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Double-counting problem of the bonus–malus system

Title
Double-counting problem of the bonus–malus system
Authors
Oh R.Lee K.S.Park S.C.Ahn J.Y.
Ewha Authors
안재윤
SCOPUS Author ID
안재윤scopus
Issue Date
2020
Journal Title
Insurance: Mathematics and Economics
ISSN
0167-6687JCR Link
Citation
Insurance: Mathematics and Economics vol. 93, pp. 141 - 155
Keywords
Auto insuranceBonus–malus systemDouble countingOptimizationRatemaking
Publisher
Elsevier B.V.
Indexed
SCIE; SSCI; SCOPUS scopus
Document Type
Article
Abstract
The bonus–malus system (BMS) is a widely used premium adjustment mechanism based on policyholder's claim history. Most auto insurance BMSs assume that policyholders in the same bonus–malus (BM) level share the same a posteriori risk adjustment. This system reflects the policyholder's claim history in a relatively simple manner. However, the typical system follows a single BM scale and is known to suffer from the double-counting problem: policyholders in the high-risk classes in terms of a priori characteristics are penalized too severely (Taylor, 1997; Pitrebois et al., 2003). Thus, Pitrebois et al. (2003) proposed a new system with multiple BM scales based on the a priori characteristics. While this multiple-scale BMS removes the double-counting problem, it loses the prime benefit of simplicity. Alternatively, we argue that the double-counting problem can be viewed as an inefficiency of the optimization process. Furthermore, we show that the double-counting problem can be resolved by fully optimizing the BMS setting, but retaining the traditional BMS format. © 2020 Elsevier B.V.
DOI
10.1016/j.insmatheco.2020.04.008
Appears in Collections:
자연과학대학 > 통계학전공 > Journal papers
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