Logical and technical problems connected to the use of the “multiplicative method” to personalize the rates in automobile liability insurance

Abstract

I argue that the idea of pursuing a strong personalization of the motor liability insurance conflicts hopelessly with the need to refer to homogeneous groups of policyholders large enough to be correctly priced. I furthermore discuss the fact that, due to purely algebraic reasons, it is a priori impossible to obtain the right individual premium by the usual method of multiplying a common base one by a series of factors (as many, as the personalization variables one has chosen to consider). Finally, I point out that the choice of the said factors, not always made with sufficient respect for the statistical evidences, not only gives rise to serious problems concerning the system’s fairness and transparency, but puts theoretically at risk the Companies management balance.