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Foundations of Casualty Actuarial Science
use in their premium calculations. Credibility has the
same function and is used in the same way for
retrospective rating as for experience rating.
E.g, :- The NCCI Experience Rating Plan has the
unique characteristic of dividing the losses for each claim
into a primary portions and an excess portion.
The expected and actual primary portions are compared
using one credibility factor, and the expected and actual
excess portions are compared using another credibility
factor. The credibility factor applied to the actual primary
losses is higher than that applied to the actual excess
losses.
The formula to determine the experience
modification is as follows :
M = AP + B + (Ae X w) + [ (1 - w) X Ee ]
Ep + B + (Ee X w) + [ (1-w) X Ee]
Where
M = Experience Modification Factor
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