Risk Classification - AAA

Question 1

3 Primary Purposes of Risk Classification

Answer 1

1. Protect the insurance system’s financial soundness.
2. Enhance fairness.
3. Permit economic incentives to operate and thus encourage widespread availabilty of coverage.

Question 2

5 Basic Principles that achieve the 3 primary purposes of risk classification

Answer 2

1. The system should reflect expected cost differences.
2. The system should distinguish among risks on the basis of relevant cost-related factors.
3. The system should be applied objectively.
4. The system should be practical and cost-effective. 5. The system should be acceptable to the public.

Question 3

9 Considerations in designing a risk classification system

Answer 3

1. Underwriting
2. Marketing
3. Program Design
4. Statistical Considerations
5. Operational Considerations
6. Hazard Reduction Incentives
7. Public Acceptability
8. Causality
9. Controllability

Question 4

3 elements of program design of a risk classification system

Answer 4

1. Degree of choice available to the buyer
2. Experience based pricing
3. Premium Payer

Question 5

Statistical Considerations of a risk classification system

Answer 5

1. Homogeneity
2. Credibility
3. Predictive Stability

Question 6

Operational Considerations of a risk classification system

Answer 6

1. Expense
2. Constancy
3. Availability of coverage
4. Avoidance of extreme discontinuities
5. Absence of ambiguity
6. Manipulation
7. Measurability

Question 7

Major public acceptability considerations for risk classification systems

Answer 7

1. They should not differentiate unfairly among risks.
2. They should be based upon clearly relevant data.
3. They should respect personal privacy.
4. They should be structured so that the risks tend to identify naturally with their classification.