A computer simulation model of the no-claim discount system.

• Main Authors: Choo, Koon San., Chua, Phyllis Bee Cheng., Teo, Chin Leong.
• Other Authors: Nanyang Business School
• Format: Final Year Project
• Language: English
• Published: 2013
• Subjects: DRNTU::Business
• Online Access: http://hdl.handle.net/10356/51198
• Institution: Nanyang Technological University

Although the motor insurance business grew by 15.7% to $482 million in terms of gross premiums in 1994, it has been registering losses since the Emergency Period after World War II. The dismal performance of the motor business has often been attributed to the high incurred lost ratio. Although much research had been conducted and actions taken to try to improve the profitability of the motor business, very little has been done on a unique feature of the motor portfolio -- the No-Claim Discount(NCD) system. In fact, the NCD system could have a considerable impact on the motor business. This report looks into the profitability of the current NCD structure in Singapore as well as the equitability of the premiums charged for the different risk groups. This is done firstly by using a theoretical equilibrium state model approach and secondly, by using a computer simulation model. The first approach is a simplified mathematical analysis of the NCD structure using matrix theory to model the movements within the structure. It is found to be insufficient to fully reflect the real-life situation because of the unrealistic assumptions made. To remove these assumptions would make analysis too complicated and hence, computer simulation is necessary. Using Lotus 123, a model is set up to simulate the claims experience of a motor portfolio. The movements of the policyholders were monitored for fifteen years and an analysis of the profitability and equitability of the NCD structure was done. Under different averages for the number of accidents per policyholder per year, different conclusions as regards the profitability issue are obtained, suggesting that the profitability of the current NCD structure varies from insurer to insurer depending on their respective claims experience. As for the equitability of premiums charged, it is observed that a percentage increase in the average number of accidents results in only a very small increase in the total premiums paid. This implies that the structure is not equitable as the better risks are effectively cross-subsidising the poorer risks. Towards the end of the report, the limitations of this study as well as recommendations for future investigation will be presented.