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Foundations of Casualty Actuarial Science

make price differentials. If they do not do so, their
profitability, and ultimately their solvency may be
affected. Classification system may be more refined as
coverage become more expensive.

From buyers' perspective, shopping for favourable prices
is encouraged when coverage is more expensive. From
insurers' perspective, more expense dollars may be
available to classify and underwrite.

Moreover, the cost making mistakes, or of not having a
refined system is higher when the premium is higher.
E.g, towing coverage may be same for all vehicles, even
though the older vehicles are more likely to break down.

Classification systems are usually more refined for larger
markets. Considering the credibility of available cost data,
more classifications can be supported by larger amounts
of insured exposure. Classification system has become
refined with the advent of information technology. More
information can be handled more cost effectively today
than in the past.

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