An Improved Method for Experience Rating Reinsurance Treaties Using Exposure Rating Techniques

This paper deals with two of the most common disadvantages of standard excess of loss experience rating methods: lack of complete individual claim history and significant changes in the underlying book of business due to shifts in limit profile during the experience period. We develop a methodology to estimate an trend factor by layer of loss based on the unlimited trend factor, the severity distribution and the limit profile. This excess trend factor can then be applied to the nominal losses in the layer, overcoming the problem of having incomplete individual claim detail to exposure rate lower more credible layers. The excess trend is split into its frequency and severity components. We also present a methodology to estimate exposure adjustment factors necessaries to bring the experience of excess layer to the projected limit profile distribution. The impact of shifts in limit profile is also analyzed in terms of its frequency and severity components.