R-3 - Credibility-weighted Territorial Rating

Session Description: Creating and implementing new rating territories is a complex and time-consuming process that requires agreement among pricing actuaries, underwriters, and decision-makers. In the actuarial literature, various advanced methodologies exist to develop tailored geographical segmentations. However, translating the insurer’s strategy into the math and explaining the reasoning behind smoothing or clustering decisions are challenging tasks.
Credibility theory, with its simple interpretation, offers a bridge between parameters and concepts such as risk mutualization. Remarkably, there are clear connections between credibility parameters and the degree of smoothing, which, in turn, controls territorial cross-subsidies.
Some practical tools are valuable to ensure sound geographical pricing decisions. Disclosing credibility parameters, lift, Gini, or consistency measures are some tools that can be helpful both within and outside the organization. In this session, I will explain how these could be implemented in order to achieve more fair and transparent rating strategies.