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📐 '''Relativities''' are the multiplicative factors used in insurance [[Definition:Rating algorithm | rating algorithms]] to adjust a [[Definition:Base rate | base rate]] according to the risk characteristics of an individual policyholder or exposure unit. Each rating variable — such as age, territory, vehicle type, or construction class — carries its own set of relativities that express how much more or less risky a given category is compared to a chosen reference level. When an [[Definition:Actuary | actuary]] sets the relativity for young drivers at 1.45 relative to a base of 1.00, the [[Definition:Premium | premium]] for that segment is 45 percent higher than the reference group, all else being equal.

🔧 Developing relativities is a core part of the [[Definition:Ratemaking | ratemaking]] process. Actuaries typically derive them through [[Definition:Generalized linear model (GLM) | generalized linear models]] or other multivariate techniques that isolate the independent effect of each rating factor while controlling for correlations among variables. The resulting relativities are then embedded in the insurer's [[Definition:Rating manual | rating manual]] or pricing engine, where they interact multiplicatively — a policyholder's final rate equals the base rate multiplied by the relativity for each applicable factor. Periodic re-estimation is essential because claim patterns shift over time; a territory relativity that was accurate three years ago may under- or over-state current risk if population density, weather patterns, or [[Definition:Loss trend | loss trends]] have changed.

💡 Getting relativities right is one of the most consequential decisions in [[Definition:Personal lines | personal lines]] and [[Definition:Commercial lines | commercial lines]] pricing. If a relativity is too low for a high-risk class, the insurer attracts [[Definition:Adverse selection | adverse selection]] and accumulates [[Definition:Underwriting loss | underwriting losses]]; if it is too high, the company prices itself out of the market for that segment. Regulators in many U.S. states review filed relativities to ensure they are actuarially justified and not [[Definition:Unfair discrimination | unfairly discriminatory]], adding a compliance dimension to what is fundamentally a statistical exercise. The rise of [[Definition:Telematics | telematics]], [[Definition:Machine learning | machine learning]], and richer data sources is enabling more granular relativities than ever before, though it also intensifies the regulatory and ethical debate around [[Definition:Pricing fairness | pricing fairness]].

'''Related concepts'''
{{Div col|colwidth=20em}}
* [[Definition:Ratemaking]]
* [[Definition:Base rate]]
* [[Definition:Generalized linear model (GLM)]]
* [[Definition:Rating factor]]
* [[Definition:Adverse selection]]
* [[Definition:Loss trend]]
{{Div col end}}

Definition:Relativities - Revision history

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