Rebalancing the Off-balance Factor Using the Complement of Credibility
The ratemaking algorithms used to calculate class factors, territory factors, allocations of rate changes to coverages and other types of rating values often require either an off-balance factor (off-balance correction), or, when capping is involved, a test correction factor. The current approach is to multiply a common off-balance or test correction factor by all the postcredibility rates, so that the weighted average of the final rates matches the overall rate indication. The present correction algorithm appears to have disparate impacts on some classes, though. For example, when correction factors are applied uniformly to the postcredibility rates, rates for already fully credible classes may be artificially raised or lowered. Spreading the off-balance across the complement of credibility terms creates end rates that are both more credible and in many circumstances, more accurate depictions of the loss costs.