The actuary would begin by trying to estimate the frequency and severity distribution for a particular insurance pool. This process usually begins with an analysis of past experience. The actuary will try to use data gathered from the insurance pool or from a group as similar to the insurance pool as possible.
For instance, if a group of active workers were being insured for healthcare expenditures, the actuary would not want to use data that included disabled or retired individuals. In analyzing past experience, the actuary must also consider how reliable the past experience is as a predictor of the future. Assuming that the experience collected is representative of the insurance pool, the more data, the more assurance that it will be a good predictor of the true underlying probability distributions.
