Abstract
This paper evaluates the bonus-malus system in practice in the Nigerian motor insurance industry. It would appear that the regulation is a bit fluid so that what actually looks like a bonus-malus system is more like a rule of thumb as operators do not honor the industry agreed tariff. This paper constructs an alternative bonus-malus scale that has reasonable penalties and that is yet commercially feasible. The model can easily be replicated for other developing economies.
Highlights
Some of the variables commonly used by insurance companies to divide automobile risks into different homogeneous classes include the policyholder’s occupation, age, gender, degree of disability, the type and use of car, and place of garage
These include swiftness of reflexes, aggressiveness behind the wheel, or knowledge of Highway Code, all of which have bearing on the frequency and severity of motor insurance claims
Bonus malus system is normally determined by three elements: the premium scale, the initial class, and the transition rules that determine the transfer from one class to another when the number of claims is known
Summary
Some of the variables commonly used by insurance companies to divide automobile risks into different homogeneous classes include the policyholder’s occupation, age, gender, degree of disability, the type and use of car, and place of garage. Where a policyholder reported no accident during the previous insurance year, he would be given a 20 percent premium discount (bonus) in the current period. A second problem, similar to that observed by Verico (2002), is that, after a claimless year, a policyholder may be asked to pay, at renewal, a higher premium than the one paid in the previous year Another side effect of many BMSs currently in use is a tendency of policyholders to pay small claims themselves and not report them to their insurers to avoid future premium increases. Many of the BMS in practice follow a Markov chain consisting of a finite number of classes where the premium can be reviewed upward or downward depending on a policyholder’s past record of reported accidents and in accordance with transition rules (Brouhns et al, 2003; Denuit and Dhaene, 2000; Lemaire, 1995; and Dionne and Vanasse, 1989). 1 1 where is the depreciation rate which is always assumed to be 10% Poisson-Gamma mixture
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