An Introduction to Credibility Theory
Robert Kairis
Foreword
Introduction
Ageing Populations and Changing Demographics
Determinants of Changes in Life Expectancy
Magnitude of the Longevity Issue
Pricing Longevity Risk: Establishing the Base Mortality Level
An Introduction to Credibility Theory
Projecting Future Mortality
Modelling Longevity Risk under a One-Year VaR Framework
Risk Transfer for Pension Schemes
De-Risking Insured Annuity Portfolios
Hedging Longevity Risk through Reinsurance
Commercial Aspects of Longevity Reinsurance
Extreme Mortality Risk as a Natural Hedge?
Capital Markets and Longevity Risk Transfer
Longevity Indices
Longevity Policy Committee
Legal Considerations and Challenges in Longevity Risk Transactions
Pensions and Longevity in the US
Canadian Pensioner Longevity Risk
The Dutch Pensions and Longevity Insurance Market
Credibility theory has its roots in early 20th century actuarial science, but has become mainstream mathematics. Its basic aim is to optimise an estimate by combining multiple pieces of information and giving each an appropriate weighting.
In an actuarial context, this could be estimating the mortality rate of a pension scheme by combining the scheme’s specific historical mortality experience with a “prior view” estimate derived from a rating factor model built using the historical mortality experience data from a wider group of similar pension schemes.
An estimate using only the scheme’s historical mortality experience could be quite uncertain, depending on the size of the scheme’s data set, although it may have a low bias. An estimate using a rating factor approach may have a lower sampling error due to the larger volume of data. However, it would be a biased estimate, which brings in its own uncertainty. Credibility theory shows that the optimal approach is to take a weighted average of both an individual scheme’s experience and that of a wider group of other similar schemes, and also helps to address the weight given to each.
In this chapter we provide a brief history
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