Actuarial Modelling of Claim Counts Risk Classification, Credibility ...

Credibility Models for Claim Counts 163
3.6.8 Credibility and Empirical Bayes Methods
Credibility theory has an empirical Bayes flavour, as pointed out by Norberg (1980).
Analyses commonly used in highway safety include the widely applied empirical Bayes
method. According to Lord (2006), this method has become increasingly popular since it
corrects for the regression-to-the-mean bias, refines the predicted mean of an entity, and is
relatively simple to manipulate compared to the full Bayes approach. The empirical Bayes
method combines information obtained from a reference group having similar characteristics
with the information specific to the individual under study. A weight factor is assigned to
both the reference population and the individual under study, and a credibility formula is
obtained.
Credibility theory has thus a clear empirical Bayes flavour. We refer the interested reader
to Quigley, Bedford & Walls (2006) for a case study involving the rate of occurrence of
train derailments within the United Kingdom.