B.06.Venter

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1. Experience rating
• using historical loss experience of insd to determine P
• use latest 3yrs (skip most recent years, incomplete)
• calculate E(L) based on insd size and manual classification rates
• blend actual & expected losses
• compare to expected losses to get credit/debit mod
2. 3 goals of experience rating
• safety incentive
• predictive accuracy
• enhances mkt competition
3. Experience rating formulae
• mod = (A + K) / (E + K), K = cred constant
• (-) for skewed heavy tailed dist, substantial diff btwn un/constrained estimate
• multi-split formula: ZpAp + (1-Zp)Ep + ZeAe + (1-Ze)Ee
• set Ze = E / (E + K) and Zp = E / (E + B)
• mod = (Ap + WAe + (1-W)Ee + B) / (E + B)
• W = (E + B) / (E + K)
• (+) primary & xs loss heavy tailed → more predictable
4. B & K should increase for larger firms
• inverse pattern was used to (1) prevent large swings for small insds and (2) provide self rating for largest insd
• too much weight was allocated to exp of larger insds, too little for smaller
• → small ind w credit mod preferable
• → large firms w credit mod less profitable
5. NCCI modifications to exp rating formula
• B & K increase as prem incr
• primary-excess split simplified (L<5K = primary)
6. Testing performance of rating plan
• identify risk diff: quintiles test on manual loss ratio, looking for incr LR by bucket w wide dispersion
• correct risk diff: quintiles test on standard loss ratio, looking for equal LR by group, and no trend in data
 Author: Exam8 ID: 166017 Card Set: B.06.Venter Updated: 2012-08-14 18:42:22 Tags: experience rating Folders: Description: Experience Rating - Equity & Predictive Accuracy Show Answers: