R-2 - Credibility in Experience Rating

Session Description: Experience rating is widely used in many lines of insurance. Actuarial credibility is a key component of experience rating and has always been a topic of great interest. This presentation will deepen the audience’s understanding of actuarial credibility theory by sharing the findings from the paper "D-Ratios and Credibility in Experience Rating" by Yuchen Su, Brian H. Stein, and John P. Robertson, published online in January 2023 by the Variance journal.

The American Academy of Actuaries defines credibility as a measure of the predictive value that the actuary attaches to a particular set of data in a given application. In currently common notation and terminology used for workers compensation experience rating, Zp and Ze denote primary and excess credibilities. In this presentation we will show that in NCCI’s Experience Rating Plan, the weight given to the reported primary loss ratio is D*Zp, where D is the insured’s average D-ratio, and the weight given to the reported excess loss ratio is (1-D)*Ze . We use this viewpoint to show an underlying similarity between NCCI’s and California’s workers compensation experience rating plans and to explain recent state-level performance of NCCI’s Experience Rating Plan. Additionally, the impact of this theory on recent changes to NCCI’s experience rating plan will be discussed.

This article is at https://variancejournal.org/article/57686-d-ratios-and-credibility-in-experience-rating