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Foundations of Casualty Actuarial Science

the accuracy of classification, verifiability, and
administrative cost. E.g,In automobile insurance, a
psychological or behavioural profile can be strongly
related to claims. However, if insurers try to achieve
more accurate information by using a psychological
profile, his process might be more expensive, or he might
not get much business. People might consider them more
intrusive, or may even be ready to pay more than to
disclose personal information.

(i) 'Causality' implies an intuitive relationship to
insurance costs. Let us assume that there is a rating
variable , which divides the insured into different
groups. The rating variable is correlated with costs
if the mean costs for the various groups are
significantly different. There may be other variables
for which there are similar correlations. The real
reason for the differences in costs may be something
entirely different, still the 'rating variable' discussed
till now is taken into consideration while fixing the
cost. Causality implies a closer relation to cost than
correlation. E.g, mileage in automobile insurance can

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