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Foundations of Casualty Actuarial Science

Q7. Explain the rating concepts :-

(i) Experience -The experience component should be
related to the exposure component, and to the basis on
which policies are written or funding occurs. If the policy
to be rated is written on a claims - paid basis, the two
best combinations that can be used are paid losses or
projected ultimate losses adjusted to current exposure
and currency levels.

If the costs to be allocated include ALAE, then ALAE
should be included with losses in calculation. The length
of the experience rating period usually ranges from 2 to
5 yrs. The shorter the period, the more the responsive
the plan will be to changes that truly affect loss
experience, such as changes in risk control programs,
and the more subject to unusual fluctuations in loss
experience.

Conversely, a longer period will result in less
responsiveness to changes and to unusual or catastrophic
occurrences. To reduce the effect of unusual or
catastrophic occurrences, many experience rating plans

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