CAS Exam 8 Fall 2014, Question 2
Study guide: Exam 8
In their 2007 review of hazard group mappings, the National Council of Compensation Insurance (NCCI) chose to continue to use the following formula to calculate the credibility by class:
z = \min\left(\frac{n}{n+k} \times 1.5,\ 1\right)
where
n= number of claims in the classk= average number of claims per class
The following table shows the distribution of classes by credibility range using the credibility formula above:
| Credibility Range | Claims per Year | Number of Classes | Percent of Premium |
|---|---|---|---|
0\% \le z < 10\% |
0 - 237 | 355 | 1.2% |
10\% \le z < 20\% |
238 - 511 | 89 | 1.3% |
20\% \le z < 30\% |
512 - 831 | 61 | 1.6% |
30\% \le z < 40\% |
832 - 1209 | 56 | 2.7% |
40\% \le z < 50\% |
1210 - 1662 | 46 | 2.5% |
50\% \le z < 60\% |
1663 - 2216 | 34 | 2.5% |
60\% \le z < 70\% |
2217 - 2909 | 46 | 4.8% |
70\% \le z < 80\% |
2910 - 3799 | 35 | 4.3% |
80\% \le z < 90\% |
3800 - 4987 | 29 | 4.0% |
90\% \le z < 100\% |
4988 - 6649 | 18 | 3.2% |
z = 100\% |
\ge 6650 |
101 | 71.8% |
| Total | 870 | 100.0% |
Part a (0.5 points)
Based on the table above, discuss one consideration when deciding whether to use this credibility formula.
Part b (0.5 points)
Briefly describe two alternative methods that could be used to calculate credibility by class.
No current syllabus covers this question; it is kept for the record.
Answer this question and see the worked solution