C.2. Univariate Classification

Question 1

Main distortion in pure premium approach to class ratemaking

Answer 1

Assumes no correlation between exposures for different rating variables. Could “double count” experience of variables

Question 2

How Loss Ratio approach corrects for distributional bias

Answer 2

Using premiums instead of exposures, premiums reflect the higher levels of premium obtained within a class as a result of correlation with other higher rated levels of other rating variables

Question 3

Advantages and disadvantages of univariate analysis

Answer 3

A: Simple to calculate and intuitive
D: Does not properly account for impact of correlated variables.

Question 4

Advantages and disadvantages of adjusted pure premium approach

Answer 4

A: does not require on-leveling, adjusts exposures based on levels of other variables
D: calculating weighted average relativities can be cumbersome