B.2. Experience rating

Question 1

Advantages of experience rating

Answer 1

1. Accounts for differences between risks in a class
2. Accounts for variables that are difficult to quantify
3. Further refinement of classification beyond manual rates

Question 2

Goals of experience rating

Answer 2

1. Greater risk equity
2. Safey incentive
3. Enhances market competition

Question 3

Credibility criteria

Answer 3

Question 4

No-split plan formula

Answer 4

Question 5

Split plan mod formula

Answer 5

Question 6

What primary & excess split each reflect

Answer 6

• The primary amount reflects frequency, and receives the most weight in the experience rating calculation.
• The excess amount reflects severity.

The split plan works better when the parameter risk (for Work Comp, this is the claim count uncertainty driven by many small Med only and TT claims) can be separated from the process risk (for Work Comp, this is the severity volatility, driven by a few but very influencial Major PP, PT, and fatal claims).

Question 7

Quintile test

Answer 7

For each size of risk group :

1. Sort risks by their mods in increasing order.
2. Group these sorted risks into 5 quintiles.
3. For each quintile, calculate manual and standard loss ratios. If premium is not available, replace manual loss ratios with actual losses/expected losses, and standard loss ratios with actual losses/modified expected losses.
4. Under a plan performing ideally, you would see :
   
   • Maximum disperion in manual loss ratios. This shows the plan does a good job of identifying risk differences.
   • Equal standard loss ratios. This is the most important criteria, and shows the plan corrects for risk differences.

Question 8

Efficiency test

Answer 8

For each size of risk group :

1. Sort risks by their mods in increasing order
2. Group these sorted risks into 5 quintiles.
3. For each quintile, calculate manual and standard loss ratios. If premium is not available, replace manual loss ratios by actual losses / expected losses, and standard loss ratios by actual losses / modified expected losses.
4. Efficiency test statistic = Variance(standard loss ratios) / Variance(manual loss ratios).
5. A lower test statistic indicated better plan performance.

Question 9

What trend in standard LRs indicates on a quintiles test.

Answer 9

Downward trend as mod increases : too much credibility has been applied.

Increasing trend as mod increases : too little credibility as been applied.

Question 10

When to use Schedule rating

Answer 10

To reflect individual risk characteristics that are not reflected in the rate calculation and are not already captured in experience rating.