G
gdmiccc
Member
The core reading mentions Exposure rating and Experience rating and I'm just wondering if the Frequency-Severity approach and/or Burning Cost approach fall into one of those two categories or are they neither?
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Frequency-Severity approach and Burning Cost approach examples of Exposure Rating?
Q
Qayanaat
Member
Experience rating just means that atleast part of your premium is based on past experience of the risk being priced.
Exposure rating on the other hand means that pricing is based fully on external data.
So whether or not the F/S approach or Burning Cost approaches is experience or exposure rating would depend on the sources of our data.
In practice, I think we tend to use past observed experience (atleast in part), so that would make it experience rating. However, I do not see why we cannot take for example industry benchmarks data and apply these methods, if say internal observed data was not available. For me they are just different methods that can be applied to any sets of data as long as they are in the required format needed to carry out these approaches.
That's my thoughts anyway, please correct me if I'm thinking of this in the wrong way.
Exposure rating on the other hand means that pricing is based fully on external data.
So whether or not the F/S approach or Burning Cost approaches is experience or exposure rating would depend on the sources of our data.
In practice, I think we tend to use past observed experience (atleast in part), so that would make it experience rating. However, I do not see why we cannot take for example industry benchmarks data and apply these methods, if say internal observed data was not available. For me they are just different methods that can be applied to any sets of data as long as they are in the required format needed to carry out these approaches.
That's my thoughts anyway, please correct me if I'm thinking of this in the wrong way.
Spot on! The definition of burning cost includes the words 'historical claim', so sort of implies it's going to be experience rating. But more generically, people think of burning cost methods as just depending on past claims (wherever those may be from), and F/S methods as more granular than BC (as they look at F and S separately).