Page 191 - ic92 actuarial

Foundations of Casualty Actuarial Science

So, in other words, risk classification is the formulation
of different premiums for the same coverage based on
group characteristics.

These characteristics are called rating variables. Rating
variations due to individual claim experience, as well as
those due to limits of coverage and deductibles, will not
be considered as part of classification problem.

Premiums usually vary if the underlying costs vary. Costs
may vary among groups for all of the elements of
insurance cost and income, like losses, expenses,
investment income, and risk. For losses, as an example,
groups may have varying accident frequency or varying
average claim costs.

Expenses may vary from group to group, or among
different lines of business. Investment incomes may also
vary among groups. Also, risk defined as variation from
the expected, may vary among different types of insured.
E.g, more heterogeneous groups are subject to more
adverse selection and hence, more risk.

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