Exam MAS-I Practice Question 105
Study guide: Exam MAS-I
In an auto physical damage book, older vehicles are worth much less than newer ones. A one-way review shows that average claim severity falls steadily with vehicle age. An actuary then fits a Gamma GLM with a log link for severity using both vehicle age and vehicle value as predictors. Vehicle value's coefficient is positive, and vehicle age's coefficient is positive and significant.
Which statement best explains the positive vehicle-age coefficient?
- A) It must be an error, since a coefficient's sign should match the one-way relationship with the response
- B) It measures the effect of age with value held fixed; the one-way decline reflects older vehicles' lower values
- C) It shows the predictors are uncorrelated, since the model assumes its independent variables are independent
- D) It is caused by collinearity, which always reverses a coefficient's sign, so the true age effect is negative
- E) It shows vehicle age should be categorical, since a continuous predictor cannot reverse its one-way trend
Answer this question and see the worked solution