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http://dx.doi.org/10.5351/KJAS.2014.27.1.071

A Study on the Determination of the Risk-Loaded Premium using Risk Measures in the Credibility Theory  

Kim, Hyun Tae (Department of Applied Statistics, Yonsei University)
Jeon, Yongho (Department of Applied Statistics, Yonsei University)
Publication Information
The Korean Journal of Applied Statistics / v.27, no.1, 2014 , pp. 71-87 More about this Journal
Abstract
The Bayes premium or the net premium in the credibility theory does not reflect the underlying tail risk. In this study we examine how the tail risk measures can be utilized in determining the risk premium. First, we show that the risk measures can not only provide the proper risk loading, but also allow the insurer to avoid the wrong decision made with the Bayesian premium alone. Second, it is illustrated that the rank of the tail thickness among different conditional loss distributions does not preserve for the corresponding predictive distributions, even if they share the identical prior variable. The implication of this result is that the risk loading for a contract should be based on the risk measure of the predictive loss distribution not the conditional one.
Keywords
Credibility theory; risk measure; Bayes premium;
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