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Experience rating and credibility

Published online by Cambridge University Press:  29 August 2014

Hans Bühlmann
Hans Bühlmann*
Affiliation:
Zürich
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Let me begin with some practical examples of experience rating.

a) Swiss Automobile Tariff 1963

— Within each tariff-position there are 22 grades:

— The new owner of a car starts at grade 9

— The basic premium is determined on the basis of objective characteristics of the risk and essentially depends on the horse-power classification of the car

— The 22 grades are experience-rated as follows: For each accident one rises three grades and for each accident-free year one falls one grade. A driver who has I accident in every 4 years hence remains within four adjacent grades.

b) Sliding Scale Premiums in Reinsurance

Excess of Loss Contracts often stipulate that:

The rate of premium to be applied to the subject premium volume is determined at the end of the cover period as follows:

subject to a minimum of 0,04

and a maximum of 0,08

c) Participation in Mortality Profit in Group Life Insurance

A group life insurance covers the members of the group on a one year term basis. It is often agreed that at the end of the year mortality profits are given back to the group according to the formula

refund = x% gross premiums — y% claims (where x < y)

All these examples fall under the heading “Experience Rating”. What do they have in common?

Definition: A system by which the premium of the individual risk depends upon the claims experience of this same individual risk.

Type
Astin Colloquium 1966 Arnhem
Information
ASTIN Bulletin: The Journal of the IAA , Volume 5 , Issue 2 , May 1969 , pp. 157 - 165
Copyright
Copyright © International Actuarial Association 1969

References

[1]Bühlmann, H.: “Optimale Prämienstufensysteme”, Mitteilungen Vereinigung schweizerischer Versicherungsmathematiker, 64. Band—Heft 2 (1964).Google Scholar
[2]Lundberg, O.: On Random Processes and their Application to Sickness and Accident Statistics (1940).Google Scholar
[3]Bailey, A.: “Credibility Procedures, Laplace's Generalization of Bayes' Rule and the Combination of Collateral Knowledge with Observed Data”, Proceedings of the Casualty Actuarial Society, Vol. 37 (1950).Google Scholar
[4]Bailey, A.: “A Generalized Theory of Credibility”, Proceedings of the Casualty Actuarial Society, Vol. 32 (1945).Google Scholar