A Total Credibility Approach to Pool Reserving

Posted Date: December 5, 2011
    

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A Total Credibility Approach to Pool Reserving

Among other services in the assigned risk market, NCCI provides actuarial services for the National Workers Compensation Reinsurance Pooling Mechanism (NWCRP), the Massachusetts Workers' Compensation Assigned Risk Pool, the Michigan Workers' Compensation Placement Facility, and the New Mexico Workers' Compensation Assigned Risk Pool. Pool reserving triangles pose specific challenges as they may be sparsely populated; this is because states may have left the NWCRP, recently joined it, or re-joined it after several years of absence. Furthermore, triangles of partial coverage states may have unpopulated cells due to not having experienced a claim in a given policy year.

There are two credibility aspects to Pool reserving to be addressed. First, the degree of variability of the link ratios may differ across states, possibly (but not necessarily entirely) due to differences in size of the assigned risk market. Second, the number of link ratios available varies greatly across states, from fully populated diagonals to very few observations per diagonal or, for some partial coverage states, to no observations at all. To address these challenges, a comprehensive credibility approach has been developed, where the credibility-adjustment applies to the data-generating process, as opposed to its outcome. This new concept, called Total Credibility, rests on multilevel (hierarchical) modeling. The parameters of the data-generating process of all states are estimated simultaneously, with each state-level parameter being drawn from a parent distribution. This way, all state-level parameters incorporate information from all states.