Flashcards in Gillam - WC experience Rating Deck (12):
What does value G represent?
What limitations are placed on G from one year to the next?
G: scale factor for credibilities, varying by state
G is not allowed to decrease, unless there is significant benefit reduction. There is a limit on upward change when > 20%.
What is necessary condition? What is the result of a plan that satisfies the necessary condition?
Necessary condition: credit and debit risks equally reproduce the PLR. Also, each random subgroup, provided it has adequate volume, should give the PLR.
Result is insurers would find credit and debit risks equally desirable.
What is sufficient condition?
sufficient condition: No way to select subgroups on any experience basis that will produce different LRs in the prospective period.
sufficient condition is a goal, not necessary
Briefly describe Dorweiler's test of experience rating plan based on the sufficient condition.
1. Group risk by size
2. Stratify risks by the value of their mod within each group
3. Compute LRs: 1st to modified premium, then to manual premium
4. Review LRs
- LR to manual premium should track with value predicted by mod
- LR to actual premium should be nearly flat
Define State reference point and its purpose
State reference pt: is an index factor for state experience rating.
- can be used to get SAL = 10% SRP to limit actual experience loss to enter into experience rating.
- can be used to get the scale factor G = SRP/250K, to calculate state credibility factors B, W and K
Discuss the difference between premium level and rate level.
rate level is a function solely of manual rates, It is prior to the application of experience rating, schedule rating, retrospective rating, premium discount and dividend plans.
Premium level is affected by the manual rates, experience rating, schedule rating, retrospective rating, premium discount and dividend plans.
Thus an inadequate rate level results in a premium level that is not as inadequate due to the fact that experience rating may partially correct for inadequate rate level.
=> premium level change may not be as great as rate level change since off balance is already slightly adjusting the premium level.
Briefly describe two primary goals of experience raiting
1. Individual risk equity - risks should be charged a premium that reflects their true potential for loss
2. Safety incentive - the experience plan should encourage insured to improve safety measures and reduce losses.
With regard to experience rating, describe the relationship between variance of the hypothetical means and the credibility of individual risk experience.
The higher the VHM, the higher the credibility assigned to individual experience. The more varied the individual risks are in a class, the more valuable the individual experience becomes in determining a proper individual rate.
Describe the actuarial concept of individual rate equity as it applies to experience rating.
Individual rate equity means a risks is paying the rate commensurate with its loss experience.
Discuss the effect off-balance impact will have on indicated rate increase
indicated rate increase are calculated based on standard premium assuming no change to the off-balance between experience period and prospective period. if off-balance is >1, the needed premium increase will bring it back down to 1 or lower, but the indication assumes no OB change. so the indication will be lower than the actual needed rate increase.
Defend the assertion the experience rating supports the principle that a rate should not be unfairly discriminatory.
the main goal of experience rating is individual risk equity. Experience rating recognizes that each risk has different loss potential, so by modifying rate appropriately, the expected profit potential for each risk can be made equal. This ensures that equity is achieved and rates are not unfairly discriminatory.