I have this data and my part is to do this
I have this data and my part is to do this
Minimum Bias Method. Since we don’t know the relativities currently used in the rating plan,
the adjusted pure premium method cannot be applied directly. However, you could try using
the estimated relativities for territory to compute the adjusted relativities for rating class, and
vice versa.
a) Try this method. Does it improve the results (in the sense of moving the estimates closer
to the “true” values?)
b) Chapter 9 of the Werner & Modlin text describes a “minimum bias” method for
estimating relativities. Your answer to part a) is the first step in this minimum bias
method. You can compute additional steps using the relativities from the previous step
to compute the adjusted relativities in the current step. Do this and run additional
iterations until there is no difference in the result for the first 3 decimal places.
c) Check to see if the outer product of the relativities produced by this method produce a
result closer to the actual relativities that you produced in step 3
d) Prepare a rate table. You may convert pure premiums to rates using the “all variable”
method with a permissible loss ratio of .73.
5. Credibility Adjustment. Prepare an alternative rate table using credibility to compute the
classification pure premiums. Use the traditional method (“square root rule”) based on claim
counts with 1,082 claims as the standard for full credibility. The complement of credibility
should be the pure premium for the entire state (country). Covert these estimates to rates,
adjusted for any off-balance introduced by the credibility process. How do these rates compare
with the minimum bias rates? Comment on differences? Which do you think best meets
ratemaking objectives?
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