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Foundations of Casualty Actuarial Science

those. If the adverse selection continues, the insurer must
lose money, change its underwriting criteria, or increase
its premium. Such premium increase can offend the
customers, and lower cost insured can move to another
insurer, creating selection that is more adverse and
producing a need for further premium increase. The
insurer can become insolvent, unless adequately he can
price the book of business.

4. What are the criteria for selecting variables?

Ans. The criteria for selecting variables may be summarized
into the following categories:

(A) Actuarial - Actuarial criteria may also be called
statistical criteria. They include accuracy, homogeneity,
credibility, and reliability. The rating variables are related
to costs. If costs do not differ for different values of a
rating variable, the usual methods for estimating rate
relatives will produce the same relativity.

The use of a variable adds to administrative expense,
and consumer confusion, but does not affect the
premium. For e.g, most insurers charge same premium

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