ASOP 12 - Risk Classification

Question 1

ASOP 12 - Considerations when selecting risk characteristics to use in a risk classification system (7)

Answer 1

1. The relationship between the risk characteristics and expected outcomes. Rates are considered equitable for a given risk characteristic if differences in rates reflect material differences in expected cost
2. Causality - the risk characteristic should be related to expected outcomes, but it is not necessary to establish a cause and effect relationship
3. Objectivity - select risk characteristics that are capable of being objectively determined
4. Practicality - reflect the tradeoffs between practical and other relevant considerations
5. Applicable law - consider whether the law limits the choice of risk characteristics
6. Industry practices - consider usual and customary risk classification practices for the given situation
7. Business practices - consider limitations created by business practices for the given situation

Question 2

ASOP 12 - Considerations when establishing risk classes (4)

Answer 2

1. Intended use - select a risk classification system that is appropriate for the intended use
2. Actuarial considerations
   a. Adverse selection - may occur if the variation in expected outcomes within a risk class is too great
   b. Credibility - risk classes should be large enough for expected outcomes to be credible
   c. Practicality - must balance the conflicting objectives of accuracy and efficiency
3. Other considerations - should comply with applicable law, consider industry practices, and consider limitations created by business practices
4. The reasonableness of results from using the risk classes