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Foundations of Casualty Actuarial Science

The availability of a feasible, more accurate system is
unknown. Efficiency may be low in any given case, but
no better system is available at a reasonable cost.

If efficiency is lower, however, it is an indication
that there is a greater potential to introduce better
variables. To produce a higher efficiency there must
be a higher percentage of insured at more extreme
relativities. This is necessary to produce a higher
variance or CV.

This process, however, runs counter to much public
criticism of the insurance industry. Higher rates mean
less affordability. In addition, greater efficiency can be
produced by any variable that can accurately refine the
classification system.

f) Unequal Exposure - Regardless of which form is
chosen for the relativities, estimation is not necessarily
straightforward. Certain subdivisions of a rating variable
may have a disproportionate share of another rating
variable, i.e two rating variables may be correlated.

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