TABLE OF CONTENTS This chapter deals with the theory behind bonus-malus methods for automobile insurance. This is an important branch of non-life insurance, in many countries even the largest in total premium income. A special feature of automobile insurance is that quite often and to everyone's satisfaction, a premium is charged which depends for a great deal on the claims filed on the policy in the past. In experience rating systems such as these, bonuses can be earned by not filing claims, and a malus is incurred when many claims have been filed. Experience rating systems are common practice in reinsurance, but in this case, it affects the consumer directly. Actually, by charging a randomly fluctuating premium, the ultimate goal of insurance, namely being in a completely secure financial position, is not reached. But it can be shown that in this type of insurance, the uncertainty is greatly reduced. This same phenomenon can also be observed in other types of insurance; think for instance of the part of the claims that is not reimbursed by the insurer because there is a deductible.
That 'lucky' policyholders pay for the damages caused by less lucky insureds is the essence of insurance ( probabilistic solidarity). But in private insurance, solidarity should not lead to inherently good risks paying for bad ones. An insurer trying to impose such subsidizing solidarity on his customers will see his good risks take their business elsewhere, leaving him with the bad risks. This may occur in the...
