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On Changing the Parameter of Exponential Smoothing in Experience Rating

Published online by Cambridge University Press:  29 August 2014

Heikki Bonsdorff*
Affiliation:
Pohjola Insurance Company Ltd., Helsinki, Finland
*
Pohjola Insurance Company Ltd., Lapinmäentie 1, 00300 Helsinki, Finland.
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Abstract

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We consider exponential smoothing Yn = αXn + (1 − α)Yn−1, 0 < α < 1, in experience rating. Here the premium Yn is determined by the policy's own claims history (Xn). In order to uniformize the fluctuation of premiums, it is appropriate to use a bigger α for the big policies than for the small ones. When the size of the policy changes with time, a need arises to change α correspondingly. It has recently been shown that changing based on the size of the premiums Yn may lead to too low a tariff level. This result is presented here and illustrated by means of simulation. Further, some general results are given how the changing can be made without a decline in the tariff level. The results are applied to a tariff system in which the linking of the smoothing parameter to the size of the policy is particularly motivated.

Type
Workshop
Copyright
Copyright © International Actuarial Association 1990

References

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