Let's assume there are good and bad drivers. The probabilities that a good driver will have 0, 1 or 2 claims in any given year are set to 70%, 20% and 10%, while for bad drivers the probabilities are 50%, 30% and 20% respectively.
Further I assume that 75% of all drivers are good drivers and only 25% would be classified as bad drivers. Therefore the average number of claims per policyholder across the whole customer base would be:
Now a customer of two years asks for his renewal. Suppose he had no claims in the first year and one claim last year, how many claims should I predict for next year? Or in other words, how much credibility should I give him?
0.75*(0*0.7 + 1*0.2 + 2*0.1) + 0.25*(0*0.5 + 1*0.3 + 2*0.2) = 0.475
To answer the above question I present the data here as a Bayesian Network using the
gRainpackage . I start with the contingency probability tables for the driver type and the conditional probabilities for 0, 1 and 2 claims in year 1 and 2. As I assume independence between the years I set the same probabilities. I can now review my model as a mosaic plot (above) and as a graph (below) as well.
Next, I set the client's evidence (0 claims in year one and 1 claim in year two) and propagate these back through my network to estimate the probabilities that the customer is either a good (73.68%) or a bad (26.32%) driver. Knowing that a good driver has on overage 0.4 claims a year and a bad driver 0.7 claims I predict the number of claims for my customer with the given claims history as 0.4789.
Alternatively I could have added a third node for year 3 and queried the network for the probabilities of 0, 1 or 2 claims given that the customer had zero claims in year 1 and one claim in year 2. The sum product of the number of claims and probabilities gives me again an expected claims number of 0.4789.
References Klugman, S. A., Panjer, H. H. & Willmot, G. E. (2009), Loss Models: From Data to Decisions, Wiley Series in Proability and Statistics.
 Søren Højsgaard (2012). Graphical Independence Networks with the gRain Package for R. Journal of Statistical Software, 46(10), 1-26. URL http://www.jstatsoft.org/v46/i10/
R version 3.0.2 (2013-09-25)
Platform: x86_64-apple-darwin10.8.0 (64-bit)
attached base packages:
 grid stats graphics grDevices utils datasets methods
other attached packages:
 Rgraphviz_2.6.0 gRain_1.2-2 gRbase_1.6-12 graph_1.40.0
loaded via a namespace (and not attached):
 BiocGenerics_0.8.0 igraph_0.6.6 lattice_0.20-24 Matrix_1.1-0
 parallel_3.0.2 RBGL_1.38.0 stats4_3.0.2 tools_3.0.2