In estimating loss and loss adjustment expense, the actuary attempts to group claims into:

Question

Options

• Aheterogeneous groups
• Bbusiness groups
• Chomogeneous groups
• Dcoverage extensions groups

• A
  14% (5)
• B
  9% (3)
• C
  74% (26)
• D
  3% (1)

Explanation

Actuaries group claims into homogeneous groups (C) because estimating losses accurately requires that claims within each group share similar characteristics - such as coverage type, line of business, or claim complexity - so that historical patterns are meaningful predictors of future losses. Grouping unlike claims together would distort the statistical patterns and produce unreliable estimates.

Why the distractors are wrong:

• A (heterogeneous) is the opposite of what's needed; mixing dissimilar claims obscures trends and inflates variance.
• B (business groups) is vague and not an actuarial term of art - while business segment can inform grouping, it's not the defining principle.
• D (coverage extensions groups) is not a standard actuarial grouping concept; coverage type may be one dimension of homogeneity, but this phrasing is too narrow and non-standard.

Memory tip: Think of "homo-" as "same" (homogeneous = same kind). Actuaries want claims that behave the same way so their math works - like comparing apples to apples, not apples to catastrophe liability claims.

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