Parameter Uncertainty in the Collective Risk Model [review]

INTRODUCTION As the two major industry rating bureaus currently grapple with the problems of appropriate Table M charges, this paper must be considered particularly timely. The concept of parameter risk as an integral part of the total risk inherent in any insurance contract has long been recognized and discussed by actuaries. Although not always an equal partner with process risk in terms of explaining total loss ratio variance, parameter uncertainty becomes more and more important as the premium size of the insured increases. This paper goes further than any previous effort to explain, analyze and quantify parameter uncertainty as it relates to insurance pricing.