ASOP 25: Credibility Procedures

Question 1

Section 1 - Purpose and Scope

Answer 1

1. Purpose– Guide actuaries in selection of a credibility procedure and assignment of credibility values to sets of data
2. Scope – Accident and health, group term life, P&C, and other forms of non-life coverage
   - Applicable in ratemaking, prospective experience rating, reserve analysis, solvency testing, and asset/liability management

Question 2

Section 3 - Analysis of Issues and Recommended Practices

1. Purpose and Use of Credibility Procedures
2. Selection or Development of Crediblity Procedures
3. Selection of Relevant Experience
4. Professional Judgment
5. Homogeneity of Data

Answer 2

1. Purpose and Use of Credibility Procedures
a. Evaluate experience of the subject for potential use in setting assumptions without reference to other data

b. Improve estimate of the value being estimated

c. Used for pricing, ratemaking, prospective experience rating and reserving

2. Selection or Development of Credibility Procedures
a. Actuary should use appropriate credibility procedure to determine if subject has full credibility or when blending with other relevant experience

b. Considerations when selecting credibility procedures:
▪ Produce reasonable results
▪ Appropriate for intended use and purpose
▪ Practical to implement (considering cost and benefits)

c. Credibility procedure should consider characteristics of both subject and the relevant experience

d. Predictive value of more recent experience is preferred to earlier time periods

3. Selection of Relevant Experience
a. Experience to be blended should have frequency, severity, and other characteristics reasonably expected to be similar to the subject experience, otherwise it should not be used

4. Professional Judgment
a. Any credibility procedure requires actuary to use professional judgment regarding which procedure to use and how to assign full, partial or zero credibility

5. Homogeneity of Data
a. Consider the homogeneity of subject and related experience
▪ Some segments of data set may not be representative of the experience as a whole

Question 3

Section 4 - Communications and Disclosures

Answer 3

• When appropriate, actuary should disclose procedures used
• In accordance with ASOP 41, if assumptions were prescribed by law, if reliance on other sources for assumptions, or if any deviation from standard