Actuarial Notes

Credibility Procedures

By Actuarial Standards Board · 2013 · ASOP No. 25

Study guides: Exam 8, Exam GH-101, Exam GI-101

The Actuarial Standards Board's guidance to actuaries selecting or developing credibility procedures and applying them to sets of data. This revised edition (Doc. No. 174), developed by the Credibility Task Force of the General Committee and adopted in December 2013, widened the original 1996 standard beyond accident and health, group term life and property/casualty coverages to every practice area. It is effective for professional services performed on or after May 1, 2014.

On the syllabus

Transmittal Memorandum

  • The original standard, adopted in 1996, was a product of the ASB's Health and Casualty Committees and was limited to accident and health, group term life, and property/casualty coverages; in 2011 the ASB asked the Life Committee to consider widening its scope.
  • First exposure draft, September 2012: the most significant change was a revision of section 1.2, Scope, and a clarification of the purpose and use of credibility procedures and the continued need for professional judgment.
  • Second exposure draft, June 2013: no major changes, and a clarifying change to the wording of the scope section.

1 Purpose, Scope, Cross References, and Effective Date

  • 1.1 Purpose
    • Guidance to actuaries performing professional services in selecting or developing credibility procedures and applying those procedures to sets of data.
  • 1.2 Scope
    • Applies when the actuary is required by law to evaluate credibility, chooses to evaluate the credibility of subject experience or states that credibility has been evaluated in accordance with the ASOP, is blending subject experience with other experience, or represents the data as statistically or mathematically credible.
    • Where the guidance conflicts with ASOP No. 35, ASOP No. 35 governs.
  • 1.3 Cross References
  • 1.4 Effective Date
    • Professional services with respect to credibility procedures performed on or after May 1, 2014.

2 Definitions

  • 2.1 Credibility
    • A measure of the predictive value in a given application that the actuary attaches to a particular set of data (predictive in the statistical sense, not in the sense of predicting the future).
  • 2.2 Credibility Procedure
    • Evaluation of subject experience for use in setting assumptions without reference to other data, or identification of relevant experience and selection and implementation of a method for blending it with the subject experience.
  • 2.3 Full Credibility
    • The level at which the subject experience is assigned full predictive value, often based on a selected confidence interval.
  • 2.4 Relevant Experience
    • Sets of data, including data other than the subject experience, that in the actuary's judgment are predictive of the parameter under study; it may include the subject experience as a subset.
  • 2.5 Risk Characteristics
  • 2.6 Risk Classification System
  • 2.7 Subject Experience
    • A specific set of data drawn from the experience under consideration for the purpose of predicting the parameter under study.

3 Analysis of Issues and Recommended Practices

  • 3.1 Purpose and Use of Credibility Procedures
    • Used to evaluate subject experience for potential use in setting assumptions without reference to other data, and to improve the estimate of the parameter under study; applicable to tasks such as pricing, ratemaking, prospective experience rating, and reserving.
  • 3.2 Selection or Development of Credibility Procedure
    • The procedure is to be judged on whether it is expected to produce reasonable results, is appropriate for the intended use and purpose, and is practical to implement given its cost and benefit.
    • The actuary should consider the predictive value of more recent experience as compared to experience from earlier time periods.
  • 3.3 Selection of Relevant Experience
    • Relevant experience should have characteristics similar to the subject experience, such as demographics, coverages, frequency, severity or other determinable risk characteristics; if it cannot meet or be adjusted to meet such criteria it should not be used.
    • The actuary considers the extent to which subject experience is included in the relevant experience, and where no relevant experience is available uses professional judgment on the available subject experience.
  • 3.4 Professional Judgment
    • Credibility procedures are not always a precise mathematical process; an acceptable blend may assign full, partial, or zero credibility to the subject experience without a rigorous mathematical model.
  • 3.5 Homogeneity of Data
    • The actuary considers the homogeneity of both the subject and relevant experience and the balance between homogeneity and the size of the data set.

4 Communications and Disclosures

  • 4.1 Disclosure
    • Disclose the credibility procedures used and any material changes from prior procedures, together with the ASOP No. 41 section 4.2, 4.3 and 4.4 disclosures as applicable.

Appendix 1 Background and Current Practices

  • Background
    • Historical Development
  • Current Practices
    • Classical Credibility Procedures — including Limited Fluctuation Credibility, which assigns partial credibility from the square root of the ratio of actual claims to the full credibility standard.
    • Empirical Credibility Procedures
    • Bayesian Credibility Procedures — including Greatest Accuracy Credibility, also called linear Bayesian or Bühlmann credibility, with partial credibility of the form n/(n+k).
    • Emerging Practice Involving Statistical Models
    • Credibility Bases
    • Credibility Procedures for Ratemaking/Pricing
    • Credibility Procedures for Prospective Experience Rating
    • More Information

Appendix 2 Comments on the Second Exposure Draft and Responses

Related readings

  • ASOP 12 - Risk Classification (ASB - 2005) — the standard that sections 2.5 and 2.6 of this one are kept consistent with, and which Exam 8 assigns alongside it

Sources