ASOP 12

Question 2

Considerations for which risk characteristics to use to classify risks

Answer 2

1. relationship of risk characteristics and expected outcomes
2. causality
3. objectivity
4. practicality
5. applicable law
6. industry practices
7. business practices

Question 3

relationship of risk characteristics and expected outcomes

Answer 3

means correlation between levels of a variable and expected costs; any relevant and reliable info can be used which is normally historical data but can even be expert opinion; rates are equitable if they reflect expected cost differences

Question 4

Considerations in establishing risk classes

Answer 4

1. intended use (levels can vary based on use)
2. actuarial considerations (homogeneity to prevent adverse selections within class, credibility, and practicality)
3. other considerations (law, industry, business practices)
4. reasonableness of results (do reasonability check of results)

Question 5

Communications and documentation

Answer 5

-actuaries should thoroughly document their work including any significant assumptions made, deviations from traditional practices, and data limitations

Question 6

risk characteristic -> risks should be grouped based on levels

Answer 6

such that each group is large enough to be credible but small enough to be homogeneous