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Foundations of Casualty Actuarial Science

risk rating system should reflect an entry's experience
only to the extent that it is credible.
78. There are two basic types of individual risk rating
systems: prospective and retrospective. Prospective
systems use past experience to determine cost for the
future. Retrospective systems use the actual experience
of the period to determine the final costs for that period.
79. There are three basic types of prospective individual
risk rating systems schedule rating, experience rating,
and some types of composite rating.
80. Schedule rating is the only individual risk rating system
that does not directly reflect an entity's claim experience;
in theory, recognizes characteristics that are expected
to have a material effect on an entity's experience but
that are not actually reflected in that experience.
81. All individual risk rating systems are a form of experience
rating because they reflect an entity's actual experience
or characteristics that should affect the entity's
experience. However, the term "experience rating" has
come to mean a particular type of prospective system,
discussed in this section.

82. The expected losses(and AL are based on past or current

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