Exam 8 Practice Question 4
Study guide: Exam 8
A homeowners pure premium GLM includes deductible as a categorical variable, with the $500 deductible as the base level. The model returns a factor of 1.06 for the $1,000 deductible, and the estimate is highly significant. Underwriters confirm that they sometimes require a higher deductible on risks they consider worse.
Which approach to the deductible factors should be implemented in the new rating plan?
- A) Derive deductible factors by loss elimination outside the GLM, and enter them as an offset
- B) Implement the 1.06 factor, because it is significant and predicts losses on the current book
- C) Remove deductible from both the model and the plan, and charge every policy the $500 base rate
- D) Take the deductible factor from a severity GLM instead, where a positive coefficient is expected
- E) Keep the GLM factor but cap it at 1.00, so that more coverage never costs less
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