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Foundations of Casualty Actuarial Science

be 100%, if the classifications had no predictive value,
the efficiency would be 0%. The square of CV can be
used to measure efficiency in terms of variance.

This formula requires the calculation of two items : (i)
the variance of the classification system and (ii) the
variance of the insured population. The former is
relatively easy to calculate , but the latter is unknown.

6. Write short notes on -

a) Variation in classification system - To determine the
variability of the class plan, one needs the class relativities
and the percentage of exposures by class. It is assumed
that the class relativities are the expected values of actual
cost differences, if not, the latter are used.

The coefficient of variation is the standard deviation
divided by the mean. The numerical expression points
out several truisms. First, high efficiencies necessarily
require extreme rates. Second, the key to design a highly
efficient systems is to find variables that can isolate the
highest and lowest cost individuals.

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