Hi all, In the last part of obtaining the credibility premium for aggregate claims in the second year, I don't quite understand why we have to multiply the credibility factor with the aggregate loss for the first year and why we multiply the complement of the credibility factor with the risk premium for the first year? Looking for an explanation on this and thanks in advance for your help!
The credibility estimate is given as Z*observation + (1-Z)*prior estimate. Our observation is the aggregate loss in the first year ($6.75m) and our prior estimate is the risk premium for the first year ($5m). This makes intuitive sense, since the risk premium for any risk is calculated as the expected aggregate losses for that risk.
