ASOP12.RiskClass

Reading: Actuarial Standard of Practice No. 12, Risk Classification

Study Tips

ASOPs generally have these sections:

Section 1. Purpose, Scope, Cross References, and Effective Date

Section 2. Definitions

Section 3. Analysis of Issues and Recommended Practices

Section 4. Communications and Disclosures

Appendices

Sections 3 & 4 contain most of the relevant information. The definitions in Section 2 are usually obvious and familiar, and are covered in either the Werner of Friedland source texts anyway. You can skip Section 1 and the Appendices. The appendices usually contain either very general background information or comments on the draft version of the ASOP.

Estimated Study Time: 1 hr (you may occasionally refer back to this ASOP while studying the main pricing and reserving material)

BattleTable

Based on past exams, the main things you need to know (in rough order of importance) are:

• fact A...
• fact B...

reference	part (a)	part (b)	part (c)	part (d)
E (2016.Fall #10)	considerations: - for risk classification

In Plain English!

Section 2: Definitions

The 4 most important definitions (out of 10) in this ASOP are:

risk(s):

- individuals or entities covered by financial or personal security systems

risk classification system:

- a system for assigning risks to groups based on expected cost

risk characteristics:

- measurable characteristics for assigning a risk to a risk class (within a risk classification system)

risk class:

- a set of risks grouped together under a risk classification system

Just make sure you can write out these definitions.

Section 3: Analysis of Issues and Recommended Practices

You have memorize the following to be able to answer the 2016.Fall exam question.

Question: identify considerations in selecting risk characteristics for a risk classification system [Hint: ROP-LIB]

Relationship to costs (Ex: miles driven relates to expected claim costs)

Objectivity (Ex: miles driven for auto)

Practicality (Ex: # of cars in household, – note that miles driven may not be practical because it is self-reported)

-

Laws (does the risk classification system satisfy applicable laws – Ex: cannot use race)

Industry practices (should consider current industry practices before deviating from such)

Business practices (should consider company's business practices before deviating from such)

There is one consideration I left out of the above: Causality. I'm not sure why this was even listed with the others because the ASOP says that the actuary need not establish cause & effect between the risk characteristic and expected costs.

As for the 2016.Fall exam problem, it seems from the examiner's report that they accepted almost anything as long as you listed a valid consideration and provided some sort of semi-reasonable explanation. Now that you know what should be considered in selecting risk characteristics, you have to also consider how to construct an overall risk classification system.

Question: identify considerations in selecting a risk classification system [Hint: ROP-LIB]