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Optimal design of a bonus-malus system: linear relativities revisited

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  • Tan, Chong It

Abstract

In this paper, we revisit the determination of optimal relativities under the linear form of relativities that is more viable in designing a commercial bonus-malus system. We derive the analytical formulae for the optimal linear relativities subject to a financial balanced inequality constraint. We also numerically investigate the impact of different a priori risk classification towards the effectiveness of transition rules. Our results show that the a priori risk segmentation is not a sensitive factor for the effectiveness of transition rules. Furthermore, relative to the general relativities, we find that the restriction of linear relativities only produces a small amount of deterioration towards the numerical value of the optimised objective function.

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  • Tan, Chong It, 2016. "Optimal design of a bonus-malus system: linear relativities revisited," Annals of Actuarial Science, Cambridge University Press, vol. 10(1), pages 52-64, March.
    • Handle: RePEc:cup:anacsi:v:10:y:2016:i:01:p:52-64_00
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