Practice Exam 1 #7
Why did we use dispersion and not the efficiency test to compare the plans on question #7 of the first practice exam?
Why did we use dispersion and not the efficiency test to compare the plans on question #7 of the first practice exam?
Comments
Good question - I think it depends on how you define equitable which is something the CAS isn't overly clear on at the moment. The efficiency test measures how much variation is reduced when you go from manual loss ratios to standard loss ratios. However, the plan with less variation in the standard loss ratios still may not be equitable because it may be systemically biased through consistently under or overcharging the best/worst risks.
Given the point value of the question and that you'd need to do the calculations anyway to get to the efficiency test statistics, I think the CAS would expect you to comment on the trends in the context of rating plan equity in addition to comparing the range of standard loss ratios or using the efficiency test.