Implications of the Mandatory Elimination of A Rating Variable

The amount of rate classification (rate dislocation) experienced by individual insureds when a rating variable is eliminated depends on the rate relativity associated with the factor and with its distribution. In may be possible to introduce a surrogate rating variable to replace the one eliminated which reduces the total rate dislocation in the system. A mathematical expression for rate dislocation can be used to determine rate relativities for the replacement variable that minimize rate dislocation. A very high correlation is necessary between the eliminated variable and its surrogate for the surrogate to be effective in reducing rate dislocation. In private passenger automobile, mileage has been cited as a replacement variable for sex. When sex is eliminated alone or in conjunction with marital status and/or age, very little of the rate dislocation introduced is eliminated by the introduction of mileage.