Bonus-Malus
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In insurance, a Bonus-malus system (BMS) is a system that adjusts the premium paid by a customer according to his individual claim history.
Bonus usually is a discount in the premium which is given on the renewal of the policy if no claim is made in the previous year. Malus is an increase in the premium if there is a claim in the previous year. Bonus-malus systems are very common in vehicle insurance. This system is also called No Claim Discount (NCD) or No Claims Bonus in Britain and Australia.
The fundamental principle of BMS is that the higher the claim frequency of a policyholder, the higher the insurance costs that on average are charged to the policyholder. This principle is also valid in an insurance arrangement consisting of a high maximum deductible which is common to all policyholders.
[edit] Bonus malus in Automobile Insurance
Most insurers around the world have introduced some form of merit-rating in automobile third party liability insurance. Such systems penalize at-fault accidents by premium surcharges and rewards claim-free years by discounts.
The most usual BMS divides drivers by classes, where each class has its own discount or surcharge that is applied to the basic premium. A claim-free year implies in a decline of one or more degrees on the Bonus/Malus class table on the anniversary of the contract. A claim entails an increase of a given number of degrees on the Bonus/Malus scale on the anniversary of the contract. Generally, one degree corresponds to a 5% discount or surcharge. The starting class may depend on the driver's age, sex, place of residence, the car's horsepower or even the car's color. Each country has a different legislation, which rules how many degrees an insurer may increase or decrease, the maximum bonus or malus allowed and which statistics insurers can use to evaluate the starting class of a driver.
A BMS usually has an effect on road safety statistics, as it stimulates drivers to be careful and avoid accidents that would lead to the loss of bonus.
[edit] Bonus Hunger
There is a basic question under Bonus-malus system based on insurance costumer’s point of view, that is, “Should an insurance customer carry an incurred loss himself, or should he make a claim to the insurance company?”. Hence, an insurance customer prefers to choose self-financing an occurred loss by carrying a small loss himself in order to avoid an increased future premium, instead of financing the loss by compensation from the insurance company. This strategy is called bonus hunger of the insurance customer. In this strategy, the insurance customer prefers the most profitable financial alternative, after a loss occurrence. A well-designed Bonus-malus system must take bonus hunger into consideration.
[edit] References
LEMAIRE, J. (1995) Bonus-Malus systems in automobile insurance. ISBN 0-7923-9545-X
