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The Practical Replacement of a Bonus-Malus System

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  • Walhin, J.F.
  • Paris, J.

Abstract

In this paper we will show how to set up a practical bonus-malus system with a finite number of classes. We will use the actual claim amount and claims frequency distributions in order to predict the future observed claims frequency when the new bonus-malus system will be in use. The future observed claims frequency is used to set up an optimal bonus-malus system as well as the transient and stationary distributions of the drivers in the new bonus-malus system. When the number of classes as well as the transition rules of the new bonus-malus system have been adopted, the premium levels are obtained by minimizing a certain distance between the levels of the practical bonus-malus system and the corresponding optimal bonus-malus system. Some iterations are necessary in order to reach stabilization of the future observed claims frequency and the levels of the practical bonus-malus system.

Suggested Citation

  • Walhin, J.F. & Paris, J., 2001. "The Practical Replacement of a Bonus-Malus System," ASTIN Bulletin, Cambridge University Press, vol. 31(2), pages 317-335, November.
    • Handle: RePEc:cup:astinb:v:31:y:2001:i:02:p:317-335_00
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    Cited by:

    1. Azaare Jacob & Zhao Wu, 2020. "An Alternative Pricing System through Bayesian Estimates and Method of Moments in a Bonus-Malus Framework for the Ghanaian Auto Insurance Market," JRFM, MDPI, vol. 13(7), pages 1-15, July.

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