Page 198 - ic92 actuarial

The Insurance Times

administrative errors should be minimized. For e.g,
automobile insurance underwriters often talk about the
maturity and responsibility of drivers, which are difficult
to define objectively and apply consistently.

Maturity is an appropriate variable, but it is not practical.
The cost of obtaining and verifying information, may
exceed the value of the additional accuracy. If insured
know that they can pay lower premiums by lying, some
percentage of them will do so.

The effect is to cause honest insured to pay more than
they should, to make up for the dishonest insured who
pay less than they should. There is practical trade off
between verifiability, administrative expense, and
accuracy.

Few rating variables are free from manipulation by
insured. Insured supply most of the rating information
and insurers verify them only to a limited extent. At some
point, the expense saved by relying upon unverified
information is out- weighed by its inaccuracy. In practice,

Website: www.bimabazaar.com Call: 033-22184184 /40078428 198

Copyright@ The Insurance Times. 09883398055 / 09883380339