Design and Implementation of a Bonus-Malus System for Vehicle Insurance in Nigeria

Abstract

Insurance companies often categorize risks based on observable factors when determining premium rates. However, many unobservable factors can also impact risk. In a competitive market, it's challenging to cross-subsidize different risk categories. To enhance profitability and growth, insurance companies must prioritize efficient pricing models. Experience rating, also known as No Claim Discount or Bonus-Malus Systems, adjusts premiums based on claims history. This study employed a risk-based adjustment model that incorporates decisions about costs fairly and equitably based on individual characteristics. Data on risk criteria, claims impact, and placement decisions for motor insurance liability portfolios in Nigeria were collected and analysed using a 5-by-5 matrix computational approach. The study concluded that motor insurance risks are influenced by individual risk criteria and that a risk-based adjustment pricing approach is essential for fair and equitable cost allocation among insured individuals.