Bonus-malus system with premium adjustment

Kamil Gala and Wojciech Bijak
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Kamil Gala: Ubezpieczeniowy Fundusz Gwarancyjny
Wojciech Bijak: Szkoła Główna Handlowa w Warszawie, Ubezpieczeniowy Fundusz Gwarancyjny

Collegium of Economic Analysis Annals, 2015, issue 37, 99-126

Abstract: Bonus-malus systems are a widely used method for pricing automobile insurance on the basis of individual claim history. Despite their popularity and many advantages, several modifications were proposed in the actuarial literature, but none of them, however, takes into consideration the benefit for the insured. This paper analyses the bonus-malus system, in which at the end of the insurance period the premium is adjusted according to the number of reported claims. We describe such a system using Markov chains and the credibility theory framework. Furthermore, we show how premium relativities may be derived under certain optimality criteria and we investigate their properties.

Keywords: automobile insurance; bonus-malus system; Markov chain; premium relativity; premium relativity with adjustment (search for similar items in EconPapers)
Date: 2015
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