Experience Rating vs Schedule Rating Clarification

judyoh

Manual rate modification methods when you modify the manual rate to reflect risk characteristics which are not adequately reflected in past experience or manual rate.

• Even though there are several examples in the chapter, I do not understand why the risk characteristics are not adequately reflected in these policies. Is it because they are large commercial risks where the data is too thin to fully reflect the risk characteristics?

Experience rating uses past experience to adjust the manual rate.

• There is an expected component and actual component. Rates are usually calculated using actual data. In this case, are we modifying the rate by incorporating expected loss emergence?
• Why have an expected component? Is the actual data not credible enough or doesn't reflect the risk adequately?

Schedule rating is used when characteristics are not adequately reflected in the past experience.

• Correct me if I have misunderstood: An example is implementing a new safety program. Because the safety program benefits are not evident in the data yet (it's too new) we use schedule rating instead to adjust the manual rate according to how we think the manual rate would change based on the new safety program.
• When the effects are shown in the data, do we just use the actual data only now? Or just use the manual rate with no modifications? Or would we use experience rating because that method uses past data which is now reflective of the effects of let's say a new safety program?

Graham

Ok, there's a lot there that you're asking:

Why are risk characteristics sometimes not adequately reflected in past experience?

• This can happen for a variety of reasons. In cases of large commercial risks, the data may indeed be "thin," meaning not enough data points exist to make statistically credible judgments. Additionally, emerging risks (like cyber threats) might not have historical data that can be relied upon.

Experience rating uses past experience. Is the rate modified by incorporating expected loss emergence?

• Experience rating generally uses past experience to modify the manual rate. The expected component often serves as a way to anticipate future loss trends, seasonality, or other variables that aren't fully captured in the historical data.

Why have an expected component? Is the actual data not credible enough?

• The expected component can help account for variables that have not yet impacted the historical data. It's not so much that the actual data isn't credible; it's more that it might not be complete or future-oriented.

Understanding of Schedule Rating:

• Your understanding is correct. Schedule rating is often used for characteristics not yet reflected in data, such as a new safety program. The rating adjusts the manual rate according to estimated impacts.

When effects are shown in the data, what method is used?

• Once the effects of, say, a new safety program are reflected in the data, one could switch to using experience rating. This method would use updated historical data to set future rates. Alternatively, the manual rate could be used with fewer or no modifications if it's now deemed adequate.

I hope that covers everything from your post.