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An approach to merit rating by means of autoregressive sequences

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  • Martinek, László
  • Arató, N. Miklós

Abstract

A posteriori ratemaking is widely applied in the premium calculation of property and casualty products, particularly in third-party automobile insurance, which usually uses a bonus–malus system for premium adjustment. The present paper suggests an alternative to common frameworks that are designed as random walks on graphs of mostly finite states representing premium levels. The proposed premium calculation model is governed by the policyholder’s claim history through a recursive equation. This new autoregressive scheme is structurally different from the ones in use. Relevant metrics that measure the system’s optimality are evaluated, partially in analytical form. Through a comparison with existing models and parameterisation from real-life data, the new model is put into context and its practical relevance is investigated.

Suggested Citation

  • Martinek, László & Arató, N. Miklós, 2019. "An approach to merit rating by means of autoregressive sequences," Insurance: Mathematics and Economics, Elsevier, vol. 85(C), pages 205-217.
    • Handle: RePEc:eee:insuma:v:85:y:2019:i:c:p:205-217
    DOI: 10.1016/j.insmatheco.2019.01.008
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    References listed on IDEAS

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    More about this item

    Keywords

    Autoregressive processes; bonus–malus systems; Model optimisation; Experience rating; Financial equilibrium;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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