No Claim Discount or Bonus/Malus Systems in Europe

The paper introduces bonus/malus systems by briefly describing six of the systems which currently operate in Europe. The systems and their basis of operation vary widely among the six examples given. Simple spreadsheet models of these six systems are used to illustrate the workings of these systems and the results are compared. It is evident that in some markets, the bonus/malus system is more of a marketing than a rating tool, while in others the premium rating basis relies heavily on the bonus/malus system for the determination of appropriate rates. The more "efficient" systems (e.g., the Swiss system) which produce premiums for each risk group more in line with the exposure of that risk group tend to be those in which the premium paid by the individual is more affected by the random timing of claims over say a 10 year experience period. The equity of the risk group is traded off against the equity of the individual. In the context of a common market in Europe which will affect five of the six systems reviewed, the question of the implications of such market harmonization is raised. LOB-Auto Physical Damage/Premium Analysis