Optimal relativities and transition rules of a bonus-malus system
When a bonus–malus system with a single set of optimal relativities and a set of simple transition rules is implemented, two inadequacy scenarios are induced because all policyholders are subject to the same a posteriori premium relativities (level transitions) independent of their a priori characte...
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sg-ntu-dr.10356-937272023-05-19T06:44:42Z Optimal relativities and transition rules of a bonus-malus system Tan, Chong It Li, Jackie Li, Johnny Siu-Hang Balasooriya, Uditha Nanyang Business School DRNTU::Business::Finance::Insurance::Mathematical models When a bonus–malus system with a single set of optimal relativities and a set of simple transition rules is implemented, two inadequacy scenarios are induced because all policyholders are subject to the same a posteriori premium relativities (level transitions) independent of their a priori characteristics (current levels occupied). In this paper we propose a new objective function in the determination of optimal relativities that directly incorporates the a priori expected claim frequencies to partially address one of the inadequacy scenarios. We derive the analytical solution for the optimal relativities under a financial equilibrium constraint. Furthermore, we introduce a metric called effectiveness of transition rules to compare the different specifications of transition rules. We also argue that varying transition rules which are more flexible in addressing the other inadequacy scenario may be more effective than their corresponding simple rules. Accepted version 2015-07-23T07:36:02Z 2019-12-06T18:44:23Z 2015-07-23T07:36:02Z 2019-12-06T18:44:23Z 2015 2015 Journal Article Tan, C. I., Li, J., Li, J. S. H.,& Balasooriya, U. (2015). Optimal relativities and transition rules of a bonus-malus system. Insurance : Mathematics and Economics, 61255-263. 01676687 https://hdl.handle.net/10356/93727 http://hdl.handle.net/10220/38368 10.1016/j.insmatheco.2015.02.001 en Insurance : mathematics and economics © 2015 [Elsevier B.V.] This is the author created version of a work that has been peer reviewed and accepted for publication by [Insurance: Mathematics and Economics], [Elsevier B.V.]. It incorporates referee’s comments but changes resulting from the publishing process, such as copyediting, structural formatting, may not be reflected in this document. The published version is available at: [http://dx.doi.org/10.1016/j.insmatheco.2015.02.001]. 9 p. application/pdf |
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DRNTU::Business::Finance::Insurance::Mathematical models Tan, Chong It Li, Jackie Li, Johnny Siu-Hang Balasooriya, Uditha Optimal relativities and transition rules of a bonus-malus system |
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When a bonus–malus system with a single set of optimal relativities and a set of simple transition rules is implemented, two inadequacy scenarios are induced because all policyholders are subject to the same a posteriori premium relativities (level transitions) independent of their a priori characteristics (current levels occupied). In this paper we propose a new objective function in the determination of optimal relativities that directly incorporates the a priori expected claim frequencies to partially address one of the inadequacy scenarios. We derive the analytical solution for the optimal relativities under a financial equilibrium constraint. Furthermore, we introduce a metric called effectiveness of transition rules to compare the different specifications of transition rules. We also argue that varying transition rules which are more flexible in addressing the other inadequacy scenario may be more effective than their corresponding simple rules. |
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Nanyang Business School |
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Nanyang Business School Tan, Chong It Li, Jackie Li, Johnny Siu-Hang Balasooriya, Uditha |
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Article |
author |
Tan, Chong It Li, Jackie Li, Johnny Siu-Hang Balasooriya, Uditha |
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Tan, Chong It |
title |
Optimal relativities and transition rules of a bonus-malus system |
title_short |
Optimal relativities and transition rules of a bonus-malus system |
title_full |
Optimal relativities and transition rules of a bonus-malus system |
title_fullStr |
Optimal relativities and transition rules of a bonus-malus system |
title_full_unstemmed |
Optimal relativities and transition rules of a bonus-malus system |
title_sort |
optimal relativities and transition rules of a bonus-malus system |
publishDate |
2015 |
url |
https://hdl.handle.net/10356/93727 http://hdl.handle.net/10220/38368 |
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1770567484693282816 |