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Foundations of Casualty Actuarial Science

classical credibility sought to minimize rate
fluctuations whereas Bayesian-Buhlmann credibility
sought to optimize pricing accuracy.
(ii) Over time, credibility theory has undergone many
changes. Howard Mahler, one of the leading
actuarial authors, showed how credibility varied with
the extent to which risk parameters shifted over time.

Mahler has changed many of the previous actuarial
notions of credibility. Firstly, the speed at which the risk
parameters shift is not less important than the volume
of business for setting credibility values. Secondly, he
showed that there is quite a large range of optimal
credibility values.

Any value chosen from this range works equally well
for maximizing pricing accuracy. However, the actuary
should examine the rate at which the risk parameters
shift to determine whether older experience years have
much predictive value for the future. Thirdly, though
credibility theory was nourished by casualty actuaries,
it is now being used in other fields like financial

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