The section starts by talking about “experience rating plans.” This is rather out-of-the-blue since these have not been mentioned previously. There don’t seem to be many references to their use in UK insurance. They are far more prevalent in US insurance where “rate filing” regulations are in force. These require approval of rates by regulators in advance. In some cases, such as motor insurance, rates may be determined solely on the basis of rating factors, which may include information about the insured, the insured asset and basic information regarding recent claims experience. In the case of other lines, such as Workers’ Comp, the regulator accepts that it is reasonable to use some form of retrospective experience rating to determine rates but it still requires advance submission of the formula that will be used. This formula constitutes the experience rating plan and many insurers outsource the development and submission of these plans to bodies such as the NCCI. The two desirable features for experience rating plans that the text mentions, i.e. maximum swing and self-rating, would appear to be less important in the context of UK insurance. When a risk is offered to a UK insurer, it is free to use whatever method it considers appropriate at the time to derive the quoted premium. If on any occasion it feels that the method it normally uses is unduly influenced by a particular large claim and is concerned that this may undermine the relationship it has with a particular client then it is free to quote a lower premium. The content of this section of the Core Reading is taken from Meyers “An Analysis of Experience Rating”, which can be found at: http://www.casact.org/pubs/proceed/proceed85/85278.pdf. This paper in turn references a CAS Study Note by Gillam and Snader, which can be found at: http://www.casact.org/library/studynotes/gillam9.1.pdf. Note to Core Reading authors: a reference in the text would have been appreciated. In the penultimate paragraph, a sentence from the original has been edited out, which read: Also, the first sentence of the last paragraph reads as follows in the original: This provides important clarification to the meaning of the last paragraph. Where it refers to a “simplified model” it is referring to the mathematical model used to derive the “theoretical formula”. The model is simplified as opposed to the reality, which is unsimplified. The “practical” formula is not derived from a mathematical model but from administrative considerations. This is in contrast to what the author of the ActEd write-around seems to have assumed. I’ve researched this as best I can but I’m open to being corrected on any of the above. I hope it’s of some help to anyone out there who, like me, has felt rather puzzled by this section.
