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Asymmetric Information, Self‐selection, and Pricing of Insurance Contracts: The Simple No‐Claims Case
Author(s) -
Donnelly Catherine,
Englund Martin,
Nielsen Jens Perch,
Tanggaard Carsten
Publication year - 2014
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/j.1539-6975.2013.01520.x
Subject(s) - actuarial science , selection (genetic algorithm) , insurance policy , auto insurance risk selection , simple (philosophy) , adverse selection , business , automobile insurance , information asymmetry , economics , general insurance , microeconomics , computer science , artificial intelligence , philosophy , epistemology
This article presents an optional bonus‐malus contract based on a priori risk classification of the underlying insurance contract. By inducing self‐selection, the purchase of the bonus‐malus contract can be used as a screening device. This gives an even better pricing performance than both an experience rating scheme and a classical no‐claims bonus system. An application to the Danish automobile insurance market is considered.