D-Ratios and Credibility in Experience Rating

The American Academy of Actuaries defines credibility as a measure of the predictive value that the actuary attaches to a particular set of data in a given application. In currently common notation and terminology used for workers compensation experience rating, Z p and Z e denote primary and excess credibilities. This article shows for the first time that in NCCI’s Experience Rating Plan, the weight given to the reported primary loss ratio is Z p D , where D is the insured’s average D-ratio, and the weight given to the reported excess loss ratio is Z e ( 1 – D ) . We use this viewpoint to show an underlying similarity between NCCI’s and California’s workers compensation experience rating plans, to explain recent state-level performance of NCCI’s Experience Rating Plan, and to discuss interstate mods across states with differing experience rating plans.