Acta Mathematica Sinica, English Series

Nov., 2011, Vol. 27, No. 11, pp. 2217–2228 Acta Mathematica Sinica,
Published online: October 15, 2011 English Series
DOI: 10.1007/s10114-011-9198-4 Springer-Verlag Berlin Heidelberg &
Http://www.ActaMath.com The Editorial Office of AMS 2011

The Credibility Premiums for Exponential Principle

Li Min WEN
Department of Mathematics, Jiangxi Normal University, Nanchang 330022, P. R. China
E-mail : wlmjxnu@163.com

Wei WANG
Department of Mathematics, University of Ning Bo, Ningbo 315211, P. R. China
E-mail : weiwangecnu@163.com

Jing Long WANG

Department of Statistics, East China Normal University, Shanghai 200241, P. R. China
E-mail : jlwang@stat.ecnu.edu.cn

Abstract In the classical credibility theory, the credibility premium is derived on the basis of pure
premium. However, the insurance practice demands that the premium must be charged under some
adaptable premium principle and serves the purpose for insurance business. In this paper, the bal-
anced credibility models have been built under exponential principle, and the credibility estimator of
individual exponential premium is derived. This result is also extended to the versions of multitude
contracts, and the estimation of the structure parameters is investigated. Finally, the simulations
have been introduced to show the consistency of the credibility estimator and its differences from the
classical one.
Keywords Exponential premium principle, credibility estimator, consistency, safe-loading
MR(2000) Subject Classification 91B30, 62P05

1 Introduction
Credibility theory is a common approach to generate insurance premium based on the policy-
holder’s past experience and the experience of the entire group of policyholders. This approach
is widely used in commercial property of liability insurance and group health or life insurance.
In credibility theory, the most common formulae take premium as weighted sum of the average
experience of the policyholder and the average of the entire collection of policyholders. These
formulae are easy to understand and simple to apply due to their linear properties. This ap-
proach has so far been an important member in the toolbox of actuarial science and extensively
employed in many fields such as automobile insurance, worker’s compensation, and IBNR (In-
curred But Not Reported) techniques in loss reserving. The modern theory of credibility was
introduced by Bühlmann [1]. For recent detailed introductions, one can refer to, for example,
Norberg [2], which describes its evolutionary history and gives a simple account of its main
Received April 13, 2009, revised June 8, 2010, accepted July 23, 2010
Supported by National Natural Science Foundation of China (Grant No. 71001046), Science Foundation of the
Education Department of Jiangxi (Grant No. GJJ10096), and Scientific Funds of Jiangxi Normal University
2218 Wen L. M., et al.

issues and results, and Bühlmann and Gisler [3], which gives a comprehensive exposition of the
modern credibility theory.
From the point of view of practical application, however, the classical credibility premium
can not be applied by insurance company directly as it is derived in the form of net premium, as
described in Bühlmann and Gisler [3]. In general, the premium charged by insurance company
must be positive safety loading. In terms of ruin theory, an insurer ruins with certainty if
only net premium is charged for risks. See, e.g., Asmussen [4] or Gerber [5]. One way to
extend the classical model to a more general one which at least in certain cases is no longer
related to the net premium principle is to replace squared error loss by other loss function.
This was first observed by Gerber [6], who considered a weight related to the Esscher principle
and determined the credibility premium for that case, and subsequently by Heilmann [7] and
Schmidt and Timpel [8]. For a recent work on this issue, one can refer to Wen et al. [9],
who introduced the generalized weighted loss function to derive the corresponding credibility
estimator and discussed the consistency.
However, we found that the credibility estimator derived by replacing loss function might
cause difficulties in computations and the estimation of structure parameters. See, Wen et al. [9].
The purpose of the present paper is to generate a credibility estimator for exponential premium.
This model is distribution-free and the estimation of structure parameters can be got easily.
Thus this estimator can be used directly in practice.
In actuarial science, the exponential premium principle is one of the most important ones.
It is applied widely in practice due to its simple mathematical terms and in theory research
due to its many desired properties in risk measures (Artnzer et al. [10]). For the discussions
about exponential premium principle, see, for example, Young [11], Gerber [12], and Denuit
[13], among others.
The rest of this paper is arranged as follows. Section 2 introduces premium principle, es-
pecially the exponential premium principle and its properties. In Section 3, the credibility
estimators for premium under exponential principle are derived. In Section 4, the credibility
estimators of multitude contract versions are discussed, and the estimation of structure param-
eters is investigated. Finally, the simulations have been done to show the differences between
the classical credibility premium and the credibility premium that we have derived. We also
investigate the consistency of credibility estimator under exponential principle in the simulation
part.

2 The Exponential Premium Principle

First, we present some notations that we use throughout the paper. Let χ denote the set of
non-negative random variables on the probability space (Ω, F, P ). This is our collection of
insurance-loss random variables — also called insurance risks. Let X, Y, Z, etc. denote typical
members of χ. Suppose that the loss X ∈ χ is random variable with distribution function
FX (x).
Definition 2.1 Let H denote the premium principle, or function, from χ to the set of non-
negative real numbers. I.e., define the premium of risk X as
P ≡ H[X], X ∈ χ. (2.1)
Thus, it is possible that H[X] takes the value ∞. We can also extend the domain of a
The Credibility Premiums for Exponential Principle 2219

premium principle H to include possibly negative random variables. That might be necessary
if we consider a general loss random variable of an insurer, namely. However, in this article,
we consider only the insurance payout and refer to that as the insurance loss random variable,
which only take the nonnegative value.
Throughout the paper, the existence of expectations and variances of random variables are
implicitly assumed when referred to.
Definition 2.2 The exponential premium of X ∈ χ is given by
1
P ≡ H[X] = log[E(eαX )], α > 0. (2.2)
α
The exponential premium principle (2.2) is a coherent risk measure (see Artnzer et al. [10]).
Some properties of exponential premium are listed as follows. The proofs can be easily checked.
• Risk loading: H[X] > EX for all X ∈ χ, and α > 0. In addition, when α → 0, we have
H[X] → E(X). Loading for risk is desirable because one generally requires a premium rule to
charge at least the expected payout of the risk X, namely E(X), in exchange for insuring the
risk. Otherwise, the insurer will lose money on average;
• No unjustified risk loading: If a risk X ∈ χ is identically equal to a constant c ≥ 0 (almost
everywhere), then H[c] = α1 log(Eeαc ) = c. If we know for certain (with probability 1) that
the insurance payout is c, then we have no reason to charge a risk loading because there is no
uncertainty as to the payout;
• Maximal loss (or no rip-off): H[X] ≤ ess sup[X] for all X ∈ χ;
• Translation equivariance (or translation invariance): H[X + c] = H[X] + c for all X ∈ χ
and all c ≥ 0. If we increase a risk X by a fixed amount c, then the premium for X + c should
be the premium for X increased by that fixed amount c;
• Additivity for independent risks: If X, Y ∈ χ are independent of each other, then H[X +
Y ] = H[X] + H[Y ];
• Monotonicity: If X(ω) ≤ Y (ω) for all ω ∈ Ω, then H[X] ≤ H[Y ];
• Preserves first stochastic dominance (FSD) ordering: If SX (t) ≤ SY (t) for all t ≥ 0, then
H[X] ≤ H[Y ];
• Preserves stop-loss ordering (SL) ordering: If E[X − d]+ ≤ E[Y − d]+ for all d ≥ 0, then
H[X] ≤ H[Y ];
• Continuity: Let X ∈ χ, then lima→0+ H[max(X − a, 0)] = H[X], and lima→∞ H[min(X,
a)] = H[X].

3 Credibility Estimator for Exponential Premium Principle

In classical credibility theory, the risk X can be recognized by a risk parameter Θ, which is
an unobservable random variable with distribution π(θ). Given Θ, X1 , X2 , . . . , Xn , Xn+1 are
iid copies of X, i.e., for i = 1, 2, . . . , n + 1, (Xi , Θ) has the same joint distribution as that of
a typical representative (X, Θ). Formally, the assumptions of the model and corresponding
notations are stated as in the following:
Assumption 3.1 The non-negative random variable X (also called risk) can be specified by
a risk parameter Θ, which is an unobservable random variable with prior distribution π(θ).
Assumption 3.2 Given Θ, the X1 , X2 , . . . are independent and identically distributed copies
of X, follow the distribution f (x, θ). Write Xn = (X1 , X2 , . . . , Xn ), which is claim experience
2220 Wen L. M., et al.

up to time n (also called the sample).

Assumptions 3.1 and 3.2 characterize the risk structure which belongs to the theory of
Bayesian framework. Now we can define the individual premium under the exponential princi-
ple (2.2).
Definition 3.1 Then the individual premium of risk X under exponential premium princi-
ple (2.2) is
1
H(X, Θ) = log[E(eαX |Θ)]. (3.1)
α
If the risk parameter Θ is known, the premium H(X, Θ) will be the most adaptive premium
for the risk X to charge under exponential premium principle. However, the risk parameter Θ
is generally unknown in practice, and hence the individual premium H(X, Θ) is also unknown
and to be estimated based on the samples Xn = (X1 , X2 , . . . , Xn ) . In order to find a consistent
estimator for H(X|Θ), we first consider the estimator of u(Θ) = E(eαX |Θ).
n
Write un = n1 i=1 eαXi . For convenience, we introduce the following notations:

Var(eαX |Θ) = σ 2 (Θ), E[u(Θ)] = u0 , Var[u(Θ)] = τ02 and E[σ 2 (Θ)] = σ02 .
B

Under the squared loss function, it is well known that the Bayes estimation u(Θ) =
E(u(Θ))|Xn ) solves the problem:

min E[u(Θ) − g(X1 , X2 , . . . , Xn )]2 , (3.2)

g

i.e., g(X1 , X2 , . . . , Xn ) = E[u(Θ)|X1 , X2 , . . . , Xn ] is the best estimator of u(Θ) in the class

of all measurable functions of X1 , X2 , . . . , Xn . However, in order to calculate the conditional
expectation E[u(Θ)|X1 , X2 , . . . , Xn ], the joint distribution of the random variables involved
need to be completely specified. Besides, the Bayes estimator E[u(Θ)|Xn ] cannot be solved
explicitly in general cases. In real applications, a weaker requirement is to resolve optimization
problem (3.2) in the smaller class, for example, Bühlmann [1] resolved the optimization problem
in the class of linear functions of sample X1 , X2 , . . . , Xn and got the well-known credibility
formula. In this paper, however, we constrain the estimator of u(Θ) to the linear function of
u0 and un . In this reduced class, the solution is also called credibility estimator. I.e., we solve
the following optimization problem:

Min E[au0 + bun − u(Θ)]2 . (3.3)

a,b∈R

From the credibility estimator of u(Θ), a estimator of H(X, Θ) can be easily derived by
∗
Θ) = 1 log u(Θ),
H(X,  which is called credibility premium (credibility estimator) under expo-
α
nential premium principle in this paper.
Theorem 3.2 Under Assumptions 3.1 and 3.2, the credibility estimator of u(Θ) is given by
∗
 = Zun + (1 − Z)u0 ,
u(Θ) (3.4)
nτ02
where Z = nτ02 +σ02
is the so-called credibility factor. Consequently, the credibility premium
∗
Θ) under exponential premium principle is given by
H(X,
∗
Θ) = 1 log[Zun + (1 − Z)u0 ].
H(X, (3.5)
α
The Credibility Premiums for Exponential Principle 2221

Proof Write Ψ = E[au0 + bun − u(Θ)]2 . Firstly, differentiate Ψ with respect to a and then let
the derivation be zero, then we get the following equation:
∂Ψ
= E[au0 + bun − u(Θ)] = 0. (3.6)
∂a
n
Note that E(un ) = E{E[ n1 i=1 eαXi |Θ]} = E[E(eαX1 |Θ)] = u0 , and E[u(Θ)] = u0 , then we
derive the relationship between a and b:

a = b − 1. (3.7)

Inserting (3.7) into Ψ, it gives Ψ = E[(1 − b)u0 + bun − u(Θ)]2 . We differentiate Ψ with respect
to b and let the derivative be zero. So we derive the following normal equation:
∂Ψ
= E[b(un − u0 ) + u0 − u(Θ)](un − u0 ) = 0. (3.8)
∂b
Hence the solution of b is given by
E[u(Θ) − u0 ](un − u0 )
b= . (3.9)
E(un − u0 )2
Since
1 2
E(un − u0 )2 = Var[un ] = E[Var(un |Θ)] + Var[E(un |Θ)] = σ + τ02 , (3.10)
n 0
and

E[u(Θ) − u0 ](un − u0 ) = E{E[(un − u0 )(u(Θ) − u0 )|Θ]} = E[(u(Θ) − u0 )2 ] = τ02 , (3.11)

one can obtain

E[u(Θ) − u0 ](un − u0 ) τ02 nτ02
b= = 1 2 = .
E(un − u0 )2 n σ0
2
+ τ0 nτ02 + σ02
Put Z = b. Then
∗
 = au0 + bun = Zun + (1 − Z)u0 .
u(Θ)

This completes the proof of Theorem 3.2. 

Remark 3.3 From the expression of the credibility factor, we can easily see that 0 ≤ Z ≤ 1,

Z → 1 when n → ∞, and Z → 0 when n → 0. (3.12)

∗
 is exactly the weighted sum of empirical survival function un and u0 .
These ensure that u(Θ)
In addition, we will believe the sample information more than that of prior information if the
sample volume is large enough.
Furthermore, the credibility estimator of (3.4) is consistent with u(Θ). This ensures the
consistency of credibility estimator of (3.5) with individual premium H(X, Θ), which is stated
in the following proposition.
∗
Proposition 3.4 The credibility estimator H(X, Θ) given by (3.5) converges to H(X|Θ)
almost surely.
Proof This can be proved easily from the central limit theorem. Firstly, from Assumption 3.2,
∗
 = Zun + (1 − Z)u0 → u(Θ) due to (3.12). The consistency
we have un → u(Θ), a.s. . So u(Θ)
∗
Θ) follows from the continuity of the function log(x).
of H(X, 
2222 Wen L. M., et al.

∗
Proposition 3.5  satisfies
The quadratic loss of the credibility estimator u(Θ)
∗
 − u(Θ))2 ] = (1 − Z)τ 2 = Z σ02
E[(u(Θ) 0 , (3.13)
n
where Z is defined as in (3.4).
Proof By (3.4) and straightforward calculations, we find
∗
 )2 ] = E[(u(Θ) − Zun − (1 − Z)u0 )2 ]
E[(u(Θ) − u(Θ)
= Z 2 E[(u(Θ) − un )2 ] + (1 − Z)2 E[(u(Θ) − u0 )2 ]
E[Var(eαXi |Θ)]
= Z2 + (1 − Z)2 τ02
n
= (1 − Z)τ02
σ02
=Z .
n
The second equation follows from that
E[(u(Θ) − un )(u(Θ) − u0 )] = E[E((u(Θ) − un )(u(Θ) − u0 )|Θ)] = 0, (3.14)
which completes the proof of Proposition 3.5. 

4 The Credibility Model with Multitude Contracts

4.1 Credibility Premium in Multitude Contracts
In applications, however, the structure function π(θ) usually cannot be completely specified
so that u0 , σ02 and τ02 are actually unknown. Therefore, the claim experiences over a number
of risks in the same portfolio have to be observed in order to estimate π(θ) or some moments
of Θ by empirical Bayes techniques. More specifically, let X1 , X2 , . . . , XK denote K risks
under observation. The distribution of each Xi is characterized by its risk parameter Θi and
contributes a sequence of claim experiences Xi = (Xi1 , Xi2 , . . . , Xini ) over ni time periods (to
simplify our exposition, the same time periods will be applied to all individuals (the so-called
balanced model), i.e., n1 = · · · = nK . With a slight variation to the model, however, it can
be easily extended to the unbalanced case). Therefore, these data {Xij , i = 1, 2, . . . , K, j =
1, 2, . . . , n} are therefore structured in two dimensions with one indicating the time horizon and
the other the distinct insured individuals. We list the assumptions for the model of multitude
contracts as follows.
Assumption 4.1 Conditioning on Θi = θ, the random variables Xij (j = 1, 2, . . . , n) are
independent, with the same distribution function Fθ and the conditional moments:
u(Θi ) = E(eαXij |Θi ), σ 2 (Θi ) = Var(eαXij |Θ), i = 1, 2, . . . , K, j = 1, 2, . . . , n.

Assumption 4.2 The risk parameters Θ1 , Θ2 , . . . , Θk are independent and identically dis-
tributed as the same structure distribution function π(θ).
Assumption 4.3 The random vectors (Θi , Xi ) are independent for i = 1, 2, . . . , K.
We also denote E[u(Θi )] = u0 , E[σ 2 (Θi )] = σ02 , and Var(μ(Θi )) = τ02 such that the notations
are consistent with Section 3. This model is called balanced Bühlmann credibility models with
multitude contracts. The goals are to estimate the individual exponential premium H(X, Θi ) =
1 αXij
α log[E(e |Θi )] of the i-th contracts for i = 1, 2, . . . K.
The Credibility Premiums for Exponential Principle 2223

1
n 1
K
Write ui = n j=1 eαXij , u = K i=1 ui . Firstly, we solve the following minimization
problem:
 K 
 n 2
Min E u(Θi ) − c0 − cst exp(αXst ) , (4.1)
c0 ,cst ∈R
s=1 t=1

and derive the following theorem.

Theorem 4.1 Under Assumptions 4.1–4.3, the credibility estimators of μ(Θi ) by solving
the (4.1) is given by
∗

u(Θ i ) = Zi ui + (1 − Zi )u0 , (4.2)
nτ02
where Zi = nτ02 +σ02
is the credibility factor.
Proof Write Yij = exp(αXij ), i = 1, 2, . . . , K, j = 1, 2, . . . , n, and Y = (Y1 , Y2 , . . . , YK ) ,
where Yi = (Yi1 , Yi2 , . . . , Yin ) , i = 1, 2, . . . , K. Then the minimization problem becomes
 K 2
Min E u(Θi ) − c0 − cs Ys , with c0 ∈ R, and cs = (cs1 , . . . , csn ) ∈ Rn . (4.3)
c0 ,cst
s=1

So the credibility estimator of u(Θi ) is exactly the orthogonal projection of u(Θi ) on linear
space:
 K 
 n
L(Y, 1) := c0 + cs Xs , c0 ∈ R and cs ∈ R ,
s=1
∗

i.e., u(Θi ) = proj(u(Θi )|L(Y, 1)) (see, for example, Wen et al. [14]). From the relationship
between orthogonal projection and credibility estimator, we have
∗

u(Θi ) = proj(u(Θi )|L(Y, 1)) = E[u(Θi )] + Cov(u(Θi ), Y )Cov(Y, Y )
−1
(Y − E(Y )). (4.4)

Write Θ = (Θ1 , . . . , ΘK ) , and u(Θ) = (u(Θ1 ), . . . , u(ΘK )) . Then

Cov(u(Θi ), Y ) = E[Cov(u(Θi ), Y |Θ)] + Cov[u(Θi ), u(Θ) ⊗ 1n ] = τ02 ei ⊗ 1n (4.5)

and

Cov(Y, Y ) = E[Cov(Y, Y |Θ)] + Cov[E(Y |Θ), E(Y |Θ)]

= InK σ02 + Cov[u(Θ) ⊗ 1n , u(Θ) ⊗ 1n ]
= IK ⊗ (σ02 In + τ02 1n 1n ),

where ei is a vector with 1 in the i-th entry and 0 in the other entries and ⊗ indicates the
Kronecker product of matrices. Recall the well-known formula for matrix inverse (see, e.g., Rao
and Toutenburg [15, Theorem A.18, p. 291])

(A + BCD)−1 = A−1 − A−1 B(C −1 + DA−1 B)−1 DA−1 . (4.6)

It is easy to verify that


1 τ 2 1n 1n
Cov(Y, Y )−1 = IK ⊗ (σ02 In + τ02 1n 1n )−1 = 2 IK ⊗ In − 20 . (4.7)
σ0 σ0 + nτ02
Hence inserting (4.5), (4.7) into the (4.4) we have
∗

u(Θi ) = E[u(Θi )] + Cov(u(Θi ), Y )Cov(Y, Y )
−1
(Y − E(Y ))
2224 Wen L. M., et al.

1 τ02 1n 1n
= u0 + (τ02 ei ⊗ 1n ) IK ⊗ In − (Y − u0 1nK )
σ02 σ02 + nτ02
= Zui + (1 − Z)u0 .
Thus we complete the proof of Theorem 4.1. 
Remark 4.2 If the model is unbalanced, i.e., the ni may be different for i = 1, 2, . . . , K, the
results of Theorem 4.1 are still true with
ni
ni τ02 1 
Zi = and u i = eαXij . (4.8)
ni τ02 + σ02 ni j=1

Remark 4.3 For fixed i, if n → ∞, the ui → u(Θi ), a.s. from the central limit theorem. In
∗
nτ02 
addition, Zi = nτ 2 +σ 2 → 1, so u(Θi ) → u(Θi ), a.s.. This shows that the credibility estimator
0 0
∗

u(Θi ) is consistent with u(Θi ).

Corollary 4.4 Under Assumptions 4.1–4.3, a credibility estimator of H(X, Θi ) is given by

∗ 1

H(X, Θi ) = log[Zui + (1 − Z)u0 ]. (4.9)
α
∗

Furthermore, the H(X, Θi ) is consistent with H(X, Θi ) as n → ∞.
If we constrain the estimator of u(Θi ) to be a homogeneous linear class of Y, we can derive
the homogeneous credibility estimator. Hence we should solve the following problem:
 K 2  K 
Min n E u(Θi ) − cs Ys , with E[u(Θi )] = E cs Ys . (4.10)
c0 ,cs ∈R
s=1 s=1
Then we obtain the following theorem.
Theorem 4.5 The homogeneous credibility estimators of u(Θi ) for i = 1, 2, . . . , K are
hom

u(Θi) = Zi ui + (1 − Zi )u, (4.11)
where Zi is the same as in Theorem 4.1. So a homogeneous credibility estimator of H(X, Θi )
is
∗ 1

H(X, Θi ) = log[Zui + (1 − Z)u]. (4.12)
α
K K
Proof Write Le(Y ) = { s=1 cs Ys , with cs ∈ Rn and E[u(Θi )] = E[ s=1 cs Ys ]}. Then the
homogeneous credibility estimator of u(Θi ) is exactly the orthogonal projection in the linear
hom

space Le(Y ) (see Wen et al. [14]): u(Θ i) = proj(u(Θi )|Le(Y )). Since Le(Y ) ⊆ L(Y, 1), from
the iterativity of projection operator (see Bühlmann and Gisler [3]), one can obtain
hom

u(Θ i) = proj(u(Θi )|Le(Y )) = proj[proj(u(Θi )|Le(Y ))|Le(Y )]
= Zi ui + (1 − Zi )proj(u0 |Le(Y )).
Recall the formula
u0 E(Y  )Cov(Y, Y )−1 Y
proj(u0 |Le(Y )) = , (4.13)
E(Y  )Cov(Y, Y )−1 E(Y )
in Wen et al. [14], inserting E(Y ) = u0 1nK and (4.7) we have
τ02 1n 1n
u0 (u0 1nK )[ σ12 IK ⊗ (In − σ02 +nτ02
)]Y
proj(u0 |Le(Y )) = 0
τ02 1n 1n
= u, (4.14)
(u0 1nK )[ σ12 IK ⊗ (In − σ02 +nτ02
)](u0 1nK )
0
The Credibility Premiums for Exponential Principle 2225

which proves the desired results. 

4.2 Estimation of Structure Parameters

For the credibility model of multitude contracts in the above subsection, the structure parame-
ters u0 , σ02 and τ02 may be estimated based on the samples {Xij , i = 1, 2, . . . , K, j = 1, 2, . . . , n}.
Firstly, from the homogeneous credibility of Theorem 4.5, we have got a unbiased estimator of
u0 , i.e., u0 = u. In fact, Theorem 4.5 says that u is the best estimator in all the linear biased
1
K
estimator class. In addition, since u = K i=1 ui , from the strong law of large numbers, we
a.s.
have u → E(ui ) = u0 as K → ∞. This shows that u is a consistent estimator with u0 . We
obtain the following unbiased estimators for σ02 and τ02 .
Proposition 4.6 A unbiased estimator of σ02 is given by
 K n
1
σ02 = [exp(αXij ) − ui ]2 , (4.15)
K(n − 1) i=1 j=1
a.s
and then σ02 is consistent with σ02 , i.e., σ02 → σ02 as K → ∞.
Proof Write Θ = (Θ1 , . . . , ΘK ) ,
n
1 
Δ2i = [exp(αXij ) − ui ]2 and σ02 (Θi ) = Var(exp(αXij )|Θi ), (4.16)
n − 1 j=1

and then we get

n
1 
Δ2i = (exp(αXij ) − u(Θi ) + u(Θi ) − ui )2
n − 1 j=1
 n 
1 2 2
= (exp(αXij ) − u(Θi )) − n(u(Θi ) − ui ) .
n − 1 j=1

We obtain immediately that

E(Δ2i |Θ) = σ02 (Θi ), (4.17)
and then
E(Δ2i ) = E[E(Δ2i |Θ)] = E[σ02 (Θi )] = σ02 . (4.18)
Hence we have
  K 
1
E[σ02 ] =E Δ = σ02 .
2
(4.19)
K i=1 i
Furthermore, by the i.i.d. assumption of Θi and the strong law of large numbers, we obtain
1
K 2 a.s. 2
σ02 = K i=1 Δi → σ0 when K → ∞. This completes the proof. 
Proposition 4.7 An unbiased estimator of τ02 is
K K n
1  1 
τ02 = (ui − u)2 − [exp(αXij ) − ui ]2 , (4.20)
K − 1 i=1 Kn(n − 1) i=1 j=1
a.s.
In addition, τ02 is consistent, i.e., τ02 → τ02 as K → ∞.
Proof Consider
K
1 
T = (ui − u)2 . (4.21)
K − 1 i=1
2226 Wen L. M., et al.

1
K
Since E(T ) = K−1 i=1 E[(ui − u)2 ], and E(ui ) = E(u) = u0 , then

E[(ui − u)2 ] = Var[ui − u] = Var(ui ) + Var(u) − 2Cov(ui , u). (4.22)

Applying the conditional expectation theorem, we obtain

   n     n 
1 1
Var(ui ) = E Var exp(αXij )|Θ + Var E exp(αXij )|Θ
n j=1 n j=1
1
= E[Var(exp(αXij )|Θi )] + Var[u(Θi )]
n
σ2
= 0 + τ02 (4.23)
n
and
σ02 1
Var(u) = E[Var(u|Θ)] + Var[E(u|Θ)] = + τ02 . (4.24)
Kn K
For the third term on the right side of (4.22), we have
 K
1  1 σ2 1
Cov(ui , u) = Cov ui , ui = Cov(ui , ui ) = 0 + τ02 . (4.25)
K i=1 K Kn K

Hence inserting (4.23), (4.24) and (4.25) into (4.22), we obtain

K
1 
E(T ) = [Var(ui ) + Var(u) − 2Cov(ui , u)]
K − 1 i=1
K   2 
1  σ02 σ2 1 σ0 1
= + τ02 + 0 + τ02 − 2 + τ02
K − 1 i=1 n Kn K Kn K
1 2
= σ + τ02 . (4.26)
n 0
So we have  
1
E[τ02 ] = E T − σ02 = τ02 . (4.27)
n

Now we prove the consistency of τ02 . Firstly, we observe that

k K
1  1  2 K 2
T = (ui − u)2 = ui − u . (4.28)
K − 1 i=1 K − 1 i=1 K −1

Since u is consistent with u0 , we obtain

K 2 a.s.
u → u20 . (4.29)
K −1
In addition, from the strong law of large numbers, we obtain
K
1  2
(ui − E(ui 2 )) → 0, a.s.. (4.30)
K − 1 i=1

Thus from (4.29), (4.30) and the consistency of σ02 , we have

a.s.
τ02 → τ02 , as K → ∞. (4.31)
The Credibility Premiums for Exponential Principle 2227

5 Numerical Experiment
This section is devoted to demonstrating how to generally compute the credibility premium
under exponential premium principle given in Section 3 and compare this estimator with the
classical one for different α value. In addition, we will check the consistency of credibility
∗
Θ) given as in Theorem 3.2.
estimator H(X,
We assume that X is distributed as N (Θ, σ 2 ), and the risk parameter Θ is exponential
1
variable with density function π(θ) = μ10 e− µ0 θ I (θ > 0), then the classical Bühlmann credibility
estimator is
 =
B nμ20 σ2
μ(Θ) X + μ0 , (5.1)
nμ20 + σ 2 nμ20 + σ 2

where X = n1 ni=1 Xi . The corresponding quantities defined in Section 3 can be derive as

1 exp(0.5α2 σ 2 ) 1
u(Θ) = exp(αΘ + α2 σ 2 ), u0 = , H(X|Θ) = Θ + ασ 2 (5.2)
2 1 − μ0 α 2
and
exp( 21 α2 σ 2 ) exp( 12 α2 σ 2 ) exp(2α2 σ 2 ) − exp(α2 σ 2 )
τ02 = − , σ02 = . (5.3)
1 − 2μ0 α (1 − μ0 α)2 1 − 2μ0 α
Then we can obtain the expression of the credibility estimator under exponential principle:
 

∗ 1 nτ02 σ02
H(X, Θ) = log un + 2 u0 , (5.4)
α nτ02 + σ02 nτ0 + σ02
n
where un = n1 i=1 eαXi .
In the simulation, we take μ0 = 0.7, σ 2 = 8.1. First, for different α, we generate a sample
B
 = 0.8649,
Xi ∼ N (Θ, σ 2 ) for the sample size n = 100. We obtain the Bühlmann estimator μ(Θ)
∗
Θ) is given by the following table:
while the credibility estimator H(X,

n = 100 α = 0.02 α = 0.04 α = 0.06 α = 0.08 α = 0.10 α = 0.12 α = 0.14 α = 0.16

∗

H(X, Θ) 0.8748 0.8833 0.8919 0.9004 0.9090 0.9176 0.9262 0.9347

∗
Table 1 Θ) with different values of α
The credibility estimator H(X,
∗ B
Θ) is generally larger than μ(Θ)
From the table above, the credibility estimator H(X,  , and
is increasing with the parameter α. In insurance practice, the actuary can derive the premium
with positive safe-loading by the adjustment of α value.
∗
In the second, we will verify the consistency of estimator H(X, Θ) and only consider
α = 0.05. Nine different values θ = 0.1, 0.2, 0.3, . . . , 0.9, and three sample sizes n = 30,
n = 100, n = 1000 are considered. For each combination of values of parameters θ and n, we
carry out a simulation of 10000 times. The corresponding simulation results are listed in the
following tables:

n = 30 θ = 0.1 θ = 0.2 θ = 0.3 θ = 0.4 θ = 0.5 θ = 0.6 θ = 0.7 θ = 0.8 θ = 0.9

H(X, θ) 0.1203 0.2203 0.3203 0.4203 0.5202 0.6202 0.7203 0.8203 0.9203
∗
θ)
H(X, 0.1294 0.2172 0.3283 0.4197 0.5166 0.6243 0.7164 0.8104 0.9114
θ)
MSE H(X, 0.0201 0.0217 0.0201 0.0217 0.0201 0.0207 0.0213 0.0219 0.0204

Table 2 The simulation results with n = 30

2228 Wen L. M., et al.

n = 100 θ = 0.1 θ = 0.2 θ = 0.3 θ = 0.4 θ = 0.5 θ = 0.6 θ = 0.7 θ = 0.8 θ = 0.9
H(X, θ) 0.1203 0.2203 0.3203 0.4203 0.5202 0.6202 0.7203 0.8203 0.9203
∗
θ)
H(X, 0.1186 0.2204 0.3230 0.4201 0.5184 0.6148 0.7213 0.8180 0.9184
θ)
MSE H(X, 0.0067 0.0061 0.0067 0.0065 0.0065 0.0064 0.0067 0.0068 0.0070

Table 3 The simulation results with n = 100

n = 1000 θ = 0.1 θ = 0.2 θ = 0.3 θ = 0.4 θ = 0.5 θ = 0.6 θ = 0.7 θ = 0.8 θ = 0.9
H(X, θ) 0.1203 0.2203 0.3203 0.4203 0.5202 0.6202 0.7203 0.8203 0.9203
∗
θ)
H(X, 0.1199 0.2189 0.3172 0.4164 0.5172 0.6155 0.7176 0.8156 0.9146
θ)
MSE H(X, 0.0007 0.0006 0.0006 0.0006 0.0005 0.0007 0.0007 0.0007 0.0006

Table 4 The simulation results with n = 1000

∗ ∗
θ) is the mean of estimator in the simulation, and MSE H(X,
where H(X, θ) = E H(X,θ) −
2  ∗
H(X, θ) θ) . We can see from the
indicates the mean square error for the estimator H(X,
∗
θ) is consistent with the individual premium H(X, θ), even if the
tables above, that H(X,
sample size is moderate.
Acknowledgements We would like to express our thanks to the anonymous referees for
their careful reading and revisions and helpful suggestions on the manuscript.

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