CAS Exam 8 Fall 2014, Question 11
Study guide: Exam 8
The following formula is used by the National Council of Compensation Insurance (NCCI) to calculate workers compensation experience modifications under its Experience Rating Plan:
M = \frac{A_p + WA_e + (1 - W)E_e + B}{E + B}
where W = \dfrac{E - B}{E + K} (as printed) and B and K vary by size of risk.
Part a (0.5 points)
Explain the assumptions behind the theory that B and K should be constant for all risk sizes.
Part b (0.5 points)
Critique the theory that B and K should be constant for all risk sizes.
Part c (1 point)
Suppose a new experience rating plan is proposed such that B and K are constant for all risk sizes.
Fully explain a valid method that can be used to assess the performance of the proposed plan as compared to the current NCCI plan.
Part d (0.5 points)
Assess the impact of implementing the newly proposed experience rating plan in a competitive market.
Answer this question and see the worked solution