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Foundations of Casualty Actuarial Science

5. How measurement of efficiency is important
to actuary?

Ans. Efficiency is defined as the measure of the accuracy of
the classification system. This concept is important to
the public demand concerning restrictions on the use of
classification variables. It is also important to actuaries,
in order to understand how well the classification system
is working, and to develop methods of improvement.

The first step to measuring the efficiency is to understand
the variability of classification system. Costs vary with
claim frequency and claim size.

A perfect classification system would produce the same
variability as the insured population. Conversely a
classical system that has less variability than the insured
population cannot be perfect, because two insured may
receive the same rate when their costs are actually
different. Insurance is fortuitous in nature.

Costs are unknown. Whenever costs are measured, it
is always after the events. The same event might not

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