Fisher1 Flashcards

1
Q

experience rating relates

A

insured’s premium for current policy term to their own loss experience from prior policy terms

-insured’s actual experience is credibility weighted with expected losses to produce medication factor that is applied to manual premium to get modified premium

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2
Q

if experience mod factor < 1

if experience mod factor > 1

A
  • if experience mod factor < 1, it is a credit mod
  • if experience mod factor > 1, it is a debit mod
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3
Q

debit mod implies

A

risk has worse than average experience compared to other risks in the same class but this may be due to poor class fit or pure chance so debit mod shouldn’t be thought as a stigma

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4
Q

experience rating is particularly well suited for

A

commercial lines since company management has a great deal of control over company practices

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5
Q

experience rating helps distinguish

A

between risks within classification for differences such as: compensation, variation in plants & premises, operating processes, materials involved, management, employee morale, claims consciousness, relation to community

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6
Q

in commercial lines, credibility for actual loss experience depends on

A

size of insured (measured by manual premium, expected loss, expected #claims, or exposures)

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7
Q

credibility of individual risk experience increases when

A

there is greater variance between loss experience of risks within a classification

AKA experience rating is more powerful when classification plan does not sufficiently explain variance in loss experience between risks

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8
Q

Advantages of experience rating

A
  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
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9
Q

Goals of experience rating

A
  1. greater risk equity
  2. safety incentive
  3. enhance market competition
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10
Q

greater risk equity

A
  • main goal
  • degree of charge based on past experience should be degree to which it is predictive of future losses
  • ensures equity which means insureds are charged a premium that more closely relates to their loss potential and rates will not be unfairly discriminatory
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11
Q

safety incentive

A

-by charging insureds higher premium for prior losses, insureds have a financial incentive for loss control

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12
Q

enhance market competition

A

-more companies will be willing to sell insurance since experience rating helps guarantee an equal profit potential on all risks after application of experience mod

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13
Q

goals 1&2 need to be balanced since

A

2nd in isolation would charge for all prior losses while 1st would only charge for non-random prior losses that are predictive of future loss potential

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14
Q

3 types of credibility

A
  1. classical: limited fluctuation credibility; determine full credibility standard using standard normal distribution based on given probability that observed experience will be within some % of true mean
  2. Buhlmann: greatest accuracy or least squares credibility; involves analysis of variance
  3. Bayesian: update prior hypotheses with new experience
    - experience rating uses Buhlmann credibility which means credibility is calculated using Z=E/(E+K)
    - individual risk experience is credibility weighted with experience of class containing risk
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15
Q

-simplest type of experience rating plan

A

is one in which there is no subdivision of losses

-ISO commercial GL experience rating plan uses this version of experience mod formula

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16
Q

under split plan

A

actual and expected losses are split into primary and excess components

  • primary amount of each loss reflects claim frequency and receives the most weight in experience rating calculation
  • excess amount of each loss reflects severity
  • NCCI uses single-split plan for WC
17
Q

split plan works better when

A

parameter risk can be separated from process risk

-for WC: parameter risk=claim count uncertainty driven by many small med-only and TT claims & process risk=severity volatility driven by few but very influential Major PP, PT, and Fatal claims

18
Q

2 other credibility issues

A
  1. maximum single loss (MSL): individual large losses can be capped to limit impact on experience mods since full loss amount isn’t likely credible
  2. min and max mods: mod itself can be capped to limit extreme values
    - note that Z, MSL and min/max mods will all change with risk size with larger risks receiving more credibility and larger absolute values of caps
19
Q

there are several similar ways to test predictive accuracy of plan

A
  • tests are usually performed for different risk size groups separately
    1. method 1: quintiles test
    2. method 2: efficiency tests
20
Q

quintiles test

A
  • sort risks by their mods in increasing order
  • group these sorted risks into 5 quintiles
  • for each quintile, calculate manual and standard LRs using weighted averages
  • under a plan performing ideally you would see: maximum dispersion in manual LRs (plan does good job of identifying risk differences) & flat standard LRs (shows plan corrects for risk differences ie shows appropriate amount of credibility has been given to actual loss experience)
21
Q

-if too much credibility to actual experience,

A

see risks with low mods getting too much credit for experience resulting in too big a reduction in their standard premium and as result having higher standard LRs & risks with high mods would get overly penalized resulting in their standard premiums being too high and thus having lower standard LRs

-appear as downward trend in LRs as mods increase

22
Q

if too little credibility,

A

see risks with low mods getting too little credit for their experience resulting in too little reduction in their standard premium and as result having lower standard LRs & risks with high mods wouldn’t get penalized enough resulting in their standard premium being too low and have higher standard LRs

-appear as upward trend in LRs as mods increase

23
Q

efficiency tests

A

can only be used to compare 2+ plans

  • sort risks by their mods in increasing order
  • group these sorted risks into 5 quintiles
  • for each quintile, calculate manual and standard LRs using weighted averages
  • calculate efficiency test statistic
  • lower test statistic indicates better plan performance
24
Q

schedule rating

A

is pricing mechanism that allows underwriters to subjectively adjust premium for individual risks based on risk characteristics that are not otherwise reflected in premium calculation

25
Q

schedule rating plans are filed with

A

set list of risk characteristics that will be considered by underwriters along with maximum credits and debits that will be allowed for each category and in total across all categories

26
Q

schedule rating adjustments are made by

A

risk characteristic and then summed to get total schedule credit or debit

  • credit or debit is given in each category if the risk is either above average or below average related to other risks for that category
  • ISO GCL plan categories: location, premises, equipment, classification, employees, cooperation
  • credits and debits by risk characteristic are summed and then capped so max schedule debit of 25% and max schedule credit is -25%
27
Q

it is important for schedule credits and debits

A

to avoid reflecting any risk characteristics that are already fully reflected in experience rating

-partial exception would be if risk’s experience isn’t fully credible then some partial schedule credit would make sense on top of having risk characteristic partially reflected in experience mod

28
Q

three criteria for an effective credibility function in experience rating.

A

i. The credibility should be between zero and one (inclusive).

0 ≤ Z ≤ 1
ii. The credibility should not decrease as size increases.

d/dE (Z)≥ 0
iii. As the size of risk increases, the percentage charge for a loss of a given size decreases.

d/dE (Z/E) < 0

29
Q

relationship between the variance of the
hypothetical means and the credibility of individual risk experience.

A

As the VHM increases, the credibility of individual risk experience also increases.

30
Q

actuarial concept of individual rate equity as it applies to experience rating

A

Individual rate equity means charging risks a rate that is commensurate with their loss exposure.

31
Q

why splitting the formula into primary and excess components is preferable for
workers compensation risks.

A

Splitting losses into primary and excess components results in more accurate estimates of expected losses, because this would separate the parameter uncertainty related to the volume of claims in the primary layer, and the process risk related to the severity volatility in the excess layer.

This works well for Work Comp since it has many small Medical-Only claims, and fewer large and uncertain Lost-Time claims.

32
Q

why the excess component is capped

A

capping prevents large losses that are not predictive of future losses from having too big of an impact on the insured’s premium

33
Q

full credibility conflicts with one goal of experience rating.

A

Giving full credibility to loss experience conflicts with the goal of individual risk equity, which is to charge insureds for their true loss potential.

Giving full credibility to an insured’s loss experience would penalize the insured for having random losses that do not reflect their true expected loss.

34
Q

The main goal of experience rating is individual risk equity.

A

Experience rating recognizes that each risk has a different loss potential, so by modifying rates appropriately, the expected profit potential for each risk can be made equal. This ensures that equity is achieved and rates are not unfairly discriminatory.

Otherwise, risks with lower loss potential within the class would subsidize other higher loss potential risks.

35
Q

The average experience modification factor for the current plan is 1.05 and for the proposed Plan A is 0.99. The analyst says that proposed Plan A performs better because the average factor is less than 1.

Critique this statement.

A

While ideally the value of the average modification factor should remain close to 1 so as not to influence the overall premium level, this is not a major criteria in determining the best plan for experience rating.

Instead, a plan can be evaluated by looking at the dispersion of manual loss ratios across quintiles to see how well the plan identifies risk differences, and then looking at both the trend in standard loss ratios and the variance in standard loss ratios to see how well the plan corrects for these risk differences.

36
Q

Interpret each of the terms for

Mod = 1+Zp(Ap-Ep/E)+Ze(Ae-Ee/E)

A

Unity is the manual rate

The 2nd term is the charge if the actual primary losses are greater than expected.

The 3rd term is the charge if the actual excess losses are greater than expecte