Sequential Analysis Guidelines

Hunstad, Lyn, 1996. "Sequential Analysis Guidelines," California Department of Insurance, September.

This paper describes the context in which the requirement for a sequential analysis was developed and provides technical guidelines for performing the analysis. The types of data needed to perform a sequential analysis are discussed and detailed examples of two approaches are presented. A sequential analysis proceeds one step at a time. The key task is measuring the influence of prior rating factors and adjusting for it. The loss residual approach is based on evaluating the variations in losses that have not been accounted for by previous factors. The prior relativities approach is based on adjusting a rating factor's relativities by the average relativity of prior factors. Both approaches are mathematically equivalent and produce the same results. The spreadsheet instructions needed to implement the prior relativities approach for two different types of algorithms each with two different ways of handling the good driver discount are completely worked out in examples.

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