While attempting to measure its risk exposure for the upcoming year, an insuranc

Question

While attempting to measure its risk exposure for the upcoming year, an insurance company notices a trend between the age of a customer and the number of claims per year. It appears that the number of claims keep going up as customers age. After performing a regression, they find that the relationship is (claims per year) = 0.155*(age) + 3.955. If a customer is 43.541 years old and they make an average of 14.59 claims per year, the residual is 3.886. Interpret this residual in terms of the problem.

Question 7 options:

1)

2)

3)

4)

5)

1)

The number of claims per year is 14.59 claims larger than than what we would expect.

2)

The age is 3.886 years less than than what we would expect.

3)

The age is 3.886 years larger than than what we would expect.

4)

The number of claims per year is 3.886 claims larger than than what we would expect.

5)

The number of claims per year is 3.886 claims less than than what we would expect.

Explanation / Answer

Since the residual is positive that means the actual number of claims is higher than the predicted number. Therefore,

The number of claims per year is 3.886 claims larger than than what we would expect.

Option 4 is correct.

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