CAS Exam 8 Fall 2015, Question 6
Study guide: Exam 8
A company groups its homeowners' policies based on Coverage A amount for ratemaking. The company is proposing using a new method, k-means clustering, to group these policies. The graphs below show the range of deductible factors by Coverage A amount group for the current and proposed method:
Part a (1 point)
Describe the steps in performing the k-means clustering method.
Part b (0.5 points)
Discuss whether the current or proposed method should be used to group homeowners' policies using the two graphs provided.
Part c (1.5 points)
Identify two operational considerations that would affect the decision to implement a change in policy grouping and explain how these considerations would apply to implementation of the new groups.
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