CREDIBILITY THEORY: THE CORNERSTONE ACTUARIAL SCIENCE

James C. Hickman* and Linda Heacox

OF

ABSTRACT
The North American Actuarial Journal is honoring the Society of Actuaries on its golden anniversary in 1999 by publishing a series of articles on the contributions of actuaries to the development of ideas. In this issue, the second of the series, we explore the development of the credibility idea and the relationships of this development to deep issues in the methodology of science. We begin with a short essay by James C. Hickman and continue with comments by three actuaries who were deeply involved with the development of credibility: Robert A. Bailey, Hans Buhlmann, and Charles C. Hewitt.

1. INTRODUCTION
The title of this introductory essay and the associated interviews is lifted from Longley-Cooks 1962 monograph on credibility theory. It is one of many strong statements about the centrality of credibility theory to actuarial thought. In connection with marking the ftieth anniversary of the Society of Actuaries, it seems appropriate to review some of the history of this pervasive idea. The conservative nature of actuaries has often been the foundation of the public perception of them. Moorhead (1989, p. 391) quotes Matthew Rodermund on this perception: The image of actuaries depicted on stage and screen, in books and comedy routines, has been that of staid, humorless, unimaginative creatures, their minds immersed in numbers, lacking, it has been said ad extremum, the personality to be an accountant. Given this propensity to a lack of imagination, the extravagant praise heaped on credibility theory is all the more surprising. The same Matthew Rodermund (1990) who articulated the conventional conservative image of actuaries used exuberant language to declare, It is the concept of credibility that has been the casualty actuaries

most important and enduring contribution to actuarial science. Rodermund also quotes Thomas Carlson, a prominent actuary, as saying of Arthur Bailey, the pioneer in using the Bayesian approach to credibility, [he is] probably the most profound contributor to casualty actuarial theory the United States has produced. Allen Mayerson (1964) published a modern Bayesian approach to credibility theory. In his discussion of Mayersons paper, Hewitt (1965) said, European actuaries have outstripped us in the classical theory of risk. Professor Mayerson has distilled the essence of American achievement in the area of credibility and the Bayesian approach. These words about credibility do not contain the moderate adjectives expected in actuarial prose. What accounts for this ebullience? Reviews of the current status of the theory and practice of credibility are available in Herzog (1994), Klugman, Panjer, and Willmot (1998) and Venter (1990). In this article we will provide some historical background that will be helpful in appreciating the interviews with some of the pioneers in actuarial thought on credibility and attempt to justify the extravagant praise.

2. A BUSINESS NECESSITY
*James C. Hickman, F.S.A., A.C.A.S., Ph.D., is Emeritus Professor and Dean, University of Wisconsin, School of Business, 975 University Avenue, Madison, Wisconsin 53706. Linda Heacox is Public Relations Specialist at the Society of Actuaries, 475 N. Martingale Road, Suite 800, Schaumburg, Illinois 60173, e-mail, lheacox@soa.org.

In the years immediately before World War I, the rapid industrialization of the United States and Canada was driving many adaptations. These adaptations included new provisions for family economic security. For example, the rst group life insurance for employees was

NORTH AMERICAN ACTUARIAL JOURNAL, VOLUME 3, NUMBER 2

issued in the United States in 1911. Starting about the same time, the states enacted workers compensation laws. These laws were based on the new principle of liability without fault for occupational injuries and diseases. Employers were compelled to nance the benets. Depending on the individual state, the nancing could be done by purchasing an insurance policy, by self-insuring, or by obtaining insurance from a monopolistic or competitive state fund. The same path of development was followed in Canada. Suddenly, a new line of essentially compulsory group insurance had been created. Workers compensation not only changed tort law, it created a host of new actuarial problems. There were institutional and intellectual responses to these challenges. The Casualty Actuarial Society was an institutional response, and credibility an intellectual response. Rodermund (1990), in the section entitled Days to Remember, retells the story of the efforts to develop an experience-rating process for workers compensation insurance. From these efforts came the name, the basic equation, and even the notation of credibility theory. The original account of these developments is by Whitney (1918). The idea of midcourse corrections has been around as long as humans have made journeys. Control systems to maintain stability in the operation of a process were an important component that technology developed to harness the steam engine for transportation and production. The need for such adjustments in a large and almost completely new insurance system is obvious. An extra force pushing for premium adjustments in workers compensation insurance was the social desirability to charge lower premiums to those employers who by safety engineering reduced the cost of industrial accidents. Premium reductions could provide an economic incentive to safety.

n n

, k

3. THE IDEA
The plan suggested for the periodic revision of group insurance premium rates used a linear adjustment function: New Rate Z Observed Rate (1 Z) Old Rate,

where 0 Z 1 and was an increasing function of the exposure size. The item Z is the credibility factor. Clearly many functions have the desired properties. One example of such a function is:

where k 0 and n is a measure of exposure size. The remaining issues were to develop a consistent and coherent theory for the premium experience adjustment procedure so that it could be used in a variety of applications and to nd practical ways to estimate the parameters of the credibility factor. In facing the rst of these two issues, it soon becomes clear that one cannot avoid choosing sides on a fundamental philosophic issue. Perhaps it is the fact that a very practical business problem is found to require a philosophic foundation that accounts for the fascination of credibility theory. Probably no subject within actuarial science has attracted more attention from an array of economists, mathematicians, philosophers of science, and statisticians than has credibility theory. The task of describing in a few sentences the salient attributes of the two philosophic foundations of credibility theory is daunting. It is acknowledged that there are intermediate positions to the two extremes, and students of credibility theory differ in the language they use. Nevertheless, to trace the history of the credibility idea it is useful to try to characterize the two basic positions: (1) Those starting from this position interpret probability as a relative frequency and assert that random variables, such as total claims in an accounting period, have probability distributions with xed parameters. Prior information enters statistical model building only in the selection of a class of models. (2) Those starting from this position interpret probability as a measure of the degree of belief in a proposition. Relative frequencies are relevant to estimating probability distributions, but other information is also relevant. Prior information, that is, information available before recent information, is to be used in the form of probability distribution about various models or parameters. In statistics, position (1) is called the sampling theory approach and position (2) is the Bayesian approach. The Bayesian approach draws its name from Thomas Bayes (17021761), who made the rst statements of position (2). Amazingly, almost from the beginning, perhaps without digging down to the bedrock of a philosophic position, both schools of thought were represented by

CREDIBILITY THEORY: THE CORNERSTONE

OF

ACTUARIAL SCIENCE

actuaries working on development of credibility theory. The superb set of references and the section entitled Further Topics provided by Venter (1990) permits one to trace the remarkable intellectual history of credibility theory and its competing philosophic foundations. Ideas do not respect organizational boundaries. Although some would say that credibility is a product of casualty actuaries, one of the important milestones in the history appeared in the Transactions of the Actuarial Society of America. The paper was by Keffer (1929) and adopted a Bayesian foundation for experience rating in group life insurance.

4. A REMARKABLE ACTUARY
In Section I of this essay, Thomas Carlson was quoted about the singular contribution of Arthur Bailey to credibility theory. In Rodermunds (1990) Introduction in Foundations of Casualty Actuarial Science, the section on Arthur Bailey is entitled An Actuary to Remember. The natural questions are who was Arthur Bailey and why was his contribution important? In the interviews that follow, both of these questions will be addressed. To provide context for the interview, it is helpful to review briey the controversy that was underway about the foundation of statistics at the time that the Society of Actuaries was founded and Arthur Bailey was writing. The sampling theory and Bayesian foundations for statistical inference had been present at least since the time of Thomas Bayes. In the rst half of the twentieth century, rapid progress, built on a sampling theory foundation, had greatly increased the range of application of statistical methods. Names such as Fisher, Neyman, E. Pearson, and K. Pearson are associated with the progress. The Bayesian approach received little attention. Writing in 1950, Bailey described the situation very well.
The statistical methods, developed by the mathematicians and available in the standard textbooks on statistical procedures, deal with the evaluation of the indications of a group of observations, but under the tacit or implicit assumption that no knowledge existed prior to the making of those particular observations. The credibility procedures, used in the revisions of casualty rates, have been developed by casualty actuaries to give consistent weightings to additional knowledge in its combination with already existing knowledge.

What was amazing was that, at the same time, several philosophers of science and statisticians were saying almost exactly the same thing. This group included Jeffreys, Barnard, Ramsey, de Finetti (also a contributor to actuarial science), Savage, and Lindley. What made Bailey remarkable was that he came to his criticism of sampling theory and support of the Bayesian approach because of intensive study of a very practical business problem. Baileys papers (1942, 1945, 1950a, 1950b) are not necessarily easy to read. He did not use the notation and language of modern Bayesian analysis. Yet you will nd powerful arguments in support of the actuarial use of the Bayesian approach, a review of the satisfying examples of Bayesian conjugate analysis that reproduces standard credibility formulas, and even a review of using least squares estimates of next periods expected claims, using a linear function of past claims and some prior information about the claims process.

5. THE INTERVIEWS
The interviews will be with Robert A. Bailey (1959, 1961), son of Arthur Bailey and himself a contributor to credibility theory; Charles C. Hewitt (1965, 1970), a contributor to credibility theory whose actuarial career spans these developments; and Hans Buhlmann, Swiss professor and actuary. Dr. Buhlmann (1967) is a major contributor to credibility theory, especially the idea of a least squares linear estimate depending on prior data and parameters to estimate next year claims. Dr. Buhlmann will be asked to place this seg ment of American actuarial history in a worldwide perspective.

ROBERT A. BAILEY
Robert Bailey, F.C.A.S., says it has been his good fortune to work for some outstanding actuaries. He began his career with a job recommended by his famous father at the National Bureau of Casualty Underwriters. His boss was Thomas Carlson. From there, he went to Sentry Insurance, formerly Hardware Mutuals, where he worked for Ruth Salzmann and Norton Masterson. He also served in the actuarial department of the Insurance Company of North America in Philadelphia working for Laurence Longley-Cook. Later, he was brought to the Michigan Insurance Bureau by Allen Mayerson, who was Insurance Commissioner for the state. He holds a Master of Science degree in mathematical statistics from the University of Iowa, where Robert Hogg was his thesis advisor. He now lives

NORTH AMERICAN ACTUARIAL JOURNAL, VOLUME 3, NUMBER 2

in Lansing, Michigan and has been retired from the Michigan Insurance Bureau since June 1997. Can you give us the highlights of your fathers career? He graduated from the University of Michigan actuarial and statistical program in 1928 and worked in the statistical department at the United Fruit Company in Boston until the Depression, when the department was eliminated. Then he worked for The Alliance of Mutual Insurers in New York City, where he was in charge of making rates for the Mutual cartel. In those days, it was legal for cartels to make rates in concert, not a violation of anti-trust laws. That was until the SEUA case came along and caused the law to be changed. SEUA day was the same day as D-Day. When it made that decision, the U.S. Supreme Court made my fathers job illegal. I remember that day. Thats what we talked about at the dinner table. He was also casualty actuary for the New York State Insurance Department and he was at Lumbermans when he died in 1954. He was 49 years old. Where did he get his creative ideas? Well, I dont know, I can only guess. But he did have a questioning attitude toward everything. And his father had a similar attitude, constructive, but never took anything for granted. Did his employment permit study? His rst job during which he became an Associate of the Casualty Actuarial Society was with the Alliance. His boss there did not allow any company time for studying or even to take the actuarial exams. So my father decided to become a member of the Actuarial Society. He was reading and studying all the time anyway. He passed his ACAS exams in one sitting on his vacation. He never took another exam. He didnt need to, he had what he wantedto be able to write papers and attend meetings. It wasnt until quite a while later the CAS asked if he would accept an honorary Fellowship on the basis of his papers. Were the seeds of his ideas planted in college? A lot of his colleagues complained about the kind of math he used. The notation was archaic. It was the notation he was taught at the University of Michigan and that he used at the United Fruit Company. In the bibliography to James Hickmans essay there is mention of one of his papers, Credibility Procedures:

LaPlaces Generalization of Bayes Rule. He was working with Bayes rule before he got into the insurance business. I have a book he was given in 1940 called Facsimiles of Two Papers by Bayes. It was published by a colleague of his at the United Fruit Company, W. Edwards Deming. So I know my father was working on Bayes rule before he got into the insurance business. Did he read some of the literature on statistics? I dont know. I used some of his textbooks when I was in high school just to do some of the exercises. What he gave me would have been on statistics. But he read widely, a lot more than just actuarial literature. I have two of his books. One is Human Knowledge: Its Scope and Limits, Bertrand Russell, 1948. The other is The Philosophy of Physical Science, Sir Arthur Eddington, 1949. What was the response of his colleagues to his ideas? His colleagues usually complained about his math. It was hard to understand and the notation was difcult. But they all understood what he said when he spoke. I have a 20-page letter from John Carleton, about the 1950 paper Credibility Procedures: LaPlaces Generalization of Bayes Rule, written about a month and one-half before my father delivered his paper. Carleton was aware of its contents, so obviously my father had been discussing it with him. Carleton asked my father to keep his letter personal and condential, but it was eventually published in 1993 by the Casualty Actuarial Society. It was published as a paper in the Casualty Actuarial Society Forum, Summer 1993, and called True Inherent Hazards and the Futility Thereof. I recommend it because it is a friendly review of the content of my fathers paper and contains some genuine actuarial humor. On the rst page John says, Ignorance is an asset which the insurance industry should not dissipate thoughtlessly. What was the response to his ideas from other statisticians or philosophers of science? If you look at the reviews of the 1950 paper Credibility Procedures, it had several reviewers who had nothing to do with the insurance business. They were former colleagues or people that he knew and had been in touch with on mathematical statistics, not insurance.

CREDIBILITY THEORY: THE CORNERSTONE

OF

ACTUARIAL SCIENCE

Can you talk about your work in credibility? I think the paper of mine, which I wrote jointly with LeRoy Simon, An Actuarial Note on the Credibility of Experience of a Single Private Passenger Car, is the oldest paper on the CAS reading list. It was a fun paper, not very mathematical. At the time, merit rating was regarded as unsound because the insurance for a single car did not have adequate credibility. I was then working with INA, which was independent, so I was free and LeRoy was free to try to demonstrate that the politically correct idea was incorrect. My contribution is more in the application area rather than the theoretical area. How did you get involved with credibility? Well, my father was making rates for insurance companies and he noticed that procedures they were using were inconsistent with what he had learned at the University of Michigan and had used at the United Fruit Company. His question was Why are they doing it that way? It doesnt make sense. And my rst job at the National Bureau was making rates for the stock insurance companies. I was busy using credibility procedures, so I was facing the same questions. What is credibility? How are we using it?

HANS BUHLMANN
Professor Buhlmann has been associated with ETH Zu rich since 1966 when he joined the university. He served as its president from 19871990 and is currently Professor Emeritus. At Swiss Re, he was employed as an actuary from 19581966 and is currently a member of its Board of Directors. In addition, Professor Buhlmann has held visiting appointments at several universities in Asia, Canada, Europe, and the United States. How did you get acquainted with credibility? In 1963, Swiss Re asked me to explore whether mathematics could be of use on the nonlife side of insurance. In particular, I was to familiarize myself with the role of casualty actuaries in the United States. I had just nished an 18-month leave at the statistics department at the University of California at Berkeley. On my way back to Zurich, I stopped at the National Bureau of Casualty Underwriters San Francisco and New York ofces. In New York, Thomas Carlson gave me Longley-Cooks An Introduction to Credibility (1962), which immediately caught my interest.

I liked the concept, but I also felt that the mathematical reasoning behind it, as presented by LongleyCook, was not convincing. His argument relied completely on frequentist thinking. First, he derived the necessary volume of risks to obtain full credibility. This was done by constructing a condence interval. Then, he used a standard deviation argument to reduce full credibility to partial credibility for smaller volumes. But why should a condence interval, which by denition covered the true value only with probability less than one, guarantee full credibility? Back in Zurich, I started to work on the concept. I remember that I had a special drawer in my desk containing notes which I ultimately published (Optimale Pramienstufensysteme, Swiss Actuarial Journal 1964). In the beginning, I was rather interested in the concept of experience rating. How should observed claims inuence premiums? As a reinsurer, we had all kinds of devices in operation where the issue came up: prot commissions, sliding scale premiums, spread loss treaties, and so on. Were these devices actuarially sound or just gimmicks invented by the sales force? Slowly, my mathematical reasoning found its route. Premiums should not only depend on the individual risk but also on the collective from which the risk was chosen. This led to the type of reasoning known as Bayesian, where besides the individual risk distribution, the collective is reected by the probability distribution of the risk parameters (called prior distribution by the Bayesian school). When I tried how this concept would work in a case where individual numbers of claims are Poisson distributed and the Poisson parameter follows a Gamma distribution, I found to my surprise one of the formulae in Longley-Cooks treatise (actually the one that he could only explain by a numerical approximation). What a lucky coincidence! Of course, later I realized that my American colleague Allen Mayerson had done the same calculation (Mayerson 1964). Allen visited us in Zurich quite regularly, his wife Dorli being from Zurich. My surprise became even bigger when later on I came across Arthur Baileys paper Credibility Procedures LaPlaces Generalization of Bayes Rule and the Combination of Collateral Knowledge with Observed Data (Bailey 1950a). What a great paper explaining the concept of credibility. I have asked many American colleagues why this achievement of Arthur Bailey has been so little valued and for a long time has been forgotten. They have usually answered that very few, if any, actuaries understood Baileys lectures, and the mathematical statisticians failed to take interest in Baileys paper. Nevertheless, one of the latter group,

NORTH AMERICAN ACTUARIAL JOURNAL, VOLUME 3, NUMBER 2

Professor Richard von Mises, made a visionary statement (Proceedings of the Casualty Actuarial Society, Vol. 37, Part 9, 1950). It is to be hoped that those and similar problems will nd the attention of competent statisticians as the unjustied and unreasonable attacks on the Bayes theory, initiated by R.A. Fisher, will fade out. You asked whether the early development of credibility is mainly due to Americans. My answer is a convinced yes. Even if Ove Lundberg in Sweden (On Random Processes and Their Applications to Sickness and Accident Statistics, Thesis Uppsala, 1940, printed by Aluquist and Wiksells) had already in 1940 applied Bayesian modeling, he did not pursue the subject to arrive at the very intuitive formula of a weighted average between individual experience and collective mean. What was the contribution of Continental European actuaries? In North America, credibility entered insurance via workers compensation. Subsequently, it was used in other types of insurance, particularly automobile insurance. But on the Continental European scene, it was rst introduced via auto insurance. In the 1960s, most automobile companies suffered heavy losses and a new rating system was absolutely needed. The solution arrived in the form of Bonus Malus systems on a contractual basis for each individual driver. The French had the ideas (Pierre Delaporte, Principes de Tarication de lAssurance Automobile par la Prime Modelee sur le Risque, Transactions of the ICA, Vol. III, 1964). But the Swiss were the rst to put them into practice. The formula was not a weighted average, but a table which Fritz Bichsel had calculated using the Poisson Gamma model which I mentioned before (Swiss Actuarial Journal 1964). At that time in Switzerland all companies applied a single tariff, and in 1964, the common tariff based on Bichsels table was introduced. Many other Continental European countries followed with similar tables. It has been my privilege to bring this Continental European thinking and the early American developments together. Yet, there is still one fundamental difference in concept. Whereas early Bayesian statisticians used the prior distribution of risk parameters as a means to express judgment (which in insurance we would call underwriting judgment), our interpretation thinks of the probability distribution of the risk parameters as having an objective meaning. It hence needs to be extracted from the data gathered about the collective. (Only in the case of a lack of such data might one

accept the subjective view faute de mieux). For this reason, I have always insisted on speaking about the structural distribution of risk parameters, avoiding the standard Bayesian terminology, prior distribution. I think that the early American pioneers in credibility were truly Bayesians. On the other hand, we European Continentals insisting on the objective meaning of the structural distribution may for that reason have avoided the mid-century heated debate in mathematical statistics confronting frequentists on one side and Bayesians on the other. It is interesting that in the United States statistical community, Professor Robbins (An Empirical Bayes Approach to Statistics, Third Berkeley Symposium, 1955) has taken the same view of the prior distribution. Do you have any thoughts in conclusion? Credibility, as developed by American actuaries, has provided us with a very powerful and intuitive formula. The European Continental School has contributed to its interpretation. The concepts are fundamental to insurance and will continue to be most important in the future. I nd it deplorable that the world of nance has not yet realized the importance of collateral knowledge far beyond insurance and the power of credibility-type formulae.

CHARLES C. HEWITT
Charles Hewitt, F.C.A.S., graduated with honors in math from Princeton University in 1940. His career began at Metropolitan Life Insurance Company where he was recruited by Gilbert Fitzhugh. During World War II, Hewitts career was interrupted by service in the Army Air Corps, where he studied and taught meteorology and served as a weather ofcer. His four-year stint included serving in Shanghai, China as the station weather ofcer. After his military service, he switched to casualty insurance, working at New Jersey Manufacturers Casualty Insurance Company, Trenton, from 19461957. The companys main line was workers compensation. He left to work as a consultant with Bowles, Andrews & Towne, now Tillinghast Towers-Perrin, then went to American International Underwriters (now AIG) and Allstate before returning to work for Metropolitan. There, he helped form Metropolitans casualty company as a vice president. When Metropolitan created its reinsurance company, Hewitt transferred to that entity and became its president and CEO. He also served on the boards of both Metropolitans casualty and reinsurance companies.

CREDIBILITY THEORY: THE CORNERSTONE

OF

ACTUARIAL SCIENCE

Hewitt is a past vice president of the American Academy of Actuaries and has served the profession in a number of capacities. He is the author of several papers and was the rst winner of the Dorweiler Prize in 1971 for his paper Credibility for Severity. In your discussion of Mayersons credibility paper you comment on the lack of research on risk theory in North America. Do you have an explanation? I think there are a couple of fairly important ideas that contributed to this situation. We lived for 500 years, until the development of nuclear physics, in a world where everything was exact and deterministic. When you get into the study of nuclear physics, you nd that what happens is probabilistic and is not determined absolutely. That determination encouraged an environment in which people refused to use a priori probability. There was a statistical school that predominated when I was being trained called the Neyman-Pearson school. It said you shouldnt make any assumptions about probabilities before you did your analysis. You examined your observations and made a determination as to whether or not the assumption was justied on the basis of statistical evidence. All you did was say Within an agreed range, this assumption is believable or not believable. About the time Hans Buhlmann wrote his paper, there were two Harvard professors, Raiffa and Schlaiffer, and a Yale professor, James Savage, who revived an interest in the theorem of the English minister Thomas Bayes in which he did make assumptions about the a priori probabilities. His system was to make assumptions, then get data, then look at the observations and determine a posteriori probabilities. Thats Bayesian analysis. That revival took place in the late 1950s and early 1960s, and when Buhlmann came along with his paper in 1967 the idea obtained respectability. Did you know Arthur Bailey? Do you have any recollections of him? I know Robert Bailey and I knew his father tangentially. I was told by others that he was a very religious man who carried a Bible with him. In meetings, during downtime when the rest of the attendees were otherwise engaged, hed be reading his Bible. I do know a story about him that shows his sense of humor. In the late 1940s, the auto liability insurance rating bureau for the old line stock companies found that there were differences in drivers, namely, that young drivers are a bigger risk than older, more sedate

drivers. Now in those days, there were two rating bureaus that made the auto insurance ratesone bureau rated liability and one rated collision/comprehensive. The liability rating bureau realized young drivers were bad risks. And the other rating bureau didnt catch up with this for a few years. I remember Arthur, who was casualty actuary of the New York State insurance department, got up in a meeting and said he couldnt understand how young drivers could do all this damage to other peoples cars without doing any damage to their own. Did you see the papers by Bailey and Mayerson before they were published? If so what was your view? I did see the Mayerson paper before it was published but not the Bailey paper. I discovered a minor misprint in the Mayerson paper before it was published. It was before Buhlmanns paper. Mayersons ideas were an eye-opener for me and prepared my mind for the Buhlmann paper later on. The Buhlmann paper was a great paper and got me pointed in the right direction. In your earlier education, had you learned about the Bayesian approach? This would be before the Arthur Bailey and Allen Mayerson papers. When I rst got into the casualty business, I knew there was a better way of making rates because of my math background. I was mystied that no one had come up with a solution. By the time the Mayerson paper came out, I was beginning to narrow down my thinking. When I read the Buhlmann paper in 1967, it was like a giant light bulb lighting up over my head. The Buhlmann paper was the answer when one is thinking about the problem of making insurance rates or judgments; insurance uses mathematical statistics. I became a crusader. I became somebody who wanted to carry the gospel to everyone else. At the time, did actuaries recognize the fundamental nature of the issues being presented by Bailey and then Mayerson? I think they didnt. Many actuaries still dont understand the fundamental nature of credibility. The training of the Neyman-Pearson school was partly responsible. Ive been in meetings where people have gotten up very irritated with the rest of us and they say, You cannot make a priori assumptions. Youre not allowed to. In the math and statistical training of some of

NORTH AMERICAN ACTUARIAL JOURNAL, VOLUME 3, NUMBER 2

these people they are taught you cannot make a prejudgment of probabilities, of something thats going to happen. Of course, I think some of them may not understand the math. Its not that complicated but that may be part of it. Did you use credibility theory in your career? The answer is yes though I couldnt cite you any references. Im using it now in a completely different application. For instance, I have often beaten the odds on football games in the Las Vegas spreads, not for money, just for fun. I will say one thing. There are a lot of people that have gone way beyond my math ability in using credibility theory. Not all actuaries are theoretical actuaries. I just wish more people would understand the principle. Its been a great joy to me to see the idea. That has been one of the highlights of the mathematical and theoretical aspects of my career.

REFERENCES
BAILEY, A.L. 1942. Sampling Theory in Casualty Insurance, Proceedings of the Casualty Actuarial Society 29, no. 59: 5093. BAILEY, A.L. 1945. A Generalized Theory of Credibility, Proceedings of the Casualty Actuarial Society 32, no. 62: 1320. BAILEY, A.L. 1950a. Credibility Procedures: LaPlaces Generalization of Bayes Rule and the Combination of Collateral Knowledge with Observed Data, Proceedings of the Casualty Actuarial Society 37, no. 67:723. BAILEY, A.L. 1950b. Discussion, Journal of the American Teachers of Insurance (now The Journal of Risk and Insurance) 17:1724. BAILEY, R.A., AND SIMON, L.J. 1959. An Actuarial Note on the Credibility of Experience of a Single Private Passenger

Car, Proceedings of the Casualty Actuarial Society 46, no. 85:15964. BAILEY, R.A. 1961. Experience Rating Reassessed, Proceedings of the Casualty Actuarial Society 48, no. 89:6082. BUHLMANN, H. 1967. Experience Rating and Credibility, The ASTIN Bulletin 4, Part III:199207. CARLETON, J.W. 1950. True Inherent Hazards and the Futility Thereof, Casualty Actuarial Society Forum, Summer 1993:285. HERZOG, T.N. 1994. Introduction to Credibility Theory. Winsted, Conn: Actex Publications. HEWITT, C.C. 1965. Discussion of A Bayesian View of Credibility, Proceedings of the Casualty Actuarial Society 52: 12127. HEWITT, C.C. 1970. Credibility for Severity, Proceedings of the Casualty Actuarial Society 57, nos. 97, 98:14871. KEFFER, R. 1929. An Experience Rating Formula, Transactions of the Actuarial Society of America 30:13039. KLUGMAN, S.A., PANJER, H.H., AND WILLMOT, G.E. 1998. Loss Models: From Data to Decisions. Somerset, N.J.: John Wiley & Sons. LONGLEY-COOK, L.H. 1962. An Introduction to Credibility Theory, Proceedings of the Casualty Actuarial Society 49, nos. 91, 92:194226. MAYERSON, A.L. 1964. A Bayesian View of Credibility, Proceedings of the Casualty Actuarial Society 51, nos. 95, 96: 85104. MOORHEAD, E.J. 1989. Our Yesterdays: The History of the Actuarial Profession in North America 18091979. Schaumburg, Ill.: Society of Actuaries. RODERMUND, M. 1990. Introduction, in Foundations of Casualty Actuarial Science. New York: Casualty Actuarial Society. VENTER, G.G. 1990. Credibility, in Foundations of Casualty Actuarial Science. New York: Casualty Actuarial Society. WHITNEY, A.W. 1918. The Theory of Experience Rating, Proceedings of the Casualty Actuarial Society 4, nos. 9, 10: 27492.