Page 129 - ic92 actuarial

Foundations of Casualty Actuarial Science

future. Retrospective systems use past experience to
determine the costs for the final costs for that period.

Retrospective systems are more responsive to
experience changes than prospective systems. This is
an advantage when the primary goal is to motivate
participation in risk control programs. This
responsiveness also means that retrospective system
results in a less stable costs from one time period to the
next time period.

The final costs are more responsive to experience , but
are not known until after many years. While different
systems use different formula, all individual weight
assigned to the experience component is a reflection of
the credibility of the entity's experience as a valid
predictor of future costs.

There are practical considerations that affect individual
risk rating system. It may be appropriate to use
alternative exposure bases and data if those desired,
are not available. For individual entities allocating risk

Sashi Publications - www.sashipublications.com 129

Copyright@ The Insurance Times. 09883398055 / 09883380339