Bonus-Malus System with the Claim Frequency Distribution is Geometric and the Severity Distribution is Truncated Weibull

Abstract

Bonus-Malus system is said to be optimal if it is financially balanced for insurance companies and fair for policyholders. Previous research about Bonus-Malus system concern with the determination of the risk premium which applied to all of the severity that guaranteed by the insurance company. In fact, not all of the severity that proposed by policyholder may be covered by insurance company. When the insurance company sets a maximum bound of the severity incurred, so it is necessary to modify the model of the severity distribution into the severity bound distribution. In this paper, optimal Bonus-Malus system is compound of claim frequency component has geometric distribution and severity component has truncated Weibull distribution is discussed. The number of claims considered to follow a Poisson distribution, and the expected number λ is exponentially distributed, so the number of claims has a geometric distribution. The severity with a given parameter θ is considered to have a truncated exponential distribution is modelled using the Levy distribution, so the severity have a truncated Weibull distribution.