Bailey and Simon - Credibility of Experience of a Single Private Passenger Car

Question 1

Stability within class

Answer 1

if individual risks chance for an accident were the same within each class, credibility would vary approximately in proportion to the average claim frequency

Test (3-yr cred)/freq pre EEtotal, lower the ratio => more stable

Question 2

Stability across time

Answer 2

if an risks chance for an accident remain constant from year to year, credibility would vary approximately in proportion to the number of years

Test (3-yr cred):2-yr cred:1-yr cred. closer to 3:2:1, more stable.

Question 3

Why do the authors use Earned premium as exposure base

Answer 3

to avoid the maldistribution that results when high frequency territories produce more X, Y & B risks, and thus result in higher territorial premium

Question 4

What conditions must be met to use Earned premium as exposure base

Answer 4

1. High freq territories are also high premium territories
   compare freq to avg prem
2. territory differentials are proper
   compare LR => same across territories means differentials are proper

Question 5

Discuss the circumstances when individual risk merit rating is accurate or not accurate.

Answer 5

In HIGHLY refined rating class system which reflect inherent hazard, there won’t be much accuracy in individual risk rating.

If a wide range of hazards are encompassed within a class, credibility is much large

Question 6

Three reasons multi- yr credibility does not grow linearly from 1-yr credibility

Answer 6

1. risk entering and leaving the group
2. an insured’s chance for having an accident changes over time
3. individual insureds may have various degree of accident proness

Question 7

Conclusion w.r.t merit rating using one year worth of experience.

Answer 7

The experience for one car for one year has significant and measurable credibility for experience rating.

In a high refined class system with homogeneous risks in a class, there is not much accuracy in individual merit rating.

But where there is a wide range of hazard within a class, credibility is larger.