ASOP 12

Question 1

Considerations for selecting characteristics

Answer 1

1. Correlation
2. Objectivity (Verifiable fact not easily manipulated)
3. Practicality (Cost, acceptability)
4. Regulations
5. Industry Practices
6. Business Practices

Question 2

Considerations for splitting into classes

Answer 2

1. Intended Use
2. Adverse Selection (homogeniety)
3. Credibility
4. Practicality
5. Law
6. Reasonability of results

Question 3

Testing a Class System

Answer 3

1. Effect of Adverse Selection
2. Effects of changes (in class, industry, business practices)

Question 4

Purpose of Risk Classification

Answer 4

1. Protect against adverse selection
2. Price reflects expected cost
3. Increases availability of insurance

Question 5

Risk Characteristic vs Risk Class

Answer 5

Characteristics: Measurable factors used to classify. Objective and relationship to outcome.

Classes: Assigned to a class based on characteristic. Credible and homogeneous.