Page 190 - ic92 actuarial

The Insurance Times

Q1. Discuss the concept of risk classification.

Ans. Actuaries use risk classification primarily in rate making
when we do not have sufficient information to estimate
a price for a given individual. In order to derive a price,
individuals who are expected to have the same costs
are grouped together.

The actuary then calculates a price, individuals who
are expected to have the same costs are grouped
together. The actuary, on assuming that the same price
is applicable to the entire group, calculates a group
price.

This is the substance of risk classification. Recent
technological advances allow actuaries to construct
complex cost models for individuals.

E.g, multiple regression, natural networks, and global
positioning. Even though these models seem
complex, they essentially estimate the average cost
for groups of insured that share the same
characteristics.

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