A1. ASOP 12: Risk Classification

Question 1

Risk Characteristic Considerations

Identify + briefly explain

ASOP 12: Risk Classification

Answer 1

1. Legal
2. Correlation between variable and expected costs
3. Causality (hard to prove)
4. Objective - clearly defined, verifiable and not easily manipulated
5. Industry Practice - is this the usual risk characteristic for the LOB?
6. Any business practice affect the use of the variable

Question 2

Establish Risk Classes/Levels Considerations

Identify + briefly explain

ASOP 12: Risk Classification

Answer 2

1. Intended Use - levels vary by use (ratemaking vs. reserving)
2. Actuarial Consideriation - homogeneity (prevent adverse selection), credibility, & practicality
3. Legal, industry, & business practice considerations
4. Reasonability of results