Pricing Effectiveness and Regulation: An Examination of Premium Rating in Taiwan Automobile Insurance

Chu-Shiu Li, Chih Hao Lin, Chwen-Chi Liu () and Emilio Venezian ()
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Chu-Shiu Li: Department of Economics, Feng Chia University, 100 WenHua Road, Taichung 40747, Taiwan. E-mails: csli@fcu.edu.tw, andrelin39@so-net.net.tw
Chih Hao Lin: Department of Economics, Feng Chia University, 100 WenHua Road, Taichung 40747, Taiwan. E-mails: csli@fcu.edu.tw, andrelin39@so-net.net.tw
Chwen-Chi Liu: Department of Risk Management and Insurance, Feng Chia University, 100 WenHua Road, Taichung 40747, Taiwan.
Emilio Venezian: Professor Emeritus, School of Business, Rutgers University, United States.

The Geneva Papers on Risk and Insurance - Issues and Practice, 2010, vol. 35, issue S1, S68-S81

Abstract: This paper examines premium determination of voluntary automobile insurance policies and risk classification under Taiwan’s heavily regulated rating system. On the basis of a unique data set, we investigate the appropriateness of the official one-size-fits-all rating formula for insurers by calculating an actual premium, a pure premium in terms of incurred loss, and a loading factor to account for different insurance coverage types. Empirical evidence indicates that there are large discrepancies between average actual premiums and average pure premiums, requiring large loading factors. The official formula captures the regular loss pattern but not excess claims, due to biased claims’ behaviour. In addition, average loss ratios for all coverage types are closely correlated and profitability is high.

Date: 2010
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