Actuaries blend two numbers when they price a risk: what the account’s own history says, and what the class it belongs to says. The weight on the account’s own history is its credibility, usually written Z. The class rate gets the rest, 1 minus Z.
Why Z is small in aviation
Credibility grows with the number of claims behind a history. A corporate jet may go its entire life without a hull claim; a clean ten-year record on one aircraft is a handful of years with no events, which says very little statistically. So Z stays small, and 1 minus Z, the class rate, carries the price.
This is not only true of single aircraft. In 2022, insurers representing about 70 percent of Missouri’s aircraft market told the state regulator there were too few risks for the law of large numbers and that they rely largely on underwriter judgment. (Missouri DCI, 2022)
Where the class rate comes from
A large carrier builds its class rates from its own book, blended with judgment. A new program has no book. Either way, the question a reviewing actuary or a capacity provider will ask is the same: on what exposure, and how many events? A class rate is only as good as the answer.
What a useful class rate looks like
- It is built on the whole US fleet.
- It prints its events and its aircraft-years, so its credibility can be judged.
- It is dated, and restated in the open when it moves.
The ALEX™ Market Tables are built that way.