0
Volume 0 0 0 0 0 4 4 1 1 0
Contract 4 Aggregate Claim Amount 0 0 0 15016 0 526 750 2436 362 552
Volume 0 0 0 5 0 2 1 3 1 2

Intermediary results:

1 47.00 1991.72 1664.34 0.7034 1860.79


2 16.00 1056.25 0.4467 1329.65
3 10.00 1464.50 0.3353 1521.55
4 14.00 1403.00 0.4139 1489.35

2126668 1550 107291


Part B

Question 1

Essentially, the credibility factors under Approach 1 are an indicator of how much weight should be placed on the experience of a
particular contract j. When it is equal to one, then full credibility should be given to the data given by that particular contract j. On
the other hand, a credibility factor of zero implies that no weight should be given to the experience on contract j; and instead full
weight is applied to the collective experience.

The main reason for why the credibility factors differ between contracts is due to the different volumes associated with each
contract, where the volume for each contract is used to standardised the claim sizes since the amount of policies (volume) varies
each year. Thus, if the units of volume were the same for each contract, then all credibility factors will between contracts will be the
same.

Question 2

Compare credibility factors, volume, premiums

Comparing the credibility levels computed under Approach 1 relative to Approach 2, it is visible that those under Approach 2 tend to
be higher except for contract 3. However, this can be attributed to a lack of experience; which is also why the credibility factors
under Approach 2 for contracts 2 and 4 are only marginally higher than those under Approach 1 while the credibility for contract 1
under Approach 2 is almost 5% higher than that under Approach 1. Essentially, the latter is the most reliable estimate as it has the
most years of experience.

Notes:

greater weights for more recent accident years vs greater weights for years with larger volumes

Question 3

Despite contract 2 only having 2 years of experience, it does not necessarily mean that credibility theory is not appropriate for
pricing because it is the portfolio of contracts that we need to consider. A credibility approach is only questionable if the portfolio is
heterogeneous, otherwise using credibility for pricing is appropriate. The portfolio can be tested using the F test under the
assumption that all claims are independent and N(m,s^2) distributed. Doing so gives the "insert ratio" here

Approach 1 Approach 2

,11 ,11
1 0.654053244 1739.59031 0.70336636 1860.79272
2 0.44064005 1122.6398 0.44665905 1329.6474
3 0.355433506 1236.39981 0.33532846 1521.552
4 0.401051977 1266.78069 0.4139378 1489.34741

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