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Foundations of Casualty Actuarial Science

current relativities by calculating the loss ratios. The state
wide rate level change deal with the overall loss ratio,
so we have to make adjustments by territory to balance
the same overall rate level change.

As a general rule , if the historical loss ratio for a territory
has been higher than the average, we have to increase
the rates in that territory relative to the rates in other
territories.

The third step is to adjust for credibility. Often in practice,
the amount of data for any given territory or other rating
variable may be quite small. We then may not want to
give full credibility to the historical experience.

The usual approaches is to base credibility on the amount
of claim experienced, ( the claim count or the amount of
incurred losses) and to use the current relativity to
compliment the credibility. Sometimes we need to
assume that the compliment of the credibility applies to
the current relativity . We then need to calculate the
credible adjustment as the credibility times.

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