Use of credibility theory for rate-making in marine (Cargo) insurance business

Abstract

Marine (cargo) Insurance is one of the commercial lines of insurance business. Traditionally, rate-making in this line is intuitive, based on individual knowledge, wisdom and general feel of underwriters. The extent of heterogeneity perceived to be present in this line of insurance business is described by the fact that the marine underwriters claim be often faced with “first-of-a-kind “ risk. Multiple-classification of the risks is an acceptable principle of refinement for making an intelligent application of past experience to the future expectations. Successful application of this principle, however requires two conditions to be fulfilled: first, a stable classification system; and second availability of sufficient volume of data for each sub-group. None of these requirements appears to be fulfilled in practice. In fact, it is second, if ever , the case that data is sufficient for independent rate-making for each category. The volume of data in many cases is too small to be fully credible, but large enough to have some credibility. Casualty actuaries in America have overcome this problem by development and making successful l application of the credibility theory in rate-making in some lines of insurance. Credibility theory concerns itself with establishing a measure of credibility and for providing an “optional” combination of the additional information with the existing one. Use of this theory in developing an experience rating plan for marine insurance is very promising. The objective of this study is to devise a formal experience rating plan for marine . (cargo) Insurance Business. In this context, following question are sought to be answered. - How to measure the claim producing - possibilities and how to relate - these the premium variation? - How to use the past experience (explicitly) in rate-making? It is recognized that in marine (Cargo) Insurance , the risk in collective present heterogeneity in respect of both ,the claim proneness, and the claim severity. An empirical study is respected pertaining to the wet-marine insurance.