Fisher1 Flashcards
experience rating relates
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
if experience mod factor < 1
if experience mod factor > 1
- if experience mod factor < 1, it is a credit mod
- if experience mod factor > 1, it is a debit mod
debit mod implies
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
experience rating is particularly well suited for
commercial lines since company management has a great deal of control over company practices
experience rating helps distinguish
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
in commercial lines, credibility for actual loss experience depends on
size of insured (measured by manual premium, expected loss, expected #claims, or exposures)
credibility of individual risk experience increases when
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
Advantages of experience rating
- accounts for differences between risks in a class
- accounts for variables that are difficult to quantify
- further refinement of classification beyond manual rates
Goals of experience rating
- greater risk equity
- safety incentive
- enhance market competition
greater risk equity
- 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
safety incentive
-by charging insureds higher premium for prior losses, insureds have a financial incentive for loss control
enhance market competition
-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
goals 1&2 need to be balanced since
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
3 types of credibility
- 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
- Buhlmann: greatest accuracy or least squares credibility; involves analysis of variance
- 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
-simplest type of experience rating plan
is one in which there is no subdivision of losses
-ISO commercial GL experience rating plan uses this version of experience mod formula