Experience Rating Flashcards
3 Advantages of experience rating
Allows us to account for differences between risks within a class
Allows us to account for differences in variables that are difficult or impractical to quantify
Rate can be further tailored to its loss potential beyond use of manual rates
3 Goals of experience rating
Greater risk equity
Increased incentive for safety
Enhances market competition
Type of credibility used in experience rating
Buhlmann
3 conditions Z should satisfy
- 0 <= Z <= 1
- Credibility increases with risk size
- Ratio of Z to risk size should decrease
Mod for generic no-split plan
Mod for generic split plan
What primary split reflects in the split plan
Frequency
What excess split reflects in the split plan
Severity
Condition for split plan to work better than non-split
When process risk and parameter risk can be separated
Ex: WC with serious injury types vs. minor injury types
Two credibility issues in experience rating
Maximum Single Loss: full loss amount not likely credible
Minimum and maximum mod values: limit extremes
Quintile tests for experience rating
Sort by mods into 5 quintiles
Calculate weighted average manual and standard LRs
Looking for maximum dispersion in manual LRs
Looking for flat standard LRs
Trend in standard LRs from quintile test
If lower mods have higher standard LRs, too much credibility being applied
Efficiency Test
Rank risks into quantiles by mod
Test ratio of variance of standard LRs to variance of manual LRs
Lower the better
Purpose of schedule rating
Reflect risk’s individual characteristics
Modified Premium
Manual premium x Emod
Population variance
Loss-free scenario within mod
