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Optimal Loss Financing Under Bonus-Malus Contracts

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  • Holtan, Jon

Abstract

The paper analyses the question: Should an insurance customer carry an occurred loss himself, or should he make a claim to the insurance company? This question is important within bonus-malus contracts with individual experience adjustments of the premium. The analysis model includes a bonus hunger strategy where the customers prefer the most profitable financial alternative, that is, the alternative which represents the lowest rate of interest. Hence the loss of bonus after a claim is calculated as a rate of interest paid from the customer to the insurer. Within this model the paper outlines the existence of a true compensation function and a relative cost function for each customer. A set of properties for bonus-malus contracts are presented and discussed. A concrete example of a bonus-malus system and an insurance compensation function illustrates the theoretical framework in a practical manner.

Suggested Citation

  • Holtan, Jon, 2001. "Optimal Loss Financing Under Bonus-Malus Contracts," ASTIN Bulletin, Cambridge University Press, vol. 31(1), pages 161-173, May.
    • Handle: RePEc:cup:astinb:v:31:y:2001:i:01:p:161-173_00
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    Cited by:

    1. Lammers, Frauke & Schiller, Jörg, 2010. "Contract design and insurance fraud: An experimental investigation," FZID Discussion Papers 19-2010, University of Hohenheim, Center for Research on Innovation and Services (FZID).
    2. Frauke von Bieberstein & Jörg Schiller, 2018. "Contract design and insurance fraud: an experimental investigation," Review of Managerial Science, Springer, vol. 12(3), pages 711-736, July.

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