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IAI Actuarial Core Principles · Actuarial Statistics · Purpose and function of data analysis

An actuary fits a simple linear regression of claim cost (Rs thousand) on driver age using past data: fitted line = 40 − 0.5 × age. She uses it to estimate the expected claim cost for a new policyholder aged 30. Which statement and value are correct?

This is predictive use and the expected claim cost is Rs 25 thousand. Substituting age 30 gives 40 minus 0.5 times 30, which is 25. Applying a fitted model to a new policyholder to estimate an outcome is predictive analysis.

  1. APredictive use; expected cost Rs 25 thousandCorrect
  2. BDescriptive use only; expected cost Rs 25 thousand
  3. CPredictive use; expected cost Rs 55 thousand
  4. DPredictive use; expected cost Rs 15 thousand
  5. Inferential use only; expected cost Rs 35 thousand

Explanation

Substituting age 30: 40 − 0.5 × 30 = 40 − 15 = 25. Applying a fitted model to a new case to estimate an outcome is predictive analysis. Distractor 15 forgets to subtract from 40, and 55 uses the wrong sign.

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