Determination of net premium rates on Bonus-Malus system based on frequency and severity distribution

Abstract

Vehicle insurance companies in many countries use the Bonus-Malus System to determine the policyholder’s net premium. The determination of net premiums on the Bonus-Malus System is based solely on the frequency of claims and ignores the severity of claims. This is unfair to policyholders who have small claims. To overcome this problem, the net premium determination method in Bonus-Malus System was developed taking into account both the frequency and severity of claims. Frequency and severity be assumed to be independent. In determining the net premium, a posterior distribution of parameters of the frequency and severity distribution is required. In the case of frequency and severity independent, the determination of the posterior distribution for frequency and severity is performed separately. This thesis discusses the determination of net premium based on frequency distribution and severity distribution for frequency and severity independent.

Multivariate Modelling of Motor Third Party Liability Insurance Claims

“…Insured persons that historically have large claim severity are charged higher net premiums than persons that have a small claim severity. This shows that net earned premiums are fairer than the net premiums on the classic Bonus-Malus System (Pratama et al, 2020).…”