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Double-counting problem of the bonus-malus system

Title
Double-counting problem of the bonus-malus system
Authors
Oh, RosyLee, Kyung SukPark, Sojung C.Ahn, Jae Youn
Ewha Authors
안재윤
SCOPUS Author ID
안재윤scopus
Issue Date
2020
Journal Title
INSURANCE MATHEMATICS & ECONOMICS
ISSN
0167-6687JCR Link

1873-5959JCR Link
Citation
INSURANCE MATHEMATICS & ECONOMICS vol. 93, pp. 141 - 155
Keywords
Bonus-malus systemRatemakingDouble countingOptimizationAuto insurance
Publisher
ELSEVIER
Indexed
SCIE; SSCI; SCOPUS WOS 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. (C) 2020 Elsevier B.V. All rights reserved.
DOI
10.1016/j.insmatheco.2020.04.008
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자연과학대학 > 통계학전공 > Journal papers
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