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Foundations of Casualty Actuarial Science

but does not affect the premium. For e.g, most insurers
charge same premium for automobile insurers for owner-
driver of age range 30 to 50.
(i) Accuracy is important for at least two reasons,

the market mechanism and fairness. In market
economy, insurers who price their products more
accurately can be more successful and competitive.
Greater accuracy requires more rating variables and
a more detailed classification. Another important
reason of accuracy is fairness. Similar conditions
of groups should have similar prices.

(ii) Homogeneity - The second actuarial condition is
homogeneity. This means that all the members of
the group who receive the same rate or premium
should have similar expected costs. Practically it is
difficult to know if all members do have similar costs.
The reason is the lack of credibility of individual
experience. Consequently, for many such rating
groups, subdivisions of the group may not have much
credibility than individual insured.

(iii) Credibility - A rating group should be large enough
to measure costs with sufficient accuracy. There

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