Optimal claim behaviour for third-party liability insurances or To claim or not to claim: that is the question (Q917207): Difference between revisions

The problem of optimal claiming in automobile insurance systems with bonus-malus structure has been discussed intensively. The present paper gives a comprehensive review of the literature. Then a Markov programming model with discrete time axis is developed by which a number of related questions can be treated simultaneously. It is proved that - given some assumptions - the optimal decision rule to claim or not to claim, in such a way that the expected discounted costs are minimal, is of the form: `to claim for damage only if its amount exceeds a certain limit'. A system of recurrent equations, the solution of which gives the optimal critical claim size, is derived for both the case of a finite and that of an infinite horizon. It will appear that the optimal critical claim size depends on the probability distributions of the number of claims and the claim size. Therefore, the authors also analyze the sensitivity of the optimal critical claim size with respect to changes in (the values of the parameters of) the applied probability distributions. The analysis is finished with an example based on a Dutch bonus-malus premium rating system.