ASOP 12: Risk Classification Flashcards
Considerations for which characteristics to use
LIBCORP Legality Industry practices Business practices Causality Objectivity Relationship to expected losses Practicality
Relationship of risk characteristic to expected losses
Correlation between variable and expected costs
Can use expert opinions in lieu of data
Causality
Nice to have
Not necessary
Hard to prove
Objectivity
Readily verifiable
Clearly/objectively defined
Not easily manipulated
Practicality
Initial and ongoing cost of classification
Current systems in place
Legality
Does it adhere to applicable law
Industry practices
Is it common to use/customary for insurers to include the risk characteristic
Business practices
Are there limitations currently preventing use of risk characteristic? Any duplication of efforts that can be avoided?
Considerations in establishing risk classes
Intended use
Actuarial
“Other”
Reasonableness of results
Intended use when establishing risk classes
Reserving vs. ratemaking
Ex: personal auto (combining coverages in ratemaking, finding ultimate losses separately)
Actuarial considerations when establishing risk classes
Homogeneity (to prevent adverse selection)
Credibility
Practicality
“Other” considerations when establishing risk classes
Applicable law
Industry practices
Business practices
Testing a risk characteristic
System should be reviewed to see if a change is needed
Ex: is adverse selection occurring? has the predictiveness changed?
Communications regarding risk classifications
Actuary should thoroughly document work
- significant assumptions made
- deviations from traditional practices
- any data limitations
