The effect of bonus hunger on automobile insurance

• Main Authors: Khaliludin, Nur Idayu Ah, Nor, Siti Rohani Mohd, Juhan, Nurliyana
• Format: Conference Proceeding
• Language: English
• Subjects: Insurance; Insurance premiums; Markov analysis; Markov chains; Policyholders
• ISSN: 0094-243X; 1551-7616
• DOI: 10.1063/5.0192583

Almost all motor insurance uses No-Claim Discount (NCD) system in which the premium depends on the level at which the policyholder belongs. At the end of a claim-free year the policyholder moves to a level with a lower premium or stays on the level he/she is currently at. On the contrary, if the policyholder made at-fault accident(s) in the previous year, he/she moves to a level with a higher premium. In this case, the policyholder is penalised by surcharges. This system can be modelled using Markov chains. Transitions from one premium level to another are determined once the number of claims is known. However, we should be aware that policyholders might decide not to report small claims to the insurance company if they believe that this is profitable for them. Such behaviour is called bonus hunger. This research examines the effect of bonus hunger on the five NCD systems namely Malaysia, Thailand, the United Kingdom, the Co-Operative Insurance and Brazil using Markov Chains processes and several actuarial tools. It is found that Malaysia has the toughest system, but it has the best spread of policyholders between the premium classes, and it is the most responsive to a change in the number of claims. Nonetheless, the presence of bonus hunger makes the main objective of the NCD system less achievable. The system is unable to punish bad drivers as they do not report the claims and thus, resulting in less sensitivity to claim frequency and even higher concentration of policyholders in lower premium classes.