Flashcards in Bailey and Simon - Credibility of Experience of a Single Private Passenger Car Deck (7):
Stability within class
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
Stability across time
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.
Why do the authors use Earned premium as exposure base
to avoid the maldistribution that results when high frequency territories produce more X, Y & B risks, and thus result in higher territorial premium
What conditions must be met to use Earned premium as exposure base
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
Discuss the circumstances when individual risk merit rating is accurate or not accurate.
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
Three reasons multi- yr credibility does not grow linearly from 1-yr credibility
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