CREDIBILITY - PROBLEM SET 1

Limited Fluctuation Credibility

1. The criterion for the number of exposures needed for full credibility is changed from requiring
   
\ to be within Þ!&IÒ\Ó with probability Þ*, to requiring \ to be within 5IÒ\Ó with probability
Þ*& . Find the value of 5 that results in no change in the standard for full credibility for number of
exposures of \ .
A) .0524 B) .0548 C) .0572 D) .0596 E) .0620

2. Total claim amount per period W follows a compound Poisson claims distribution. The
standard for full credibility for total claims in a period W based on number of claims is 1500
claims. It is then discovered that an incorrect value of the coefficient of variation for the severity
distribution ] was used to determine the full credibility standard. The original coefficient of
variation used was Þ'#"" , but the corrected coefficient of variation for ] is Þ&#!! .
Find the corrected standard for full credibility for W based on number of claims.
A) 1300 B) 1325 C) 1350 D) 1375 E) 1400

3. The partial credibility factor for random variable \ based on "!! exposures of \ is ^ œ Þ%!.
How many additional exposures are needed to increase the partial credibility factor to at
least Þ&!?
A) 55 B) 56 C) 57 D) 58 E) 59

4. Total claims per period W follows a compound Poisson distribution and claim severity has the
pdf 0 ÐCÑ œ &C' , for C  " . A full credibility standard based on number of exposures of W
needed has been determined so that the total cost of claims per period is within 5% of the
expected cost with a probability of 90%. If the same number of exposures for full credibility of
total cost is applied to the number of exposures needed for the frequency variable R , the actual
number of claims per exposure period would be within 100<% of the expected number of claims
per exposure period with probability 95%. Find <.
A) .054 B) .058 C) .062 D) .066 E) .070

5. An analysis of credibility premiums is being done for a particular compound Poisson claims
distribution, where the criterion is that the total cost of claims is within 5% of the expected cost of
claims with a probability of 90%. It is found that with 8 œ '! exposures (periods) and

\ œ ")!Þ!, the credibility premium is ")*Þ%( . After 20 more exposures (for a total of 80) and

revised \ œ ")&, the credibility premium is "*!Þ)) . After 20 more exposures (for a total of

100) the revised \ is ")(Þ&. Assuming that the manual premium remains unchanged in all cases,
and assuming that full credibility has not been reached in any of the cases, find the credibility
premium for the 100 exposure case.
A) 191.5 B) 192.5 C) 193.5 D) 194.5 E) 196.5
6. Total claims per period W has a compound Poisson distribution. You have determined that a
sample size of 2670 claims is necessary for full credibility for total claims per period if the
severity distribution is constant. If the severity distribution is lognormal with mean 1000 and
variance 1,500,000, find the number of claims needed for full credibility of total claims per
period.
A) 6650 B) 6675 C) 6700 D) 6725 E) 6750

7. You are given the following:

- The number of claims follows a Poisson distribution.
- The variance of the number of claims is 10.
- The variance of the claim size distribution is 10.
- The variance of aggregate claim costs is 500.
- The number of claims and claim sizes are independent.
- The full credibility standard has been selected so that actual aggregate claim costs per period
will be within 5% of expected aggregate claim costs 95% of the time.
Using the methods of limited fluctuation credibility determine the number of claims required for
full credibility of aggregate claim costs per period.

8. You are given the following:

- The number of claims per period follows a Poisson distribution.
- Claim sizes follow a lognormal distribution with parameters . (unknown) and 5 # œ %
- The number of claims and claim sizes are independent.
- 6,600 expected claims are needed for full credibility of aggregate claims per period.
- The full credibility standard has been selected so that actual aggregate claim costs per period
will be within 10% of expected aggregate claim costs per period T % of the time.
Using the methods of limited fluctuation credibility to determine the value of T .

9. W has a compound distribution with frequency R and severity ] . R and all claim amounts are
independent of one another.

Limited fluctuation credibility is being applied to W , with the full credibility standard based on the sample
mean of W being within 5% of the true mean of W with probability 90%.
The following information is given regarding the three equivalent full credibility standards for W .

The expected number of exposures of W needed for full credibility is 108.24 .

The expected aggregate amount of claim needed for full credibility is 10,824.
The expected total number of claims needed for full credibility is 541.2 .

Find all of the following quantities: IÐWÑ ß Z +<ÐWÑ ß IÐR Ñ and IÐ] Ñ Þ

Show that R cannot have a Poisson distribution and ] cannot have an exponential distribution.
10. R is the distribution of the number of claims occuring per week. R has a Poisson distribution with an
unknown mean. The standard for full credibility for R is based on the sample mean of R being within
5% of the true mean of R with probability 90%.
With 400 observed claims in 20 weeks, the credibility premium based on partial credibility
is T . With 500 observed claims in 30 weeks, the credibility premium based on partial credibility is
T  "Þ*" . Find the credibility premium based on partial credibility if there are 550 observed claims in
35 weeks. Assume that the same manual premium is used in all cases.

11. You are given:

(i) \:+<>3+6 œ pure premium calculated from partially credible data
(ii) . œ IÒ\:+<>3+6 Ó
(iii) Fluctuations are limited to „ 5 . of the mean with probability T
(iv) ^ œ credibility factor
Which of the following is equal to T ?
(A) T <Ò.  5 . Ÿ \:+<>3+6 Ÿ .  5 .Ó (B) T <Ò^ .  5 Ÿ Z\:+<>3+6 Ÿ ^ .  5Ó
(C) T <Ò^ .  . Ÿ Z\:+<>3+6 Ÿ ^ .  .Ó (D) T <Ò"  5 Ÿ Z\:+<>3+6  Ð"  ^Ñ. Ÿ "  5Ó
(E) T <Ò.  5 . Ÿ Z\:+<>3+6  Ð"  ^Ñ. Ÿ .  5 .Ó

12. (SOA) You are given:

(i) Claim counts follow a Poisson distribution.
(ii) Claim sizes follow a lognormal distribution with coefficient of variation 3.
(iii) Claim sizes and claim counts are independent.
(iv) The number of claims in the first year was 1000.
(v) The aggregate loss in the first year was 6.75 million.
(vi) The manual premium for the first year was 5.00 million.
(vii) The exposure in the second year is identical to the exposure in the first year.
(viii) The full credibility standard is to be within 5% of the expected aggregate loss 95% of the
time.
Determine the limited fluctuation credibility net premium (in millions) for the second year.
(A) Less than 5.5 (B) At least 5.5, but less than 5.7 (C) At least 5.7, but less than 5.9
(D) At least 5.9, but less than 6.1 (E) At least 6.1

13. An insurer has two separate classes of policies. The characteristics of the loss per insured in
each of the two classes during a one year period are as follows:
Class I: Expected claim per insured is 100. To be within 5% of expected loss 90% of the time,
the standard for number of insureds needed for full credibility is 1082.4 .
Class II: Expected claim per insured is 200. To be within 5% of expected loss 90% of the time,
the standard for number of insureds needed for full credibility is 1082.4 .
Class I has twice the number of insureds as Class II. The two classes of insureds are combined
and regarded as a single class with the appropriate adjusted loss per insured during a one year
period. Find the full credibility standard for the minimum number of insureds required in the
combined portfolio, where the full credibility is to be within 5% of expected loss 90% of the time.
(A) 1082.4 (B) 1190.7 (C) 1244.8 (D) 1298.9 (E) 1353.0
14. The partial credibility approach is applied to a data set of 50 claim amounts. It is assumed
that the claim amount distribution is uniform on the interval Ò!ß )Ó . The full credibility standard
is to be within 5% of the expected claim amount 90% of the time. The partial credibility factor ^
is found. After 25 additional claim amounts are recorded, the claim amount distribution is revised
to be uniform on the interval Ò!ß "Þ#)Ó . The revised partial credibility factor ^ w is found. Find the
ratio ^ w Î^ .
(B) É (D) È"Þ&
" "
(A) "Þ& "Þ& (C) 1 (E) "Þ&

15. Number of claims per year follows a Poisson distribution. A number of claims are recorded
over a specified period of time. A full credibility standard is set so as to be within 5% of
expected claims per year 90% of the time. Based on the observed number of claims, the full
credibility standard is not met, but the partial credibility factor is ^ œ Þ') .
Find the maximum value of 5 so that this same number of claims satisfies a full credibility
standard within 10% of expected claims per year 5 % of the time.
(A) 99.5 (B) 99 (C) 98 (D) 97.5 (E) 96

16. W has a compound distribution with frequency R and severity ] . R and all claim amounts are
independent of one another.

Limited fluctuation credibility is being applied to W , with the full credibility standard based on the sample
mean of W being within 5% of the true mean of W with probability 90%.
The following information is given regarding the three equivalent full credibility standards for W .

The expected number of exposures of W needed for full credibility is 108.24 .

The expected aggregate amount of claim needed for full credibility is 10,824.
The expected total number of claims needed for full credibility is 541.2 .

Find all of the following quantities: IÐWÑ ß Z +<ÐWÑ ß IÐR Ñ and IÐ] Ñ Þ

17. The aggregate loss in one week, W , follows a compound negative binomial distribution, and
the severity distribution is exponential. Limited fluctuation credibility is being applied to W so
that the full credulity standard is to be within 5% of expected aggregate losses 95% of the time.
It is found that the expected number of claims needed for full credibility is 5,412 .

Suppose that the frequency distribution is modified (but still negative binomial) so that mean and
variance of the frequency both increase by 20%. Find the full credibility standard for the number
of claims needed for the new compound negative binomial distribution (severity is the same
exponential distribution as before).
18. A compound distribution ÐWÑ has a Poisson frequency distribution ÐR Ñ with mean -.
For parts (a) and (b), assume that the severity distribution Ð] Ñ is uniform on the interval Ò!ß )Ó.
(a) Limited fluctuation credibility is applied to ] based on the sample mean of ] being within 5% of the
true mean of ] with probability 90%. Find expressions for
(i) the expected number of observations of ] needed for full credibility, and
(ii) the expected sum of the observed values of ] needed for full credibility.
(b) Limited fluctuation readability is applied to W based on the sample mean of W being within 5% of the
true mean of ] with probability 90%. Find expressions for
(i) the expected number of observations of W needed for full credibility, and
(ii) the expected sum of the observed values of W needed for full credibility, and
(iii) the expected total number of claims needed for full credibility.

19. [ is a random variable with mean IÒ[ Ó and variance Z +<Ò[ Ó. In a partial credibility
analysis of [ , the manual premium used is Q œ "!!!. A sample of 350 observations of [ is available
and the sum of the observed values is 300,000. Partial credibility is applied to determine a credibility
premium based on the "5% closeness" and "90% probability" criteria.
If the credibility standard used is the one based on the expected number of observations of [ needed,
then the partial readability premium is 884.40. If the credibility standard used is the one based on the
expected sum of the observed values of [ needed, then the partial readability premium is 887.19. Using
this information, find the mean and variance of [ .
CREDIBILITY - PROBLEM SET 1 SOLUTIONS

1. Since . œ IÒ\Ó and 5 # œ Z +<Ò\Ó, are unchanged, the standard for full credibility will be
C
unchanged if 8! œ Ð 5 Ñ# is unchanged. With 5 œ Þ!& ß T œ Þ* we have CÞ* œ "Þ'%&, and
C
5 œ "Þ'%&
Þ!& œ $#Þ* . With : œ Þ*& , CÞ*& is the
"Þ*&
# œ Þ*(& percentile of the standard normal
distribution, so that CÞ*& œ "Þ*' . In order for 8! to remain unchanged, we must have
"Þ*'
5 œ $#Þ* p 5 œ Þ!&*' . Answer: D

2. For the compound Poisson distribution with Poisson parameter - (frequency distribution or
number of claims per period) and claim amount distribution ] (severity distribution or amount
per claim), the standard for full credibility for expected number of claims is
Z +<Ò] Ó
8! Ò"  ÐIÒ] ÓÑ# Ó œ 8! Ò"  Ð .5] Ñ# Ó . Thus, with .5] œ Þ'#"" ß
] ]
8! Ò"  Ð .5] Ñ# Ó œ "Þ$)&)8! œ "&!! . With the coefficient of variation of ] changed to
]
5]
.] œ Þ5200 , we have 8! Ò"  Ð .5] Ñ# Ó œ "Þ#(!%8! œ "$(& . Answer: D
]

3. The partial credibility factor with 8 œ "!! is ^ œ Þ%! œ É "!!

8 , where 8J is the full
J
credibility standard for number of exposures needed.
The credibility factor with 8 œ "!!  5 is ^ œ Þ&! œ É "!!5
8 .
É "!!5
J
Þ&
Then, "!! œ Þ% œ "Þ#& p 5 œ &'Þ#& p &( . Answer: C

4. The severity distribution has mean IÒ] Ó œ '" C † &C' .C œ &% ß and
∞

IÒ] # Ó œ '" C# † &C' .C œ & ß so that Z +<Ò] Ó œ &  Ð & Ñ# œ & Þ

∞
$ % $ %)
With < œ Þ!& and : œ Þ* , we have 8! œ Ð "Þ'%& #
Þ!& Ñ œ "!)#Þ%" Þ The full credibility standard for
8 Z +<Ò] Ó
number of exposures needed for the compound Poisson distribution is -! Ò"  ÐIÒ] ÓÑ# Ó .
The full credibility standard for the number of exposures needed for the Poisson frequency
8w
distribution only is 8   -! . Since we are considering the same Poisson frequency distribution,
the value of - (which is not known) stays the same. If the same value of 8 for full credibility
from the aggregate compound Poisson distribution is applied to the Poisson frequency
8w 8 Z +<Ò] Ó
distribution alone, then we set -! œ -! Ò"  ÐIÒ] ÓÑ# Ó and the "8! " for the Poisson frequency
credibility standard must change, which is why it has been denoted 8w! .
8w 8 Z +<Ò] Ó &Î%)
Then -! œ -! Ò"  ÐIÒ] ÓÑ# Ó œ "!)#Þ%"
- Ò"  Ð&Î%Ñ# Ó p 8w! œ ""&%Þ&(.
With T œ Þ*& , C: œ "Þ*' , and then in order for this to be the proper 8w! for T œ Þ*& , we must
have ""&%Þ&( œ Ð "Þ*' #
< Ñ p < œ Þ!&(( . Answer: B
5. For the 60 exposure case, the credibility premium is
")*Þ%( œ ")!^'!  Q Ð"  ^'! Ñ , and for the 80 exposure case,
"*!Þ)) œ ")&^)!  Q Ð"  ^)! Ñ . We wish to find ")(Þ&^"!!  Q Ð"  ^"!! Ñ .
In going from 60 to 80 exposures, the credibility factor changes from

Ë Ë
'! )!
^'! œ to ^)! œ (where ] is the severity distribution).
- †Œ" ÐIÒ] ÓÑ# - †Œ" ÐIÒ] ÓÑ#
8! Z +<Ò] Ó 8! Z +<Ò] Ó

Thus, ^)! œ É '!

^ )!
œ "Þ"&%( , and the two credibility premium equations become
'!
")*Þ%( œ ")!^'!  Q Ð"  ^'! Ñ , "*!Þ)) œ #"$Þ'#^6!  Q Ð"  "Þ"&%(^'! Ñ .
")*Þ%(")!^'! "^'!
Juggling these equations results in "*!Þ))#"$Þ'#^ œ ""Þ"&%(^ ß
'! '!
which results in the quadratic equation
#
&Þ((%^'!  &Þ("*!^'!  "Þ%" œ ! p ^'! œ Þ&#) ß Þ%'( .
Using ^'! œ Þ&#) ß and substituting into the equations above, we get Q œ #!! ,
and using ^'! œ Þ%'( , we get Q œ "*(Þ' .
With ^'! œ Þ&#) , we get ^"!! œ ^'! † É "!!
'! œ Þ')# , and the new credibility premium is
ÐÞ')#ÑÐ")(Þ&Ñ  Ð"  Þ')#ÑÐ#!!Ñ œ "*"Þ& Þ
With ^'! œ Þ%'( , we get ^"!! œ ^'! † É "!!
'! œ Þ'!$ , and the new credibility premium is
ÐÞ'!$ÑÐ")(Þ&Ñ  Ð"  Þ'!$ÑÐ"*(Þ'Ñ œ "*"Þ& Þ Answer: A

6. If the severity distribution has variance Z +<Ò] Ó œ !, then #'(! œ 8! † ’"  ÐIÒ] ÓÑ# “ œ 8! .
Z +<Ò] Ó

If Z +<Ò] Ó œ "ß &!!ß !!! ß IÒ] Ó œ "ß !!! ß then the standard for full credibility of aggregate
claims based on number of claims is 8! † ’"  ÐIÒ] ÓÑ# “ œ #'(! † ’"  Ð"!!!Ñ# “ œ ''(& Þ
Z +<Ò] Ó "ß&!!ß!!!

Answer: B

7. If the claim number distribution is Poisson, the full credibility standard for aggregate claim
Z +<Ò] Ó
costs based on number of claims is 8! † Ò"  ÐIÒ] ÓÑ# Ó, where ] is the claim size distribution, and
8! œ Ð "ÞÞ!&
96 #
Ñ œ "&$'Þ'%Þ We are given Z +<Ò] Ó œ "!. For the compound Poisson aggregate
claims distribution, Z +<ÒWÓ œ -IÒ] # Ó p &!! œ "!IÒ] # Ó p IÒ] # Ó œ &!
p ÐIÒ] ÓÑ# œ IÒ] # Ó  Z +<Ò] Ó œ &!  "! œ %!
Z +<Ò] Ó "!
p 8! † Ò"  ÐIÒ] ÓÑ# Ó œ Ð"&$'Þ'%ÑÐ"  %! Ñ œ "*#" Þ
8. When the claim number distribution is Poisson, the standard for full credibility for
Z +<Ò] Ó IÒ] # Ó
aggregate claims per period based on number of claims is 8! † Ò"  ÐIÒ] ÓÑ# Ó œ 8! † Ò ÐIÒ] ÓÑ# Ó ,
where ] is the claim amount random variable.
For the lognormal, IÒ] Ó œ /B:Ð.  "# 5 # Ñ and IÒ] # Ó œ /B:Ð#.  #5 # Ñ .
/B:Ð#.#5 # Ñ #
Therefore, ''!! œ 8! † Ò/B:Ð. " 5# ÑÓ# œ 8! /5 œ 8! /% p 8! œ "#!Þ* .
#
C
Since 8! œ Ð Þ" Ñ# , we have C œ "Þ"! . But C is the "T # percentile of the standard normal
distribution. From the normal table, we have T Ò[  "Þ"!Ó œ Þ)'%$ œ "T
# , where
[ µ R Ð!ß "Ñ . Therefore, T œ Þ($ .

Z +<ÐWÑ Z +<ÐWÑ
9Þ "!)#Þ% † ÒIÐWÑÓ# œ "!)Þ#% p ÒIÐWÑÓ# œ Þ" ß
Z +<ÐWÑ Z +<ÐWÑ
"!)#Þ% † IÐWÑ œ "!ß )#% p IÐWÑ œ "! Þ
Then, IÐWÑ œ Ò IÐWÑ Ó ‚ ÒIÐWÑÓ# œ "!ÎÞ" œ "!! , and then Z +<ÐWÑ œ "!IÐWÑ œ "!!! .
Z +<ÐWÑ Z +<ÐWÑ

Z +<ÐWÑ
"!)#Þ% † ÒIÐWÑÓ# † IÐR Ñ œ &%"Þ# p IÐR Ñ œ & Þ
Since IÐWÑ œ IÐR Ñ † IÐ] Ñ , we have "!! œ &IÐ] Ñ p IÐ] Ñ œ #! .
If R is Poisson, then Z +<ÐR Ñ œ IÐR Ñ œ & .
Then Z +<ÐWÑ œ IÐR Ñ † IÐ] # Ñ p "!!! œ & ‚ IÐ] # Ñ
p IÐ] # Ñ œ #!! p Z +<Ð] Ñ œ IÐ] # Ñ  ÒIÐ] ÑÓ# œ #!!  #!# œ  #!! , which is not possible.

If ] has an exponential distribution, then Z +<Ð] Ñ œ ÒIÐ] ÑÓ# œ %!! Þ

Then Z +<ÐWÑ œ IÐR Ñ † Z +<Ð] Ñ  Z +<ÐR Ñ † ÒIÐ] ÑÓ#
p "!!! œ & ‚ %!!  Z +<ÐR Ñ ‚ %!! p Z +<ÐR Ñ œ  #Þ& , which is not possible.

10. Since R is Poisson, the full credibility standard for estimating the mean of R is either
Z +<ÐR Ñ
(i) "!)#Þ% † ÒIÐR ÑÓ# œ "!)#Þ% † --# œ "!)#Þ%
- as the expected number of exposures of R (weeks) needed,
or
Z +<ÐR Ñ
(ii) "!)#Þ% † IÐR Ñ œ "!)#Þ% † -- œ "!)#Þ% as the total expected number of claims needed.
Since we do not know the value of -, the only standard we can apply is (ii).


With 400 claims in 20 weeks, the average number of claims per week (sample mean) is R œ %!!
#! œ #! .

^ œ É "!)#Þ%
Using credibility standard (ii) above, the partial credibility factor is
%!!
œ Þ'!(* , and the partial credibility premium is

^ † R  Ð"  ^Ñ † Q œ "#Þ"'  Þ$*#"Q œ T , where Q is the manual premium .

With 500 claims in 30 weeks, the average number of claims per week (sample mean) is

R œ &!!
$! œ "'Þ'''( . Using credibility standard (ii) above, the partial credibility factor is
^ œ É "!)#Þ%
&!!
œ Þ'(*( , and the partial credibility premium is

^ † R  Ð"  ^Ñ † Q œ ""Þ$$  Þ$#!$Q œ T  "Þ*" , where Q is the manual premium.
10 continued
From the two equations, "#Þ"'  Þ$*#"Q œ T and ""Þ$$  Þ$#!$Q œ T  "Þ*" ,
we get Q œ "&Þ!% and T œ ")Þ!% . Then, with 550 claims in 35 weeks, we have

R œ &&!
$& œ "&Þ("%$ . Using credibility standard (ii) above, the partial credibility factor is
^ œ É "!)#Þ%
&&!
œ Þ("#) , and the partial credibility premium is

^ † R  Ð"  ^Ñ † Q œ ""Þ#!  ÐÞ#)(#ÑÐ"&Þ!%Ñ œ "&Þ&# .

11. (E) is correct. This is the formula at the bottom of page 514 in the Mahler-Dean Credibility
study note. Answer: E

12. When considering the compound Poisson aggregate claims distribution W with claim size
distribution ] , we have three ways of setting the standard for full credibility:
(i) the number of exposures (periods of W ) is   8! † -" † ’"  ÐIÒ] ÓÑ# “
Z +<Ò] Ó

(ii) the number of claims is   8! † ’"  ÐIÒ] ÓÑ# “ , or

Z +<Ò] Ó

(iii) the aggregate amount of claims is   8! † ’IÒ] Ó  IÒ] Ó “ .

Z +<Ò] Ó

We do not know - or IÒ] Ó in this case, and therefore (i) and (iii) cannot be used. We are given
ÈZ +<Ò] Ó Z +<Ò] Ó
that ] has coefficient of variation $, so that IÒ] Ó œ $ , and ÐIÒ] ÓÑ# œ * , and we can use
C
standard (ii). The credibility criterion has 8! œ Ð <: Ñ# œ Ð "Þ*' #
Þ!& Ñ œ "&$'Þ'% , since : œ Þ*& and
< œ Þ!& . The standard for full credibility is "&$'Þ'%Ð"  *Ñ œ "&ß $''Þ% as the number of
claims needed. Since only 1000 claims occurred in the first year, we have not met the standard
for full credibility, and we apply the method of partial credibility.
The credibility factor ^ is ^ œ 738ÖÉ "&ß$''Þ%
"!!!
ß "× œ Þ#&& .
We are trying to determine the credibility premium for aggregate claims for the second year. We

have only one exposure for aggregate claims, that being the first year, so W œ 'Þ(& million . The
manual premium is given to be Q œ & million
The credibility premium for the second year is

^ † W  Ð"  ^Ñ † Q œ ÐÞ#&&ÑÐ'ß (&!ß !!!Ñ  ÐÞ(%&ÑÐ&ß !!!ß !!!Ñ œ &ß %%'ß #&! . Answer: A

5#
13. Class I: "!)#Þ%" œ Ð "Þ'%& # # #
Þ!& Ñ † Ð"!!Ñ# p 5M œ "!ß !!! œ IÒ\M Ó  Ð"!!Ñ
M #

p IÒ\M# Ó œ #!ß !!! .

5#
Class II: "!)#Þ%" œ Ð "Þ'%& # # #
Þ!& Ñ † Ð#!!Ñ# p 5MM œ %!ß !!! œ IÒ\MM Ó  Ð#!!Ñ
MM #

#
p IÒ\MM Ó œ )!ß !!! .
For the combined portfolio of policies, the loss per insured is \ , is a mixture of \M and \MM ,
with #$ and "$ weighting applied, respectively. Then IÒ\Ó œ Ð #$ ÑÐ"!!Ñ  Ð "$ ÑÐ#!!Ñ œ %!! $ and
IÒ\ # Ó œ Ð #$ ÑÐ#!ß !!!Ñ  Ð "$ ÑÐ)!ß !!!Ñ œ %!ß !!! , so that
#!!ß!!!
Z +<Ò\Ó œ %!ß !!!  Ð %!! #
$ Ñ œ * .
Z +<Ò\Ó #!!ß!!!Î*
The full credibility standard for \ is Ð "Þ'%& # "Þ'%& #
Þ!& Ñ † ÐIÒ\ÓÑ# œ Ð Þ!& Ñ † Ð%!!Î$Ñ# œ "$&$ .
Answer: E
14. The partial credibility approach sets the credibility factor to be
^ œ 738šÊ8‚Š8! † ÐIÒ\ÓÑ# ‹ ß "› . In this example 8! œ Ð "Þ'%&
Z +<Ò\Ó #
Þ!& Ñ œ "!)#Þ%" .
Based on the original assumption of \ being uniform on Ò!ß )Ó , and 8 œ &! ,
we get ^ œ Ê&!‚Š"!)#Þ%" † Ð)Î#Ñ# ‹ œ Þ$(#$ .
)# Î"#

Based on the revised assumption of \ being uniform on Ò!ß "Þ#)Ó , and 8 œ (& , we get
^ w œ Ê(&‚Š"!)#Þ%" † Ð"Þ#)Î#Ñ# ‹ œ Þ%&'! .
"Þ%%)# Î"#

^ w Î^ œ È(&Î&! œ È"Þ& . Answer: D

15. The full credibility standard within 5% of expected number claims per year 90% of the time
has < œ Þ!& (5%) and C: œ "Þ'%& (95-th percentile of the standard normal distribution). For the
annual claim number distribution being Poisson, the number of claims (not exposures) needed for
C
full credibility is 8! œ Ð <: Ñ# œ Ð "Þ'%& #
Þ!& Ñ œ "!)#Þ%" .
The partial credibility factor (when less than 1) is ^ œ É number
actual number of observations
needed for full credibility .
We are told that ^ œ Þ') , from which we get
actual number of observations #
number needed for full credibility œ ÐÞ')Ñ œ Þ%'# , so that

with < œ Þ" and C: , where &!!Þ& œ Ð <: Ñ# œ Ð Þ": Ñ# œ "!!C:# , so that C: œ È&Þ!!& œ #Þ#% .
actual number of observations œ ÐÞ%'#ÑÐ"!)#Þ%"Ñ œ &!!Þ& . 500.5 is the full credibility standard
C C

From reference to the standard normal table, 2.#$ is the 98.74-th percentile. Therefore, the
probability that the 500 observed claims will satisfy the full credibility standard within 10% of
expected number of claims per year is #ÐÞ*)(%Ñ  " œ Þ*(%) . Answer: D

Z +<ÐWÑ Z +<ÐWÑ
16. "!)#Þ% † ÒIÐWÑÓ# œ "!)Þ#% p ÒIÐWÑÓ# œ Þ" ß

Z +<ÐWÑ Z +<ÐWÑ
"!)#Þ% † IÐWÑ œ "!ß )#% p IÐWÑ œ "! Þ

Then, IÐWÑ œ Ò IÐWÑ Ó ‚ ÒIÐWÑÓ# œ "!ÎÞ" œ "!! , and then Z +<ÐWÑ œ "!IÐWÑ œ "!!! .
Z +<ÐWÑ Z +<ÐWÑ

Z +<ÐWÑ
"!)#Þ% † ÒIÐWÑÓ# † IÐR Ñ œ &%"Þ# p IÐR Ñ œ & Þ

Since IÐWÑ œ IÐR Ñ † IÐ] Ñ , we have "!! œ &IÐ] Ñ p IÐ] Ñ œ #! .

17. We will denote the frequency by R and the severity will be ] .

The full credibility standard for the expected number of claims needed is
Z +<ÒR Ó†ÐIÒ] ÓÑ# IÒR Ó†Z +<Ò] Ó
"!)#Þ%" † IÒR Ó†ÐIÒ] ÓÑ# œ &%"#Þ!& .

Since the severity is exponential, we have IÒ] Ó œ ) and Z +<Ò] Ó œ )# œ ÐIÒ] ÓÑ# .
The full credibility standard for expected number of claims needed becomes
Z +<ÒR ÓIÒR Ó
"!)#Þ%" † IÒR Ó . Since both the mean and variance of R are increasing by 20%,
this full credibility standard is unchanged at 5412.

Z +<Ð] Ñ )# Î"#
18Þ (a)(i) "!)#Þ% † ÒIÐ] ÑÓ# œ "!)#Þ% † Ò)Î#Ó# œ $'!Þ) Þ
Z +<Ð] Ñ )# Î"#
(ii) "!)#Þ% † IÐ] Ñ œ "!)#Þ% † )Î# œ ")!Þ%) Þ
Z +<ÐWÑ -IÒ] # Ó -)# Î$
(b)(i) "!)#Þ% † ÒIÐWÑÓ# œ "!)#Þ% † Ò-IÐ] ÑÓ# œ "!)#Þ% † Ò-)Î#Ó# œ "%%$Þ# † -" .
Z +<ÐWÑ -IÒ] # Ó -)# Î$
(ii) "!)#Þ% † IÐWÑ œ "!)#Þ% † -IÐ] Ñ œ "!)#Þ% † -)Î# œ (#"Þ').
Z +<ÐWÑ
(iii) "!)#Þ% † ÒIÐWÑÓ# † IÒR Ó œ "%%$Þ# † -" † - œ "%%$Þ# .

Z +<Ò[ Ó
19. The full credibility standard based on the number of observations needed is "!)#Þ% ÐIÒ[ ÓÑ#
Z +<Ò[ Ó
and based on the sum of the observed values it is "!)#Þ% IÒ[ Ó .
 $!!ß!!!
From the given information, the sample mean of the observed values is [ œ $&! œ )&(Þ"% Þ

The credibility premium based on partial credibility using is ^[  Ð"  ^ÑQ ,

where [ œ )&(Þ"% ß Q œ "!!! and ^ is the partial credibility factor.

Using the credibility standard based on the expected number of observations needed,

Ê "!)#Þ% ÐIÒ[
$&!
^œ Z +<Ò[ Ó , so that )&(Þ"%^  "!!!Ð"  ^Ñ œ ))%Þ%! , from which we get
ÓÑ#

$&! Z +<Ò[ Ó
^ œ Þ)!* , and therefore Z +<Ò[ Ó œ Þ'&% , so that ÐIÒ[ ÓÑ# œ Þ%*% .
"!)#Þ% ÐIÒ[ ÓÑ#

Using the credibility standard based on the expected sum of the observed values needed,
^ œÊ
$!!ß!!!
+<Ò[ Ó , so that )&(Þ"%^  "!!!Ð"  ^Ñ œ ))(Þ"* , from which we get
"!)#Þ% ZIÒ[ Ó

$!!ß!!! Z +<Ò[ Ó
^ œ Þ(*! , and therefore +<Ò[ Ó œ Þ'#$ , so that œ %%& .
"!)#Þ% ZIÒ[ Ó
IÒ[ Ó
Z +<Ò[ ÓÎIÒ[ Ó %%&
Then, IÒ[ Ó œ Z +<Ò[ ÓÎÐIÒ[ ÓÑ# œ Þ%*% œ *!" , and Z +<Ò[ Ó œ %!"ß !!! .