C.1. Risk Classification Flashcards
Adverse and favorable selection
Adverse: not using a risk characteristic used by competitors, attracting underpriced customers as a result
Favorable: using a risk characteristic not used by competitors, attracting profitable customers
Skimming the cream
Identifying lower cost group of insureds not identified by competition and recognizing difference in UW or marketing instead of rating
3 Primary Purposes of Risk Classification
- Protect insurance system’s financial soundness
- Enhance fairness
- Permit economic incentives to operate and thus encourage widespread availability of coverage
5 basic principles that achieve 3 primary purposes of risk classification
- System should reflect expected cost differences
- System should distinguish among risks on the basis of relevant cost-related factors
- System should be applied objectively
- System should be practical and cost-effective
- System should be acceptable to the public
Considerations in designing risk classification system
Underwriting Marketing Program Design Statistical Criteria Operational Criteria Hazard Reduction Incentives Public Acceptability Causality Controllability
3 elements of program design of a risk classification system
- Degree of choice available to buyer
- Experience based pricing
- Premium payer
3 statistical criteria of a risk classification system
- Homogeneity
- Credibility
- Predictive stability
Operational criteria of a risk classification system
Expense Constancy Availability of coverage Avoidance of extreme discontinuities Absence of ambiguity Manipulation Measurability
Social criteria for rating variables
Causality
Controllability
Public Acceptability (Privacy)
Affordability
Major public acceptability considerations for risk classification systems
- Should not differentiate unfairly among risks.
- Should be based on clearly relevant data
- Should respect personal privacy
- Should be structured so that risks tend to identify naturally with their classification
