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Foundations of Casualty Actuarial Science
is valid protector of future costs. The credibility selected
should consider the validity of the component to which
the credibility compliment is being applied. Credibility
has three conditions that are to be met :
(a) Credibility must not be less than zero or greater than
one
0<Z<1
(b) Credibility should increase as the size of risk
increases, all else being equal.
dZ > 0
dE
(c) The percentage change for any loss of a given size
should decrease as the size of risk increases.
( )d Z < 0
dE E
(iv) Other considerations in rating - Experience rating
plans may be designed so that there is a minimum or
maximum premium change. These are often based on
the prior year's premium adjusted for changes in
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