A.3. Bailey and Simon

Question 1

Experience rating formula

Answer 1

Question 2

Calculating the mod

Answer 2

Question 3

Calculating R

Answer 3

Question 4

When to use a premium base for frequency

Answer 4

Hazam states that a premium base only eliminates maldistribution if:

1. High frequency territories are also high average premium territories.
2. Territorial (rate) differentials are proper

Question 5

Conclusions of Bailey and Simon Paper

Answer 5

1. The experience of a single car for 1 year has significant and measurable credibility for experience rating.
2. Individual risk experience is more credible when there is more variance in loss experience within a risk class, which occurs in less refined risk classification systems.
3. The credibilities for varying years of experience should increase in proportion to the # of years of experience.

Question 6

Credibility for 2 and 3 years of experience relative to 1 year

Answer 6

The credibility increases in proportion to the # of years only for low credibilities.

The closer the credibilities for 2 and 3 years of experience are to 2 and 3 times the 1 year credibility, then the less variation in insured’s probability of an accident. This could be due to:

1. Less risks entering/exiting the portfolio.
2. Risk characteristics not changing much over time