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) = 0.36*(age) + 5.43. If a customer is 38 years old and they make an average of 14.58 claims per year, what is the residual?

	1)-23.42
	2)-4.53
	3)4.53
	4)23.42
	5)18.89

Answer 1

Given regression equation

Claims per year = 0.36*(age) + 5.43

For age = 38

Claims per year = 0.36*38 + 5.43

Claims per year = 19.11

So predicted claims per year = 19.11

Actual claims per year = 14.58

Residual = actual - predicted

Residual = 14.58 - 19.11

Residual = - 4.53