3 Primary Purposes of Risk Classification
1. Protect the insurance system’s financial soundness.
2. Enhance fairness.
3. Permit economic incentives to operate and thus encourage widespread availabilty of coverage.
5 Basic Principles that achieve the 3 primary purposes of risk classification
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.
9 Considerations in designing a risk classification system
3. Program Design
4. Statistical Considerations
5. Operational Considerations
6. Hazard Reduction Incentives
7. Public Acceptability
3 elements of program design of a risk classification system
1. Degree of choice available to the buyer
2. Experience based pricing
3. Premium Payer
Statistical Considerations of a risk classification system
3. Predictive Stability
Operational Considerations of a risk classification system
3. Availability of coverage
4. Avoidance of extreme discontinuities
5. Absence of ambiguity
Major public acceptability considerations for risk classification systems
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.