Retrospective Exp. Rating uses a risk's experience to adjust the actual
premium due for the experience period.
Prospective is easier to see. If you get into an auto accident, you will
be rated as a bad risk when you renew. If you go enough years without a
claim, they may offer you a "safe driver" discount. But giving each policy
a separate rate based on the specific of their claim (i.e.. $750 paid in two
claims) would be too much bookkeeping.
For large accounts we can quantify how much of an adjustment (up or down)
should be made for any given claim experience.
This calculation involves credibility weighting experience against the
prior observations. (In practice there's more to it than just that, for
example splitting losses into primary and excess portions) There is an
excellent (and short!) paper by Venter on part 9, that discusses the balance
of predictive accuracy.
Retrospective rating is different. It was originally designed for very
large Workers compensation accounts. I think the closest equivalent for
personal lines is dividend plans. Consider a personal auto policy that
offers to return to you 10% of your premium during any year you do not make
a claim. They are effectively changing the rate of the policy based on the
experience.
For retrospective rating plans, the adjustment works in BOTH directions.
The insured effectively reimburses the insurer based on its losses, plus
pays some related expenses.
I am sure that sounds strange. Why do this? Three reasons:
1) For some lines (such as W.C.) insurance is mandatory.
[Just as with a deductible, if the insured assumes risk, the rate
drops]
2) The insurer may be superior in loss handling.
[Perhaps Allstate is better than IBM at reducing costs]
3) Retrospective rating plans have caps, both aggregate and per-claim
on the amount that the insured has to reimburse the insured for.
[This is a pure insurance risk that remains]
Jason Israel, A.C.A.S., M.A.A.A.
Increased Limits and Rating Plans
16-1
E-mail: JIsrael@ISO.COM
Phone:(212)-898-5829, Fax -5565
Visit our website: http://www.iso.com
> ----------
> From: Sipes, Summer[SMTP:SSIPE@Allstate.COM]
> Sent: Wednesday, September 01, 1999 8:42 AM
> To: 'studygroup4b@lists.casact.org'
> Subject: experience rating question- CH 8 in HPZ
>
> I don't understand the examples given in section 8.1 (Introduction) for
> the definitions of retrospective and prospective experience rating
> methods. Can someone help me out?
>
>
> thanks
> Summer Sipes
>