Testing for the correlation between geographical area of operation and accident risk in PSV insurance industry
The Kenyan public service vehicle insurance has been marred with a lot of uncertainty in terms of the expected outcome of claim frequency and claim severity. At least eight insurance companies have either collapsed or have been placed under statutory management in the last twenty years. In an attempt to address the problem in the industry, this research paper concentrated on the possible underwriting inadequacies of the insurance companies operating in the industry in terms of their failure to consider all the significant risk rating factors that can improve the premium pricing. The research therefore applied the unused observables test to test for the existence of asymmetric information in the industry. It checked for the significance of geographical area as an additional variable that is unused in the market. The research made use of accident records for fifteen regions within Nairobi to test for the correlation between accident risk and geographical area. Secondary data that was used for this research project was obtained from the Traffic Police Headquarters for Nairobi Area. The null hypothesis was stated as, there being no correlation between geographical area and the number of accidents. A statistical analysis was then undertaken and an econometric model ran using ordinary least squares. The cover type of the policy was controlled for to produce unbiased results. The results of the analysis revealed the existence of significant correlation between the number of accidents and the geographical area leading to a rejection of the null hypothesis. The correlation was positive for some regions and negative for other regions. Therefore the research recommended the inclusion of geographical area as one of the risk rating factors in premium pricing if an actuarially fair premium is to be charged by the PSV insurance companies.