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Foundations of Casualty Actuarial Science

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, variables

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