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E.g group A may cost twice group B or any other
relationship . In determining the relative costs ,the
disproportionate exposure is concentrated in both
higher and lower cost groups. Various methods like
the iterative method discussed above can be used to
adjust for unequal distributions of underlying
exposures.

6. How class relativities are calculated?

Ans. There are two general methods of calculating class
relatives: a loss ratio approach and a pure premium
approach. There are several actuarial problems involved
in estimating classification relatives.

These include : (i) whether relativities should be additive
or multiplicative, (ii) how to obtain more and more reliable
data, and (iii) how to select the appropriate credibility
complement for groups with less than fully credible data.
Insurers usually use relativities for classification variables
rather than pure rates because of credibility problems.
E.g there might be ten territories and ten classes for a
particular line of business in a given state.

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