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Double-counting problem of the bonus-malus system
- Double-counting problem of the bonus-malus system
- Oh, Rosy; Lee, Kyung Suk; Park, Sojung C.; Ahn, Jae Youn
- Ewha Authors
- SCOPUS Author ID
- Issue Date
- Journal Title
- INSURANCE MATHEMATICS & ECONOMICS
- INSURANCE MATHEMATICS & ECONOMICS vol. 93, pp. 141 - 155
- Bonus-malus system; Ratemaking; Double counting; Optimization; Auto insurance
- SCIE; SSCI; SCOPUS
- Document Type
- 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.
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