Practical Aspects of Credibility Theory Aiming the Hierarchical Model with Two-Levels

It is an original paper, which shows how the hierarchical model with two levels, can be used to determine the linear non-homogeneous credibility premiums at the sector level and at the contract level. The fact that it is based on complicated mathematics, involving conditional expectations, shouldn’t bother the user more than it does when he applies statistical tools like SAS, GLIM, discriminant analysis, and scoring models. These techniques can be applied by anybody on his own field of endeavor, whether it is economic, medical, insurance, or accounting. We give a rather explicit description of the input data for the used hierarchical model of Jewell, only to show that in practical situations there will always be enough data to apply credibility theory to a real insurance portfolio.