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Credibility and Persistency

Published online by Cambridge University Press:  29 August 2014

Virginia R. Young
Virginia R. Young*
Affiliation:
University of Wisconsin-Madison
*
School of Business, Grainger Hall, University of Wisconsin-Madison, Madison, WI, USA53706
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Abstract

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Policyholders often decide to buy, renew, or cancel insurance based on the premium charged by the insurer compared with what they expect their claims will be. It is important for actuaries to consider the persistency of policyholders because the financial well-being of the insurer depends on spreading its risk over a large book of business. We use statistical decision theory to develop premium formulas that account for the past experience of a given policyholder, the experience of the entire collection of policyholders, and the likelihood of the policyholder renewing with or buying from a given insurer, that is, persistency.

We assume that the persistency of policyholders depends on the arithmetic difference between the premium charged and their anticipated claims. We extend the work of Taylor (1975) in which he obtains linear credibility formulas by minimizing loss functions that incorporate the persistency of policyholders. We consider Taylor's loss functions and other objective functions, including those that account for the amount of business the insurer writes or renews.

Keywords

Credibilitypersistencystatistical decision theory
Type
Articles
Information
ASTIN Bulletin: The Journal of the IAA , Volume 26 , Issue 1 , May 1996 , pp. 53 - 69
Copyright
Copyright © International Actuarial Association 1996

References

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