B2. Experience Rating

Question 1

Advantages of Experience Rating

Answer 1

• Accounts for differences between risks in a class
• Accounts for variables that are difficult to quantify (Quality of management, employee morale, etc)
• Further refinement of classification beyond manual rates

Question 2

Goals of Experience Rating

Answer 2

• Greater risk equity - using past experience/losses to predict future losses, insureds are charged a premium more closely relates to their loss potential
• Safety incentive - by charging insureds a higher premium for prior losses, insureds have a financial incentive for loss control
• Enhance market competition - more companies will be willing to sell insurance. Exp mod helps guarantee equal profit potential on all risks

Question 3

Bühlmann Credibility (Z)

Formula and Criterias

Answer 3

Z = E / (E + K)
E = Expected Losses
K = EPV / VHM = E[Var(X|Θ)] / Var(E[X|Θ])

Criterias:
1. Z is [0,1]
2. Z increases as size of risk (E) increases
3. (Z / E) decreases as size of risk (E) increases

Question 4

General Experience Mod (No-Split Plan)

Formula and who uses this?

Answer 4

Exp Mod = [ZA + (1-Z)E] / E
A = Actual historical loss (could be capped by MSL)
E = Expected loss

The ISO Commercial GL experience rating plan uses this

Question 5

Split Plan Experience Mod

Formula and who uses this

Answer 5

Mod = [ZA + (1-Z)E + Z’A’ + (1-Z’)E’] / E
‘ = excess

NCCI uses this for WC - good for separating frequent Med-only claims from infrequent high severity PT, Fatal claims