Double-counting problem of the bonus-malus system
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Publication:784429
DOI10.1016/J.INSMATHECO.2020.04.008zbMATH Open1446.91069arXiv1910.10313OpenAlexW3024737563MaRDI QIDQ784429FDOQ784429
Authors: Rosy Oh, Kyung Suk Lee, Sojung Carol Park, Jae Youn Ahn 
Publication date: 3 August 2020
Published in: Insurance Mathematics \& Economics (Search for Journal in Brave)
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.
Full work available at URL: https://arxiv.org/abs/1910.10313
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