IAI Actuarial Core Principles · Business Management · Skills and knowledge for working as an actuary in financial services
A health insurer in Hyderabad wants to price a new critical illness product. The actuary has only five years of the insurer's own limited claims data and a large body of industry data from reinsurers covering different policyholder profiles. Which course of action BEST demonstrates sound technical judgement?
The best approach is to combine both data sources, adjusting industry data for differences in policyholder profile and weighting the insurer's own experience by its credibility, then testing sensitivity and stating limitations. Using only one source, random assumptions, or competitor premiums alone does not show sound technical judgement.
- AUse only the insurer's five years of data because it is the sole data that is directly relevant, ignoring credibility
- BUse the reinsurer data unadjusted because larger data volume is always more reliable
- CChoose assumptions at random within a plausible range to avoid appearing biased
- DSet the price from competitors' premiums alone and skip any analysis of claims
- Combine the sources, adjusting industry data for differences in profile and giving the own data a weight reflecting its credibility, with sensitivity testing and stated limitationsCorrect
Explanation
Good judgement blends relevant sources, adjusts for differences, weights by credibility and tests sensitivity while disclosing limitations. Relying on one source ignores either volume or relevance, random choice lacks basis, and copying competitor premiums skips the actuary's own analysis.
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